Pali Research is out with a new report on NII Holdings (NIHD). They are reiterating their buy and establishing a $25 price target. The cut estimates further and moved below management guidance but attributed 90% of the reduction to further weakening in the Mexican Peso.
In my recent update on NIHD, I explained that underlying fundamentals are holding up quite well considering the economic crisis and the company still has an excellent growth profile. This was the basis for Goldman Sachs recent upgrade which has triggered a 40$ rally in NIHD off its low. The next big move is going to come from a better market environment and a strengthening of the Peso. Pali’s $25 target is realistic if those things happen.
Pali’s new report touched on something I did not address on detail: NIHD’s technology risk. This has always been a worry of investors as the company is one of the few in the world to use Motorola’s iDEN standard. iDEN is superb for push-to-talk which is well known in the U.S. as the key feature of behind Nextel’s success. Over the last years. However, iDEN has been viewed as a weakness for NIHD. Pali addressees this effectively. Here is a brief summary of the technology challenges Pali identified.
iDEN has limited phone choices. This is true but especially in Latin America, NIHD is targeting a customer base that cares more about voice communication and basic email than feature available on the latest smartphones. For customers desiring voice and email based features, the technology works better than most others and is cheaper to provide. NIHD believes there is plenty penetration left among businesses who can effectively sue its services.
iDEN requires major upgrades to compete with 3G and 4G competitors. 3G networks require a lot more capacity that NIHD’s iDEN networks do not have. However, as noted above, NIHD customers are not demanding the advanced services especially because 3G networks do not work nearly as well for push to talk which is used heavily by NIHD’s subscriber base. Pali estimates over 50% of minutes of MIHD subs are push to talk.
NIHD is not a takeover candidate due to incompatible technology. As a small company with a high quality customer base that is growing quickly, NIHD should be an attractive takeover candidate. Pali points out that recent signals form NIHD about the cost of technology upgrades for iDEN are not so large as to erase all gains an acquirer would receive. I do not even consider NIHD as a takeover candidate in my decision to own the shares but it is nice to know the possibility is out there.
Motorola’s handset is dying and support for IDEN will end. Motorola has publicly stated its commitment to iDEN in relation to talks with Sprint. While it is not a huge business it is still steady and even growing while the rest of Motorola’s business is declining. I think this is the biggest risk to NIHD shares form a technology perspective, especially initial reaction were Motorola to end support of iDEN.
Overall, technology is an overhang for NIHD. Upcoming spectrum auctions in Mexico and Brazil followed by effective buildout of the spectrum and upgrade to 3G technology with no degradation of push to talk capability will resolve the technology issues. The question is ultimately the cost and quality of the upgrade. At current prices of NIHD I think the shares more than incorporate the technology risk.
NIHD is held in Northlake client accounts including my personal accounts.