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6/18/2004
01:05 PM
William Schaff
William Schaff
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Taking Stock: Wireless Networking Moves Home

The biggest headache in deploying a wireless network is security.

There I was, wandering the aisles of CompUSA, when I came upon wireless networking hardware, and, well, I just couldn't resist. I broke down and started "investing" in a home wireless network. Why? The usual rationale: I can always use it for business. Maybe I can work while eating lunch outside in the garden. The possibilities for productivity enhancement could be endless. Wireless networking is gaining popularity as the technology improves. Most large companies are seeing improved productivity at work, at home, and, yes, even at Starbucks. Companies also benefit from lower costs because of reduced wiring expenditures and infrastructure maintenance.

But I'm also interested in the fact that wireless networking is catching on in the home and small-office/home-office markets. Hardware market leaders include Belkin, D-Link Systems, Linksys (a Cisco Systems division), and Netgear. Linksys and Netgear continue to dominate the home wireless networking/small-business hardware landscape. I believe they are likely to continue to dominate, because even deep-pocketed companies such as Microsoft are getting out of the Wi-Fi hardware business.

Linksys generated sales of $174 million in Cisco's most recent quarter, ending in April. Netgear, on the other hand, had sales of $88.4 million in its first quarter of 2004, ending in March. Given the $5.6 billion in total sales for Cisco, Linksys' revenue can get lost as the division still represents little more than 3% of Cisco's total revenue.

Netgear, a purer play for wireless networking hardware, generated a 31% year-over-year increase in revenue. And, yes, Netgear is making money. Wall Street's First Call consensus for its 2004 earnings per share is 64 cents rising to 83 cents in 2005. At the current price of $13.05 per share, Netgear's forward price/earnings multiple is 15.5 times the 2005 EPS estimate.

The biggest headache in deploying a wireless network is security. Unfortunately, installing hardware with security makes the process a lot tougher for the average novice. No one is going to make much money if the hardware vendor has to pay for a big support staff to answer questions. The answer is easier for companies with large IT staffs. They use integrated solutions combining the best of hardware, software, and services.

Unfortunately, the average home or small-business user doesn't have a large IT staff available. I think Cisco may have the right answer for Linksys. They are partnering with other vendors to offer bundled subscription-based services alongside the hardware sale. For example, they have partnered with Netopia for parental controls and Boingo Wireless to enable hot-spots. If wireless security installation is an issue for a customer, Linksys can partner with private companies such as Wireless Security. Empowering users to support themselves is a good business strategy.

All I know is now that my home wireless network is set up, I don't know why I didn't do it sooner. Well, I'm off to the backyard to do some work.

William Schaff is chief investment officer at Bay Isle Financial LLC, which manages the InformationWeek 100 Stock Index. Reach him at [email protected]. This article is provided for information purposes only and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Bay Isle has no affiliation with, nor does it receive compensation from, any of the companies mentioned above. Bay Isle's current client portfolios may own publicly traded securities in one or more of these companies at any given time.


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