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The Wharton School of the University of Pennsylvania

. Thomas Lee has covered the wireless services industry at

Chase H&Q

since 1999. Before moving to Chase, he was an analyst at

Salomon Smith Barney

for two years and at


for three years.

Industry Outlook and Style

Over the next 12 to 18 months, Thomas Lee's outlook for the wireless telecommunications services sector is bright.

He says industry fundamentals are positive, citing rapid growth in the number of net new customers (63% more in the third quarter than in the year-ago period), who are spending at least as much as older users. "In fact, revenue per user is actually continuing to rise, and total revenues for the industry are up 34% year-over-year," says the analyst.

Projecting $54 billion in revenues this year, Lee contends that revenue potential for the group continues to be strong. He also says that the industry on average generates a three-to-one return on invested dollars -- triple the average for telecom services overall. As a point of comparison, he cites Internet companies, which, he contends, generate only $1 in revenue for each $10 in capital expenditure.

"For the foreseeable future, wireless continues to generate really good returns on invested capital," he says.

Within the sector, he prefers large-cap names to mid-cap ones because they tend to have better liquidity and to be national players. Lee's top stock pick is

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TheStreet Recommends

AT&T Wireless



His reasoning: "Our favorite stocks would be those in which we think fundamentals and projected results will far exceed expectations of the Street. The easiest way to do that is find stocks where people have low expectations."

For Lee, AT&T Wireless is just such a stock. He says that it has "really struggled" since its April IPO at $29.50. It currently trades in the low 20s, despite posting what Lee describes as "blow-away" third-quarter results. The analyst also observes that AT&T Wireless has "excellent visibility" in the fourth quarter as well as for 2001.

In sum, he says, "We think Street estimates need to be raised."

As for the industry overall, Lee sees two important drivers over the next several years.

While predicting that business markets will see modest growth of 5% to 10% at best, he anticipates very strong growth for

Generation Y

users. "The real incremental customers today are coming from the 15- to 29-year-olds, but increasingly from the 12- to-19-year-olds also. So that's really one of the next big stories."

The second big story the Chase analyst sees is in wireless or mobile data as packet networks proliferate. These networks provide users with a continuous wireless connection, but because they use bandwidth only when they actually send or receive information, users are charged only for what they use, not for stand-by time. Such networks also allow for "push services," such as continuous updates and location tracking, at an affordable price.

But Lee has concerns about competition in this sector. He believes that there's room for all the incremental players only as long as the industry can deliver good growth internally.

"As we start to see declining revenues per user or deceleration of growth rates," he says, "I think it's going to be bad news for the wireless group."

Stock Pick

Favorite stock for next 12 months:

AT&T Wireless Group


"Being spun off from

AT&T Corp.

(T) - Get AT&T Inc. Report

, the company is going to change from a tracking stock to a regular equity. It should see improved business growth

as a regular equity because as a subsidiary of AT&T, I think it was constrained in terms of which initiatives and objectives were being pursued. Our interim target for the stock is $30, but our 18-month target is $39."

Rate Their Stock Picks: Which stock do you like best? Lee: AT&T Wireless Freedman: Western Wireless

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