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Buy, Sell, or Hold DragonWave

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DragonWave (Nasdaq: DRWI  ) is a Canadian-based backhaul wireless provider, and with a $192 million market cap, it's one of the smallest of its bunch. It competes with another small-time player, Ceragon Networks (Nasdaq: CRNT  ) , but the majority of other backhaul equipment providers include billion-dollar Alcatel-Lucent (NYSE: ALU  ) and LM Ericsson (Nasdaq: ERIC  ) .

Considering how popular the company has become with our own CAPS investors, let's take a look at whether or not DragonWave is a buy, a sell, or a hold.


  • Founded in 2000, DragonWave is still the new kid on the block. However, its recent results have been outstanding. Last quarter, it reported a revenue increase of 463%, and boosted its gross margins by more than 60%. Income from operations reached $14.6 million, compared to a year-ago loss of $3.1 million. This tremendous surge has come mostly from a deal that the company had struck with Clearwire (Nasdaq: CLWR  ) to help build out its network.
  • The company is expanding internationally and attempting to diversify its customer base. It has shipped to 139 different customers in the previous fiscal year, and has presence in 59 different countries from Macedonia to the Philippines.
  • DragonWave looks pretty attractive from a valuation standpoint. Its P/E multiple is a paltry 4.5, and it's expected to grow by more than 17% for the next half-decade. In addition, with $3.35 in net cash per share, there doesn't seem to be too much downside from a value perspective.


  • The most glaring reason to sell DragonWave is its extraordinary dependence on one key customer: Clearwire. Last quarter, Clearwire accounted for 80% of revenue; next quarter, that figure is expected to drop to 25% -- far below analyst expectations. Although there were rumblings earlier in the year that DragonWave might team up with either AT&T or Verizon, this now looks unlikely. Unless DragonWave can bag another whale, it's going to be in big trouble.
  • Although DragonWave helped build Sprint's (NYSE: S  ) new 4G network, it's based on WiMAX technology, rather than Long Term Evoluation (LTE), which is widely believed to be the new standard moving forward. Big-time cell phone carriers have a lot riding on which backhaul provider to choose -- they need them to be around for a long time to service, maintain, and upgrade products. DragonWave's inexperience and staying power are dubious at best.
  • Simply put, there's intense competition in the space. Many of the big players I mentioned above have more knowledge of LTE and greater financial firepower than DragonWave. Alvarion (Nasdaq: ALVR  ) recently announced that it would be supporting the upcoming TD-LTE standard in its leading 4Motion Solution. DragonWave will need to act quickly and flexibly if it hopes to keep up with changes in technology.  


  • This is still a relatively new company with a lot of growth potential ahead of it. If you've got the stomach for it, then there is little reason to sell this stock prematurely when it's just recently begun to actually make money. At such a low price, and trading 55% lower than where it was at the beginning of 2010, no one would blame you for sitting tight to see what the future holds.

The Foolish bottom line
If there's one thing that makes me nervous about any small and upcoming company, it's when they depend almost entirely on one customer. Unfortunately for DragonWave, it has a history of generating losses, and one year with one major customer just doesn't cut it for me. There are too many question marks regarding revenue concentration, the ability to create long-lasting relationships, and whether management has the aptitude to adjust out of WiMAX and into LTE. If I'm going to make a risky bet, I'd look elsewhere. But if you've already made a purchase, I'd hold on and wait for the next earnings report -- hopefully it's a good one!

Jordan DiPietro owns no shares mentioned above. Sprint Nextel is a Motley Fool Inside Value choice. Ceragon Networks is a Motley Fool Hidden Gems recommendation. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (20)

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  • Report this Comment On July 20, 2010, at 6:31 PM, petecappie wrote:

    Hey All,

    I have been following the posting on Dragonwave for sometime now, but I wanted to finally interject and provide some additional information.

    1. Dragonwave's position with Clearwire: Dragonwave presently controls at or about 90% of the licensed MW being used today. At present, Clearwire is finishing their Phase 1 build, which showed the sharp rise of Dragonwave's gross over the last year. Their Q2 guidance shows that the expect a reduced revenue q over q, with the anticipation of Clearwire finishing up this phase 1 build. This is not just representative of Clearwire finishing up Phase 1 from an operational standpoint but also shows Dragonwave's ability to keep up with Cleariwire's demand. Once phase 1 is complete, Clearwire will begin Phase 2 of their project which is expected to be similiar in size to phase 1.

