|Sequans Communications Needs Resuscitating|
MONDAY, MARCH 26, 2012
Sequans Communications (SQNS) has left investors holding the bag almost since its IPO in April, 2011. The stock debuted at $8/share, then turned into a money gusher for a scant 30 days when it topped out at $19 in late May. It's been all downhill since then, and the stock has been trading in the two dollar range for well over four months. After doing quite a bit of research on pure-play wireless equities, I took a position in it, based not so much what it is doing today, but what it may be doing in the next few years.According to their corporate profile: "Sequans Communications is a 4G chipmaker, supplying LTE and WiMAX chips to original equipment manufacturers and original design manufacturers worldwide. Founded in 2003 to address the WiMAX opportunity where it is now a global leader, Sequans expanded in 2009 to address the LTE market. Sequans’ chips are inside leading 4G networks around the world. Sequans is based in Paris, with additional offices in USA, United Kingdom, Israel, Hong Kong, Singapore, China and Taiwan.".
Good enough, but why did investors get caught off guard, and, the stock become the whipping boy in the semiconductor sector? Edward Schneider gives an explanation in a report from the Mobile World Congress: "Sequans stock was massacred by a major drop-off in WiMax chip revenues. Sprint (S), Sequans largest customer, suddenly switched to an iPhone (AAPL) platforms last year, and suspended its WiMax chip orders.".
The article also goes on to say: "Some investors worry about larger competitors like Texas Instruments (TXN), Samsung (SSNLF.PK), and Marvell (MRVL) among others that will be entering the LTE chip arena. All things being equal, these larger competitors have lower costs than Sequans. But all things are not equal. Sequans LTE chip is on average 2x to 3x smaller and five generations more advanced than those of its peers.". Superior technology doesn't guarantee success, but it does give them a fighting chance in a sector that is poised for accelerated expansion.
The Sequans IPO Prospectus discusses the growth in their addressable market for the next few years: "According to ABI Research, the number of 4G chipsets shipped annually will increase from 14.5 million in 2010 to 245.9 million in 2014, representing a CAGR of approximately 103%.". The potential for reaching new customers is tremendous. GTI estimates that TD-LTE will cover two billion people in 2014. It's up to the subscribers in 3G smartphones and feature phones to upgrade, but the option will be in place.
Going back to the prospectus: "Our LTE solutions are currently in trials with wireless carriers in the United States and China, where China Mobile (CHL) has successfully demonstrated its LTE capabilities using our solution at the World Expo in Shanghai and at the Asian Games in Guangzhou, which were both held in 2010. Our solutions are incorporated into devices sold by many leading OEMs and ODMs, including HTC, Huawei, MitraStar Technology (a spin-off of Zyxel), Gemtek, Sagemcom, Teltonika, Accton Wireless Broadband and ZTE.".
Sequans' past relationship with China Mobile is intriguing because of the Hong Kong based red chip's 600 million customer base. This is the largest wireless subscriber base globally. Sequans was asked by China Mobile to develop semiconductors for its TD-LTE network at the previously mentioned Shanghai Expo. This doesn't necessarily mean the two organizations will be in partnership when the advanced wireless broadband service is deployed in The People's Republic, but it gives Sequans a foot in the door.
In fact, at the Mobile World Congress, China Mobile said it would begin large-scale trials of the 4G technology. The company is set to deploy 200,000 TD-LTE base stations by the end of next year. However, there was an unofficial report earlier this month that the Chinese government may delay granting the required TD- LTE licences for 2 to 3 years. I'm not sure if this report is true or not, but it did rock the mobile world, at least in the Far East. Investors got wind of it and put additional pressure on Sequans' stock price.
There's always the tango between value and growth, and I'm not sure where Sequans fits. Although it's been left for dead, it could be part of a highlight reel if it can stay solvent, and, 4G networks are introduced at a rapid pace. They have the leading edge technology, but lets look at the numbers before you go out and buy some shares. After all, at this juncture, they are not a profitable company.
Six analysts cover the stock on Yahoo Finance. For the current year, the company is expected to lose $.68/share with revenues of 37.38 million dollars. For 2013, they are expected to have a deficit of $.21/share and sales of 81.81 million dollars. Not exactly breaking the bank, but they are projected to make progress going forward. Current price/sales is one, and, price/book is at one single digit, too. Very reasonable valuations.
Only 19% of the outstanding shares are held by institutions, so if Sequans catches fire, it will be a full-tilt ride to the upside as mutual funds and pension plans pile in. I know they have an uphill battle, but all companies do. One of my reasons for owning it is that if their technology is all it's cracked up to be; they may be acquired by a larger company. At it's current valuation, I feel my downside is limited unless they file chapter 11.