Small Cells Will Power Big Gains at Alcatel-Lucent

The nattering nabobs of negativism, as someone once called them, have been lending their dour outlook to Alcatel-Lucent (NYSE: ALU  ) , sending its shares to record lows. It was less than a month ago that the wireless equipment maker was trading for less than $1 a share.

That may all be about to change. Shares of Alcatel jumped 13% in early-morning trading today after AT&T (NYSE: T  ) said that as part of its plan to spend $14 billion over the next three years as it builds up and out its high-speed networks, it will rely in large part on small-cell technology. It's been my contention for some time that Alcatel-Lucent will be the primary beneficiary of carriers deploying small-cell "towers," and this appears to be the first mass usage of them.

While AT&T plans to also deploy 10,000 new macro sites as well as 1,000 distributed antennae systems, it's the small-cell deployments, more than 40,000 strong, that comprise the vast bulk of how Ma Bell plans to strengthen its network.

A smart investment
According to Cisco (Nasdaq: CSCO  ) , mobile-data traffic growth doubled for the fourth year in a row last year, with smartphone usage tripling even though basic handsets still account for 88% of the devices on the market. But smartphones represent 82% of total handset traffic, meaning mobile-data traffic will increase 18-fold by 2016. As 4G networks multiply, it will represent more than one-third of all traffic, with smartphones alone generating a 17-fold increase in traffic.

The expansion of 4G long-term evolution solutions means small-cell technology will be best able to help carriers manage the heavy load being placed on the industry's infrastructure. And Alcatel-Lucent is uniquely positioned to capitalize on it. It already owns 20% of the LTE market, but it also holds dozens of key femtocell deployment agreements, allowing its technology to be deployed on telephone poles, the sides of buildings, and anyplace where it's otherwise difficult for tower coverage to reach.

It doesn't hurt that AT&T, along with Verizon (NYSE: VZ  ) , accounts for 10% of Alcatel's revenues. It previously signed a pact this summer with Sprint (NYSE: S  ) to deploy its LightRadio small-cell equipment as a means of greatly expanding its 4G-LTE coverage. I've said Sprint's acquisition of Apple's (Nasdaq: AAPL  ) iPhone made it imperative that the carrier invest in its network, and small-cell technology is the perfect way to do so.

Elms from acorns
Small cells are like tiny cell towers. Although not as powerful as "macro sites," they're less expensive and much less obtrusive, capable of being mounted on poles or the sides of buildings. As the AT&T news attests, this technology sweep amounts to a sea change in how carriers will approach the dilemma of reaching more customers at lower cost.

Already, wireless backhaul operators like DragonWave (Nasdaq: DRWI  ) and Ceragon Networks (Nasdaq: CRNT  ) are retooling their microwave equipment to account for the coming onslaught of small-cell deployments. According to the market researchers at Infonetics, millimeter wave gear should grow at a compounded annual rate of 63% until 2016, and the growth of 3G and 4G small-cell networks' microwave backhaul will become the primary solution they use.

While Alcatel will be a big winner here, Ericsson (Nasdaq: ERIC  ) is one of AT&T's biggest vendors and it should gain a large share of the business as a result. But it seems to me the market will expand at such a rate that there will be enough opportunity for Ericsson, Alcatel, and even Cisco, though the push for wireless rather than wireline solutions would minimize the latter's gains.

Early is better than late
I bought shares of Alcatel-Lucent earlier this year in no small part because of the growth of small-cell technology and my belief that it will be a key to wireless carrier expansion plans. Equipment makers have been lagging the market because of capex spending curtailment, but AT&T's announcement, following as it does Sprint's own plans, indicates we may be witnessing the thaw in the spending freeze.

I also rated Alcatel to outperform the markets on Motley Fool CAPS, the 180,000-member-driven investor community that translates informed opinion into stock ratings of one to five stars. While both my portfolio and a CAPScall are currently sucking wind -- Alcatel is down more than 50% since I weighed in compared to a 1% gain in the S&P 500 -- I'm still betting the equipment maker comes back and that this is the signal investors have been waiting for.

Let me know in the comments box below whether you agree that despite the financial hurdles Alcatel-Lucent faces, it will still be able to dial up growth using small-cell technology to get there.

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Read/Post Comments (6) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 08, 2012, at 7:10 PM, DanTheMan1984 wrote:

    Rich I hope your right about ALU, I'm with you man go ALU!

  • Report this Comment On November 08, 2012, at 7:24 PM, dion2727 wrote:

    ditto from dan the man 1927

  • Report this Comment On November 08, 2012, at 10:16 PM, piinob wrote:

    I too think that ALU has a bright future when the big tels build out infrastructure enough to make the wireless handset reral useable all over. I bought ALU a while back at 1.50 and watched it fall to 1.05 where I sold off to wait. I wonder if it is time now to jump, or wait a while longer.

    ALU has all the best hardware right now to upgrade systems very economically.

    Maybe I am trying to time the market, which is a fools game for sure. A wise man once said " I don't need the bottom 10 percent, and I don't need the top ten percent. I just need the 60 or 70 percent in the middle." I just need to remember that!

  • Report this Comment On November 14, 2012, at 3:52 PM, mommacass wrote:

    Rich

    Regarding ALU -- have you heard anything about conversations taking place between ALU & Samsung and their interest in buying ALU's wireless division?

  • Report this Comment On November 17, 2012, at 12:09 PM, SINODOG wrote:

    Small cells are a critical link in the digital delivery chain that is coming down the track like a giant world changing freight train. If you have spent time in China or India, you understand the local intensity issue in a way unimagineable in America. How could Samsung think Apple would not have taken note long ago ? There will be competition, but ALU is not going away. Looks to me like they are a hurry to clean up Europe for more than cost saving reasons.

  • Report this Comment On November 26, 2012, at 5:45 PM, Bkayoc wrote:

    You have not explained why Dragonwave( post Recent NSN acquisition)won't compete withALU

    Also, you have ignored ALU's debilitating financial Heath.

    If you know of ALU'stechnological advantage or lead in small cell, please share.

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