    What will this do for Dragonwave?

    Clearwire is presently licensing MW links through the FCC registration process (Public information). Part of this registration process is registering the manufacturer you will use for the project. This is on going right now for Clearwire's phase 2 markets. If you look at this data you will see that Dragonwave is continuing to hold their market share. Which would leave one to believe that they will be quite successful from an equipment supplier standpoint for phase 2.

    2. Comparison of Dragonwave to it's competitors

    A. Dragonwave DOES NOT compete with Alvarion. Alvarion provides last mile equipment to provide connections from a cell site to an end user. Dragonwave provides connections from one site to another, NOT to end users.

    B. Dragonwave is a Microwave ONLY provider. The other companies listed (Ericsson, Alcatel) are very large in scale, but if you look at their MW product portfolio and relative market share in North America it is much less than Dragonwave. So in valueing Dragonwave you have to be careful to compare apples to apples. The closest comparison would be Ceragon. Ceragon is an Israel based company that has a good presence in Asia and Europe, but is way behind Dragonwave in North American market share.

    3. Dragonwave providng backhaul to LTE, as opposed to wimax.

    LTE and WiMAX are similar technologies, they are based upon an IP standard. IP is a basic technology term for type of data. Unlike the older backhaul providers (Ericsson and Alcatel), Dragonwave supports IP networks natively), which is the reason that Dragonwave has been so successful in the WiMAX market. (Wimax has been around for over 6 years, whereas LTE is a new technology that does not even have a live commercial market in North America).

    Based upon Dragonwave's success with WiMAX, I would expect to see similar success with LTE, ONCE LTE is finally being deployed on a commercial scale.

    4. Market Opportunities

    There are several large projects going on in North America at present:

    A. Sprint LTE Project

    B. Verizon LTE project

    C. ATT 3G/LTE project

    D. Harbinger LTE project (Just announced today)

    E. MetroPCS 3G

    F. Leap 3G

    Let alone the 7 billion dollars being given out by the US government for broadband. Most if not ALL of these new markets will be IP based networks, that WILL require MW backhaul to support these networks. MOST will require ALL IP backhaul, which is dragonwave's speciality.

    This is just in the states. In foreign markets, this IP backhaul will not only provide service for Cellular operators, but is also the backhaul to provide for internet. In many developing or under developed countries, wireless is the primary transport of broadband and as such there is a very strong requirement for this technology.

    5. My final point is CASH

    Right now Dragonwave has approximately 3+ dollars a share in cash in the bank. They are cash flow positive and have ZERO debt.

  • Report this Comment On July 21, 2010, at 7:50 AM, FrozenCanuck wrote:

    Pete - can you explain how to find this FCC data? I know that it is public, but it is a bit complex to figure out where to look / what to look for. You made a very interesting point.

  • Report this Comment On July 21, 2010, at 9:35 AM, petecappie wrote:


    Here is the basic way to search, go to:

    In the second section (Licesnsee) where it says "Name", type in "Clearwire" (or whatever customer)

    Then go to the fifth section (Frequencies) and select "Range" , within range place a value of 6000 and 40000. (This covers the full range of the microwave spectrum, which is what is applicable to Dragonwave's equipment).

    This will provide a report. When you see the report, you then neeed to select a "Call Sign" from the first column, this will show you their application.

    Once you select a call sign, you will then need to click on the blue tab at the top titled "Paths".

    Once inside Paths, you can look in the first section and you will see a note "Transmitter Manufacturer" this will show you the vendor of choice.

    FYI, this is the manual way to do it, some companies have an automated process to run reports to get this detail (I do not), but this should get you the information you are looking for and specifically the representation I mentioned above.

    If you want to be specific, say to look at one of Clearwire's "Phase 2" markets, you can select a georgraphical region (or city) and it will return only the data for this area.

    FYI, clearwire has thousands of filings for microwave, of which as I mentioned Dragonwave has at or about 90% of the filings with their product.

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