Too Many Doubts to Take a Flier on Iridium’s Stock

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks.

Iridium World Communications (IRID)

Mike: You can’t get much higher-tech than this stock, Jim.

Jim: That’s for sure. Iridium is a global wireless communications system that’s costing some $5 billion. It uses a fleet of 66 low-Earth-orbiting satellites that enable you to be anywhere in the world and make a call with your hand-held phone.

Mike: Now, this service--which costs several thousand dollars just to sign up--is aimed at the globe-trotting executive and, uh, well frankly, I don’t know who else. Do you?

Jim: Supposedly seafarers and others far from a phone booth. But I’m not sure how many of them will need Iridium, and that goes to the core of my problems with this outfit.

Mike: First we should note that this is what’s known as a “tracking” stock. Care to enlighten us?

Jim: Iridium is actually a consortium of companies, including Motorola, that are backing the system. So this stock simply tracks Iridium’s performance, even though it’s not really a single corporation in the normal sense.

Mike: Right. Now, Iridium has been plagued with trouble since it launched service last November. That’s not unusual for a brand-new tech company, but I’d say both of its customers are probably dissatisfied.

Jim: Ouch.

Mike: OK, that’s a joke. It actually has more than two customers, but in the grand scheme of things not too many more.

Jim: Actually it’s several thousand, but that’s well below initial forecasts. Yet Iridium still expects to have more than 500,000 subscribers a year from now.

Mike: We’ll see.

Jim: The company’s start-up problems have included its phone, which is said to be clunky.

Mike: It’s a big, heavy handset. It’s not like your little Motorola StarTAC that fits in your pocket. This thing has to be hauled around; it’s like a walkie-talkie almost.

Jim: The perfect tool for the fast-moving, globe-trotting executive.

Mike: And that’s because it has to communicate with satellites that are several hundred miles up in space.

Jim: Then there have been delays getting the system going, problems with the phone sales forces not having enough trained people*. . .

Mike: . . . and it’s facing growing competition, which is something you wouldn’t expect for a business this arcane, but it’s true.

Jim: All this has taken its toll on Iridium’s shares. The stock got as high as $72 last May, but it’s since plunged to the low 20s because the system isn’t, well, getting off the ground as planned.

Mike: And there’s another problem: Iridium has to ramp up its business before it must put up more birds.

Jim: Huh?

Mike: Satellites. Iridium’s satellites only last about six years, so it has to get its system up to speed before it has to incur the cost of putting new ones in orbit.

Jim: A strict deadline, I’d say.

Mike: Exactly. So, what do you think about the stock? Its big price drop does make it cheap.

Jim: I’d pass, at least for now. On the plus side, this is obviously a system that a lot of smart people think will work--just look at the heavy hitters like Motorola that have plowed billions into making it work. There’s also no question this whole communications industry is growing by leaps and bounds. And eventually Iridium will work out its bugs. But in the meantime, I’m worried about how much demand there really is for this system.

Mike: And not just for Iridium, but for its rivals in waiting too.

Jim: Excellent point. What I really fear is that just as Iridium works out the kinks, gets its system running smoothly and even signs up a few more subscribers, along come its new competitors. As you know, similar satellite-based outfits such as Globalstar will be coming on line shortly. As that happens, I see Iridium’s stock coming under renewed pressure.

Mike: Iridium to me is the epitome of a stock for which I wish we had more choices than just “buy” and “don’t buy.” This is about as far-reaching a venture as you can find, but in the long term I think Iridium could hit it big.

Jim: Certainly Motorola and others have placed a big bet that it will.

Mike: But I agree that right now, it’s very hard to see where this company is going in the next year or two. There are just too many questions about where the market is for this system and whether Iridium will work things out not only before its competition arrives in waves, but before it faces that jump in capital spending for new satellites. The technology, while certainly intriguing, is full of unknowns. Anything can happen here.

Jim: As Fortune magazine pointed out recently, Iridium might turn out to be the next Apple Computer--or the next Betamax VCR. We just don’t know.

Mike: That’s right, and frankly, the alternatives to buying an Iridium phone and hauling it around the globe aren’t that onerous for Iridium’s potential customers. It just means having two or three small, compact cellular phones, with each one working in some part of the world. I think at this point, most of the potential customers are going to prefer that to worrying about whether they can rely on Iridium.

Jim: Iridium, in a way, poses a classic economic question: Is it pulling in customers by fulfilling a service that they’re demanding, or is it pushing customers toward the service by persuading them that they need it? I’m not convinced either way, at least not enough to buy its shares.

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Write or e-mail with a stock you would like to see discussed in this column. James Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Michael Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of a new book, “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Era.” Either can also be reached at Business Section, Times Mirror Square, Los Angeles, CA 90053

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Iridium, Monday: $20.13