The latest edition of Asif Suria’s stock newsletter SINletter recommends microcap WiMax provider Towerstream (Nasdaq:TWER).  Any SINLetter recommendation deserves serious attention for two reasons: first, Asif is a bright and insightful investor and second, SINLetter has an impressive track record:

So when Asif suggested I take a look at Towerstream, I fired up the browser and dug in.  At first glance, I could see what he found so compelling.  WiMax is an exciting area, with potential for explosive growth.  Towerstream itself has posted respectable growth while limiting customer churn, critical for any telecommunications company.  Perhaps best of all, it has a huge stash of cash — over $36M.  Backing this out, Towerstream has a  reasonable enterprise value-to-sales ratio of only 1.30.

Yet beneath the surface, the numbers tell a different story.  According to its latest quarterly report, Towerstream’s quarterly revenues grew slightly more than $500k year-over-year to $2,081,881.  To achieve this growth, however, Towerstream had to spend over $1.8M in selling expenses.  Add in another $1.9M in general & administrative overhead, $400k in customer support costs, and almost $1M in cost of services sold, and it is clear that Towerstream’s cost structure is too high.  If Towerstream does not dramatically ramp its growth rate while keeping SG&A costs in check, or cut expenses, I don’t see any path to profitability.

Nor does the company claim it will become profitable.  Instead, Towerstream states that certain markets will be EBITDA positive in 2009.  But Towerstream has been active in Boston and Providence since 2004.  Why will it take so long for even a single market to pay off, and what does that say about newly-launched markets?

The company’s failure to take a major chunk out of any market makes me wonder whether its efforts have been spread too thin, or whether there is some other fundamental or managerial problem.

Bottom Line: To be fair, the company has come a long way since its January 2007 reverse merger with a tiny shell called University Girls Calendars.  Its strong cash position gives it both operational and strategic flexibility.  It could offer a huge dividend, buy back shares, or invest substantially in increased growth.  But for my money, I’d like to see some improvement in financial results before investing.

DISCLOSURE: No position in TWER.  Long one subscription to SINLetter.

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