10 Things You Need to Know: Wireless Internet Stocks -- Understanding the Monster

The hottest stocks of the coming year or Young Frankenstein? Our columnist joins the angry mob.
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"For what we are about to see next, we must enter quietly into the realm ... of genius!" --

Gene Wilder

, as Dr. Frederick "Fronckensteen" Frankenstein,

Young Frankenstein (1974)

Forget Net IPOs and B2Bs. The Next Big Thing in the eyes of Wall Street is wireless Internet. With shares of wireless Internet pure plays like

Phone.com

(PHCM)

and

Puma

(PUMA)

surging, investors have already turned their sights toward this collision of the two fastest-growing global technologies. And with the

Consumer Electronics Show

looming in Las Vegas this week, the monster of wireless Internet is sure to incite the mobs as well.

Wireless Internet is the ability to log on to the Net from anywhere, using any number of devices, from cell phones to Palm VIIs to, who knows,

Dick Tracy

-style watches.

Join the discussion on

TSC

Message Boards.

Three years from now there will be twice as many wireless Internet users as there were Internet users at the beginning of 1999, says analyst Mark McKechnie of

Banc of America Securities

. And after years of dreaming about wireless networking, the recent adoption of Phone.com's HTML-like WAP -- Wireless Application Protocol -- standard (which lets devices access email and Web pages) allows wireless Internet to come alive.

But there is fear on the Street.

Investors are just starting to understand the Internet stock market, so how to make sensible investment strategies surrounding wireless? How to differentiate between the investments that favor wireless standards TDMA over CDMA over CDPD? How can investors make sure their heads are screwed on straight?

How else, but through the metaphor of the greatest movie of the now-past 20th century,

Mel Brooks'

classic,

Young Frankenstein

. (What, that didn't make your list?)

See, the stocks in the mobile Internet market can be divided quite easily into the five parts of

Herr Doctor's

great creation. (Note to reader: Best if you imagine crackling lightning and loud organ music at each subhead.)

The Monster's Body -- the Handset Makers

The most obvious incarnation of this new creation is the wireless phone itself. The dozens of funky designs set to be unveiled at the Consumer Electronics Show this week promise that the phones of 2000 may make us forget all about the harmonica-shaped cell phones of today.

Nokia

(NOK) - Get Report

dominates this group, with

Ericsson

(ERICY)

and

Motorola

(MOT)

desperately trying to resuscitate their businesses. Newcomers like

3Com's

(COMS)

Palm

(about to do an IPO) and

Research In Motion

(RIMM)

-- with its popular Inter@active RIM pager -- are aspiring monsters.

The Monster's Guts -- Chips and Components

As these phones evolve from handling the relatively simple task of translating voice to data, the pieces inside get more complex. Intel's recent purchase of

DSP Communications

shows that even the best and brightest semiconductor manufacturers require unique wireless competencies.

And it's not just chips.

RF Micro Devices

(RFMD)

has seen its shares double in the last six months in hopes that the mobile marketplace will spring to life. Similarly,

Sawtek's

(SAWS)

audio filters and

TriQuint's

(TQNT)

gallium arsenide circuitry and semiconductors let manufacturers cram more power into smaller phones.

The Monster's Brain -- WAP

Banc of America's McKechnie likes to call Phone.com the "

Netscape

of the wireless Internet -- with a much better business plan." Phone.com, formerly

Unwired Planet

, pulled together the disjointed efforts of Ericcson, Motorola and Nokia. They agreed on WAP, owned by Phone.com, to establish a global standard for the display of Internet content over small-screen devices -- no easy feat. (Or to quote Dr. Frederick Frankenstein: "Hearts and kidneys are tinkertoys! I'm talking about the central nervous system!")

The WAP Forum now includes more than 200 computer, component, semiconductor and software makers. In exchange for giving away its microbrowser and server, McKechnie says, Phone.com will get paid somewhere between $10 to $15 for each new subscriber that carriers sign up.

Dr. Frankenstein's Laboratory -- the Software

Software does all the pushing and pulling that will bring the beast alive. A handful of companies is trying to build special applications, repurpose Web content or simply interface with existing data for wireless devices.

Surely the most prominent of these companies is San Jose, Calif.-based Puma, which went public in December 1996. Puma provides the connection between corporate databases and far-flung devices. The stock, which traded as low as 4 1/4 in August, is now above 130.

But the handheld software field is still wide open. Other software and application makers of note include

Aether

(AETH)

,

Interleaf

(LEAF) - Get Report

,

SmartServ

(SSOL)

and

Geoworks

(GWRX)

. Geoworks, a wireless stock seemingly as old as Dr. Frankenstein's castle, is suddenly back to life, trading at around 16 after a year and a half below 5.

Lightning! -- the Network

The crucial cracking power of the market has ignited makers of wireless networking equipment, and none more so than

Qualcomm

(QCOM) - Get Report

. Qualcomm was the best-performing stock in the

S&P 500

in 1999, surging 2600%. But the old dogs in networking like

Cisco

(CSCO) - Get Report

and 3Com are dueling alongside Qualcomm in the wireless arena, as are newcomers like

P-Com

(PCMS)

, which makes access equipment that helps carriers speed the installation of high-speed wireless broadband connections.

The combination of all these parts has created a frighteningly large beast that appears unstoppable. The

Strategis Group

of Washington, D.C., estimates that high-speed wireless access revenue (excluding local business carriers) will jump from $11.2 million in 1999 to $3.4 billion in 2003.

And the wealth creation of this monster? That might get even scarier.

Dr. Frederick Frankenstein: For the experiment to be a success, all of the body parts must be enlarged. Inga: So his head, arms, vould all have to be big? Dr. Frederick Frankenstein: Yes. Inga: He would have an enormous Schvonstuker. Dr. Frederick Frankenstein: Well, yes, naturally. Inga: Voof! Igor: He's going to be very popular.

Cory Johnson files weekly from TheStreet.com's San Francisco Bureau. In keeping with TSC's editorial policy, he neither owns nor shorts individual stocks, although he owns shares of TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Johnson welcomes your feedback at

cjohnson@thestreet.com.

For more columns by Cory Johnson, visit his column

archive.

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