Straight Path Communications Inc., a small telecom company with seven employees, lost more than a third of its market value Thursday after a short-selling hedge fund released a report critical of the valuation of its portfolio of wireless airwave licenses.

Kerrisdale Capital Management LLC said Straight Path's airwaves holdings are unlikely to be useful for next-generation networks and even if they were, the spectrum is widely held and wouldn't be used for years, if at all.

"Straight Path is the latest spectrum story to catch the attention of investors," said Kerrisdale Chief Investment Officer Sahm Adrangi, whose firm has about $350 million in assets under management. "It isn't very extreme to say it is worth nothing."

Straight Path defended its holdings and criticized the report as being designed to help short sellers, who have been hurt by a recent surge in the stock after betting it would decline.

"I wouldn't call this a substantive report," said Chief Executive Davidi Jonas, though he conceded that the company's revenue from the airwaves isn't likely to pick up meaningfully in the next five years.

Shares of the company fell 38% Thursday to $29.35. They were around $22 in early September and rose to a high of $50 last week. Short sellers represent about 26% of its shares outstanding, according to FactSet.

Straight Path's shares had risen amid indications that the airwaves it holds would eventually get used. Verizon Communications Inc. last month said it has begun work on developing fifth-generation networks and the Federal Communications Commission last week laid out a framework to put such airwaves to use in the future.

The controversy is an example of both the soaring demand for wireless spectrum and the difficulty in valuing it. As Americans spend more time watching video, playing games and shopping on their mobile phones, more bandwidth is needed for cellular connections. The government's last license auction brought bids of almost $45 billion, well-above initial estimates for the total proceeds.

The company concedes that the higher frequency licenses it holds are unlikely to be useful for years.

Straight Path, which has its main offices in Glen Allen, Va., was spun out of telecom provider IDT Corp. in July 2013. IDT's founder, Howard Jonas, is the father of Straight Path's chief executive and owns 72% of the voting rights through a trust. The CEO of IDT, Shmuel Jonas, is the Straight Path CEO's brother.

An IDT spokesman declined to comment on Thursday's stock decline.

Straight Path had revenue of $13.2 million for the fiscal year ended July 31, almost entirely from payouts of patent-infringement lawsuits and related license agreements. The licenses now held by Straight Path were previously owned by WinStar Communications and were bought by IDT for about $56 million in 2001 and 2002 after WinStar went bankrupt.

In a statement defending the value of its holdings, Straight Path said it would hold a conference call with investors Monday.

Fourth-generation networks generally use LTE technology, but a fifth-generation platform hasn't yet come together. The FCC has said its coming auction for lower frequencies could be prime for 5G networks but has also said high frequency may play a part. The attributes of Straight Path's high frequency airwaves mean they don't travel well through buildings or other obstructions, so would require new technology.

But most telecom observers don't expect the next generation networks, or 5G, to become a reality until roughly 2020. Smaller carriers Sprint Corp. and T-Mobile US Inc. are still rolling out 4G technology.

Straight Path's Mr. Jonas said the company is working to develop a prototype transceiver that would work with its frequencies. He also highlighted mentions of the company's licenses in the FCC's recent proposal. Those references are largely related to proposals made by the company and comments it has made to the commission.

Kerrisdale Capital contends that Straight Path's licenses aren't likely to make money partly because there are large amounts of similar airwaves that could be available for use, and at high frequencies many providers can share the bandwidth.

Write to Thomas Gryta at thomas.gryta@wsj.com

 

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(END) Dow Jones Newswires

October 29, 2015 19:55 ET (23:55 GMT)

Copyright (c) 2015 Dow Jones & Company, Inc.
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