Following Novatel’s (NVTL) 3Q report and 4Q guidance last Thursday evening, NVTL stock dropped over 25% on Friday. Investors had expected strong MiFi revenue growth for 4Q, but management stated that this was unlikely to happen, despite continued channel sell-through improvement. The culprit was simply an inventory build-up in 2Q and 3Q, presumably at Sprint and/or Verizon Wireless.
Aside from sell-through catching up with inventories by 1Q, there are other more fundamental technology shift reasons why NVTL should see very strong MiFi growth throughout 2010:
1. There will be a WiMax/EVDO version of the MiFi for Clearwire (CLWR) / Sprint (S) / Cablecos. Given the dramatically lower cost per bit associated with Clearwire’s WiMax network, compared to EVDO, the monthly service price should come down, and the 5 GB/s monthly cap could be increased. When could this happen? Given the dual-mode nature of the device, and that WiMax is already, or will soon be, offered in numerous large cities such as Chicago, Philadelphia, Atlanta, Las Vegas, Dallas and Seattle, Portland and Baltimore by December 2009, a dual-mode WiMax/EVDO version of the MiFi is already overdue. It is reasonable to expect availability of this device by 1Q.
2. There will be an LTE/EVDO version of the MiFi for Verizon Wireless (VZ). The rationale is the same as for the WiMax version. In terms of widespread city deployment, it appears VZW is approximately one year behind Clearwire in deploying LTE vs. WiMax. LTE chips are not yet mature, so it is reasonable to expect such an LTE version of the MiFi late in 2010, probably 4Q.
In both the WiMax and LTE cases, the latency of these networks compared to EVDO is much lower, making these networks much more suitable for VoIP. There is an enormous itch by many people to switch to cheaper VoIP telephony, but quality concerns rightfully abound. Do you really want to save $50 per month if the quality of your phone conversations deteriorates from time to time? Probably not worth it for most people.
The key MiFi advantage in a low-latency WiMax and LTE world is that you can use as your handset terminal a WiFi-only device such as the Apple (AAPL) iPod Touch, on which you run your favorite VoIP service such as Skype (EBAY) or Vonage (VG). The stage is now set for a cottage industry of VoIP apps to take advantage of the ability to de-couple VoIP service from otherwise mandatory voice service offered by the large cellular carriers such as VZW, Sprint, T-Mobile USA and AT&T (T). Yet, at the same time, you also support your laptop – or several laptops – using the same MiFi connection, paying one unified price that is much lower than the current captive voice plan rates.
The good news for NVTL is that this mobile VoIP trick is possible already today, with the caveat of EVDO having potential quality issues for VoIP as a result primarily of latency. That said, NVTL can gain early-adopter business from this architecture today, and then grow it dramatically once the WiMax and LTE versions become available during 2010.
There is a third development we can expect from NVTL’s MiFi device in 2010, and that is the transition from 802.11g to 802.11n. In the past, 802.11n has meant unacceptable battery performance for mobile devices.
However, given new single-stream chips such as Atheros’ AligN 802.11n router chip, it is now possible to beef up the performance of the MiFi solution dramatically. The range of the MiFi today is suggested to be 33 feet. With 802.11n, even in single-stream configuration, both range and speed should increase dramatically. The 802.11n speed increase also goes hand-in-hand with the greater capabilities of WiMax and LTE when compared to EVDO.
What is the greatest threat to the NVTL story in coming quarters and years? Given that the market for this MiFi-type functionality should increase faster than almost any product category, the answer is pretty much only one: competition. At its core, the basic functionality of converting a licensed spectrum wireless broadband signal to WiFi is not rocket science. We should expect copycat devices not only from Huawei and Sierra Wireless (SWIR), but also from the handset operators such as RIM, HTC and others as they incorporate this functionality in coming years.
In the long run, the largest part of this MiFi-functionality market will be an integral part of the smartphone hardware/software. That said, in the meantime NVTL has managed to gain first-mover advantage with an unusually attractive and well-designed – indeed iconic – stand-alone product. NVTL should be able to use WiMax, LTE and 802.11n to leverage itself into one of the fastest-growing companies of 2010 as mobile VoIP takes off. With the shares now trading at a severe discount, it looks to me like this may be a superb investment proposition for the next 6-12 months.
LONG: AAPL, RIMM, NVTL