Superconductor Firms Ride High on Anticipation
Three small money-losing companies are just about the hottest stocks around because they can dramatically lower resistance to electricity and enable wireless telecommunications devices to work better and longer.
The three companies, Superconductor Technologies, Conductus and Illinois Superconductor, make superconducting filters, which eliminate resistance to electricity in materials cooled to roughly 300 degrees below zero. Installed in base stations that serve wireless phone networks, the filters minimize interference to signals and allow expanded and improved telephone service.
The market for superconductor filters could grow to $11 billion over the next three to five years as wireless telecommunications develop to encompass data, voice and graphics via the Internet.
Spurred by such visions of sugarplums, investors last week set off a frenzy for superconducting. The stock of Superconductor Technologies, which announced an order for 27 filter systems, shot from $14 a share to $40 before dipping back Friday to $33.63. Conductus’ stock, up massively in the last year, rose a few points more to $28.25. And Illinois Superconductor stock soared more than 80% to $8 a share. All three have risen more than 100% in the last year despite continuing losses.
In short, these relatively tiny companies, with fewer than 300 employees among them, exemplify technology investing today: Market values are bestowed on the chance that the companies are caught up in a wave of technological development and will know how to prosper from it.
Can that possibly make sense? Actually, yes. There is some good reasoning behind the expectations if you understand how rapidly telecommunications is changing and that superconductivity is a still-emerging technology.
The Defense Department first funded studies of superconductivity in 1986. Major contractors such as TRW and Rockwell International are still researching it. TRW two years ago, for example, used a superconducting microchip to help retrieve digital images from space.
The scale of imminent changes in telecommunications is nothing short of spectacular. Simply put, in the next five years the cellular telephone in your hand will go from a low-powered instrument of limited capabilities to a device that can handle 2 billion times its current capacity in data, voice and image transmissions through microwave bands in the atmosphere and satellites in space.
The future is now. Japan will have an initial version of extremely advanced telecommunications this year using local protocol with limited application elsewhere. But in the period from 2003 to 2005, the rest of the world will adapt an advanced system based on Qualcomm’s code division multiple access system, or CDMA.
How three unlikely companies landed in the middle of so much excitement is a revealing story of defense spending, technological development, risk-taking investment, commercial adaptation and sheer accident.
The three companies were founded in the late 1980s, with venture investors backing scientists in the hopes that superconducting would yield commercial breakthroughs. But breakthroughs don’t occur on timetables, and by the early ‘90s, the three firms were looking for commercial applications for the knowledge they had gained in years of research.
“We looked at uses in magnetic resonant imaging in medicine, at laboratory instruments and several other applications. Wireless was an afterthought,” says Charles Shalvoy, president of Conductus, which is based in Sunnyvale in the heart of Silicon Valley.
But at the same time, cellular telephones went from a craze to a necessity. Rural phone companies found they needed help extending signals from handsets to widely spaced base stations. Superconducting filters filled that need. Major telephone companies serving urban areas also have become interested in recent years as increased numbers of phone users have led to signal clutter and other difficulties.
And more powerful wireless protocols, such as Qualcomm’s CDMA, “demand a lot of power and will need superconductor filters,” says Peter Thomas, president of Superconductor Technologies, based in Santa Barbara. The company was started by physicist Robert Schrieffer, who won the Nobel Prize in 1972 for his work on superconducting theory.
Thomas estimates that there are 200,000 telecommunications base stations worldwide and that the number will grow to 1.1 million by 2003. He reckons that half of those base stations will need superconducting filters--complex arrays, including refrigeration, that cost about $20,000 each. Based on those calculations, the potential total market would be $11 billion.
Shalvoy of Conductus and George Calhoun, chief executive of Illinois Superconductor, based in the Chicago suburb of Mount Prospect, estimate the market more conservatively but still come up with multiple billions in potential sales of filter stations. A big pie any way you slice it.
Investors are betting on that potential and are buoyed by the recent success of small companies that make gallium arsenide semiconductors and other components of wireless handsets. Conexant Systems, the Newport Beach company spun off from Rockwell in 1998, has seen its sales grow and its stock price soar in the last year. However, Conexant was launched from a big company with a product base of $1 billion in annual sales.
The real question about the superconducting frenzy is whether these small companies--each of which has less than $10 million in annual sales--will be able to scale up if business materializes as envisioned.
Also, will competitors come in if superconducting filters become a great business? There are small companies pursuing superconducting for wireless in Japan and Germany, Shalvoy reports. “But they are behind,” he says.
Truth is, like most technology issues, the superconducting stocks are high today on potential and anticipation. But in business as in sports, execution is the key to success. The next few years will tell a story; it will be titled “Promise Fulfilled” or “Promise Denied.”
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James Flanigan can be reached at jim.flanigan@latimes.com.
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Super Conduct for the Stocks
Superconductivity, the phenomenon of creating zero resistance to electricity in materials cooled to 300 degress below zero, is boosting the fortunes of three companies that apply superconductivity to wireless telephony. The companies are small and losing money but enjoying a boom in stock prices.
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Sources: Company reports, Bloomberg news
