Skype, Google Voice And VoIP Drive Telecom Equipment Stock Values Higher
November 12, 2009 - The Wall Street Transcript has just published Telecommunications Services & Equipment Report offering a timely review of the Telecommunications sector. This 20 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Chandan Sarkar is an Analyst who covers the telecom sector at Auriga, USA. Prior to joining Auriga, Mr. Sarkar founded Balistes Capital Management, a hedge fund focused on the telecommunications industry. Previously, he worked for PAW Partners, a billion-dollar technology hedge fund in Greenwich, Conn. During the 1990s, Mr. Sarkar worked at sell-side research boutique SoundView Technology Group as a Telecommunications Equipment Analyst. Mr. Sarkar began his career in industry as a Design Engineer at AT&T Bell Laboratories. He holds three patents in the telecommunications field.
TWST: Are Skype and other VoIP applications impacting the sector much?
Mr. Sarkar: Skype has been a fast grower and still holds a lot of promise for certain applications. It does not have the look and feel of a real phone, however. So right now its acceptance has been somewhat limited to technophiles and users who are focused on making cheap international phone calls. VoIP is the technology of choice for the cable companies who continue to take share from the Telcos for basic phone service.
Getting back to Skype, I think its use will continue to grow if they could improve ergonomics. In other words, if they can make the interface to human beings look and feel more like a traditional phone call. That is part of what Google (GOOG) is trying to do with their Google Voice. That is one of the reasons they are having this battle with Apple (AAPL) to try and get it on the iPhone, because if you can make the interface more seamless and make it feel like a regular phone call, then those applications have an opportunity to grow at the expense of the traditional carriers. When we were kids, there was ham radio, and people thought that that was going to put phone companies out of business. But it did not happen because it was just too awkward. If the interface and quality continue to improve, applications like Skype and VoIP will continue to eat more share from the traditional phone companies.
TWST: What about the equipment sector? What trends are we seeing there?
Mr. Sarkar: The equipment sector has been through a tough period ever since the technology bubble burst in 2000. If you were to plot the graph of the equipment sector versus the technology index overall, you'd find that even though they both crashed in 2000, the equipment group hasn't come back nearly as strongly as the overall tech sector. The reason is that there are still too many equipment companies that have survived the crash. Whereas in previous downturns a lot of these companies would have gone out of business, thus leaving fewer competitors for the next up cycle, with the exception of Nortel (NTL), there have not been any bankruptcy stories in the group. The reason is that most of these equipment vendors got overcapitalized during the 1990s, raised huge amounts of cash and so, even during the downturn, they were able to last. What is happening now is when a Baby Bell puts a new project out for bid, you get a dozen of these equipment competitors all trying their hardest to win the business. This has driven prices down and ruined profitability for the whole group.
TWST: The carrier sector is a relatively mature industry. How do you see it evolving over the next several years?
Mr. Sarkar: The challenge for the carriers, and I am speaking specifically about AT&T (T) and Verizon (VZ), is to not end up being big dumb pipes. If you look at what's going on in the industry, a lot of the intelligence is moving into the devices and the software. So the risk to AT&T and Verizon is that they become providers of dump pipes that are low-margin commodities. They are trying to find some sort of value add that would keep them from going in that direction. But right now, I would have to say that they are probably losing the battle. They seem to be headed in the direction of becoming further commoditized.
TWST: Who are your top picks and why?
Mr. Sarkar: On the carrier side, we have a fairly negative view of the group, and we've had so for most of the year. In fact, we only have one "buy" rating, and that's Sprint (S). The reason we have a "buy" rating on them is because the spectrum that they own, we think, is worth more than the entire value of the company right now, given its current stock price. But it's more of a long-term investment and near-term business, as is the case with all the wireless carriers, is really quite bad. Overall, I'm negative on the whole carrier space right now. On the equipment side, though, we think there is more room for hope. We like Alcatel (ALU) and Tellabs (TLAB). The valuations are quite reasonable and we are starting to see some of their new products take hold.
Note: Opinions and recommendations are as of 10/15/09.
CHANDAN SARKAR
Auriga USA, LLC
One Pennsylvania Plaza
Suite 4625
New York, NY 10119
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