It's not a good time to be a Clearwire investor, according to Morgan Stanley.
The 4G wireless provider faces several problems, the investment firm says, including the need to obtain further funding, a rapidly vanishing lead in the 4G race, and the potential of a Sprint iPhone. Such a device would run on a competing network and cut into sales of other smartphones at Sprint--Clearwire's largest source of wholesale customers.
With all of these issues, Morgan Stanley says, the base case value of the company is $1 a share--or less than a third of its current stock price of $3.10.
"Limited visibility into market expansion and unproven ability to disrupt existing technology make Clearwire a risky investment," Morgan Stanley analyst Simon Flannery wrote in a note published today.
Clearwire, however, said it isn't tripped up by the near-term issues, noting that it retains a strong spectrum position and has a clear technology upgrade plan.
"Clearwire does not operate its business with a short-term view," the company said in a statement e-mailed to CNET today. "Our inherent value as a company is in meeting the long-term demand for mobile broadband capacity."
Flannery cut his wholesale net customer additions by 4 percent to a little less than 5 million for this year and cut the figure by 31 percent to 2.9 million for next year.
Clearwire is at a critical point in its young life. Last month, Clearwire said it would change its 4G technology, moving from WiMax, a less popular standard, to LTE, which is what Verizon Wireless and AT&T have been moving toward. The move makes a lot of sense because there is more investment in LTE, which offers the ability to deliver a faster wireless connection.
But a move to LTE is dependent on getting the necessary financing, something that remains up in the air. Clearwire says it needs $600 million to upgrade its network.
In the meantime, Verizon Wireless has raced past Clearwire with its own 4G LTE network. AT&T is launching its LTE network in five markets in the next few weeks, and has already begun selling an LTE-compatible tablet in the HTC Jetstream.
Flannery said the lack of a 4G LTE network--used by Verizon Wireless and increasingly AT&T--will pressure growth in average revenue per user for Clearwire.
While Sprint remains Clearwire's largest investor and customer, it could potentially become a source of competition. Sprint finally getting the iPhone would take some of the shine off its lineup of 4G WiMax smartphones, all of which generate wholesale revenue for Clearwire. The iPhone would presumably run on Sprint's 3G CDMA network, and not on WiMax.
Flannery said he sees the Sprint iPhone pressuring Clearwire's wholesale growth.
Clearwire could see a bump in its stock price if its announces a new investor or major wholesale partner, Flannery noted. Sprint, meanwhile, could buy the rest of the stake in the company, although the nation's third-largest wireless provider is reluctant to bring Clearwire's debt and cash burn onto its balance sheet.
By itself, Clearwire has a lot of financial issues to deal with.
"Clearwire faces significant funding requirements that need to be met near-term," Flannery said.
Updated at 12:38 p.m. PT: to include a response from Clearwire.