Is This Small Company Google’s Next Billion-Dollar Partner?

Some ideas just take a little time to germinate.

More than six years ago, Google (Nasdaq: GOOG) hinted at plans to roll out a nationwide network of free Internet portals, known as “Wi-Fi on steroids.”At the time, the press reports suggested that “ubiquitous wireless access for all Americans,” according to the company’s general counsel, might be coming to a town near you as soon as 2009.

Though the idea of a Google Wi-Fi network popped up in the news in subsequent years, it never really got off the ground. It seems that the technology, or Google’s basic strategy, needed more time in the shop before a broad public roll-out. Yet that roll-out may soon be at hand. According to recent reports, Google aims to provide free wireless equipment to a network of small and medium-sized businesses — if those businesses are willing to let the tech giant use that equipment as part of a nationwide network.

Why Google would pursue such a strategy is not yet fully clear. Presumably, the networked Wi-Fi gear would enable the company to deliver more targeted ads to anyone on its network. Few other companies would spend hundreds of millions of dollars — if not more — simply to gain to access to future profits. The payback period with such a program is likely quite lengthy.

If this project gets off the ground, it may create a huge windfall for little-known Ruckus Wireless (Nasdaq: RKUS).

According to FierceWireless.com, Ruckus has a strong chance of landing a major equipment contract in support of Google Wi-Fi. Earlier this year, Ruckus rolled out a suite of products that help businesses act as Wi-Fi hubs, and has apparently worked with Google on some test trials.

Investors have greeted the rumors with a yawn. Shares have ticked up a bit, but remain far below levels seen in early 2013, when the company was briefly valued at more than $ 2 billion. (Ruckus’ market value now stands at $ 850 million, and the enterprise value is around $ 700 million.) A just-announced contract with Boingo Wireless (Nasdaq: WIFI) to provide wireless Internet access on military bases was also met with a yawn.

To be sure, that $ 2 billion valuation in early 2013 now seems excessive. Sure, this company is in the midst of an impressive growth spurt — sales are expected to rise at least 20% in 2014 and 2015, after having grown at least that fast in the prior five years. Yet telecom equipment never carries such high margins as to justify a high price-to-sales (P/S) ratio. But the pullback now means shares are valued at less than 2 times projected 2015 sales (of around $ 400 million).

More intriguingly, forward estimates don’t include any sort of mega-contract from Google. That may be because it’s not a given that Ruckus will land the contract.

Analysts at Oppenheimer note: “It is unclear if Google would undertake such a large network with just one vendor, but to date it also appears to have only worked with Ruckus on the initial trial. Equipment interoperability limitations could limit the number of vendors that would be practical to work with (potentially split in large regional segments), and few companies beyond Ruckus have the service provider experience and equipment scalability to support such a Wi-Fi network (potentially Cisco (Nasdaq: CSCO) and Ericsson (Nasdaq: ERIC)).”

To paraphrase an old axiom, “nobody ever got fired for hiring Cisco” as a vendor. Indeed, Google may be hesitant to commit too deeply to Ruckus Wireless with this project — too much is at stake and too much could go wrong. So it may be best to assume that Ruckus ends up getting a third or half share of such a contract.

What kind of numbers are we talking about?

It’s very hard to know, but very likely in excess of $ 500 million for the nationwide rollout, and perhaps more than $ 1 billion. And winning a slice of such a massive contract brings another caveat: “While the top-line potential may be significant, there could be margin implications given the business model suggested,” writes Oppenheimer’s Ittai Kidron, adding that “Either way, this is likely to be viewed as a positive for the stock in the near term and is something to watch going forward.” His $ 16 price target represents 55% upside.

Risks to Consider: If this stock runs up sharply in coming months prior to any actual announcement, it may be wise to book profits as Ruckus is not assured of actually winning some or all of this contract.

Action to Take –> Ruckus appears to be a solid and fast-growing telecom equipment vendor, well-positioned for the continual spread of Wi-Fi hotspot equipment. The recent buzz around the Google contract hasn’t given shares much of a lift, so there is little risk in the failure of a large deal with Google to materialize.