Global supply chains are looking to move out of China. Last week, Taiwan Manufacturing announced plans to build a $12 billion factory in Arizona. The plant will focus on 5 nanometer chips and will take nine years to build. TSMC is a major supplier to Apple, Qualcomm and also generates 14% of sales from Huawei. The story is evolving with TSMC halting new orders from Huawei per the Nikkei Review.
Although TSMC produces chips that power iPhones and consumer products, the main takeaway here is that the United States government is ramping up investment in 5G and artificial intelligence. The more advanced chips needed for defense can’t be made in China for obvious reasons.
Since last summer, we’ve been looking at when the Huawei tensions would fully play out and what companies would stand to benefit. Primarily, I was (and am) looking for companies that solve critical 5G infrastructure issues because it is incredibly costly to overhaul the 4G systems. There are also inherent issues to 5G with millimeter waves traveling short distances.
5G PDFs:
Overview
Semis
List of Stocks
HEROES Act: $1.5 Billion for Wi-Fi Hotspots (INSG, WIFI)
The HEROES Act was passed by the House and the bill is now moving towards the Senate, where the $3 trillion may not pass. Regardless, a bipartisan provision in the bill is the “Emergency Connectivity Fund” with $1.5 billion going towards the funding for “Wi-fi hotspots, other equipment, connected devices, and advanced telecommunications and information services to schools and libraries.” There’s another $4 billion to be allocated to emergency broadband service.
Regarding hotspots, Inseego has prioritized working closely with the U.S. government. Here’s what Inseego said on their last earnings call:
Turning to our strategic initiatives. We mentioned in our prior earnings call that we began efforts to deepen our relationships with the U.S. government to increase awareness of Inseego as a U.S. supplier to the administration’s objective of a secure 5G network ecosystem.
Given the scale of potential opportunities, we wanted an executive to lead that effort and have recently appointed former Inseego senior executive, Chris Lytle, as head of government affairs, including our initiatives in the education sector. Now I’ll turn the call over to Steve to discuss our financial results.
Boingo also has experience working with the United States government as a preferred hotspot on military bases. In fact, one of Boingo’s revenue segments is dedicated to military bases and they have contracts through 2038 with the Air Force. From the PDF we published: “Boingo solves a substantial limitation to 5G, which is the inability for higher frequencies to penetrate buildings and walls. Eighty percent of all cellular traffic occurs indoors. Essentially, the high speeds that cellular 5G will become known for are not operable indoors at this time.”
One thing to note is that Huawei had outpaced Boingo on DAS systems with a new digital indoor system (DIS). The population and size of indoor spaces in China drives a greater need for an improved indoor cellular connection. However, with Huawei being cutoff, this puts Boingo in a critical place to supply this piece to not only the United States but potentially to other Western countries.
As noted in the PDF, the fundamentals are not very good on Boingo whereas the product is very promising for 5G purposes. I believe the Huawei cutoff will benefit Boingo and strengthen this story.
I also recommended Marvell in December for similar reasons. It could take some time for Marvell to make up for the loss as 14% of revenue comes from Huawei. However, Marvell is in line to supply Huawei’s competitors – Nokia and Samsung.
Huawei is building base stations without components made in the United States and this impacts Marvell as Huawei is the current leader in 5G infrastructure. The storage business was down 1% sequentially at $275 million due to the export restrictions on Huawei. Samsung is increasing their orders, which helps Marvell. Nokia also uses Marvell’s chips.
Marvell supplies components for 5G base stations and both Nokia and Samsung are customers. In turn, Samsung works with Verizon, AT&T, SK Telecom, and KT. Samsung has been able to capture business that Huawei has lost, and the level of this future growth is an important catalyst.
There’s also a small cap breaking out that we had highlighted on our short list for the 5G report. The company is Atomera (ATOM). The company did a secondary last Wednesday at $5 per share. I’ve heard that in the discovery there was information on Phase 4 deals that may be coming to fruition. I’m still digging around on Atomera and any connection the price movement could have to the announcements on Friday (being a 5G play). Knox will be updating this on the forum for anyone interested.
Atomera was mentioned briefly in this PDF
Regarding F5 Networks and Telco Networking/Network Functions Virtualization (NFV), there was another acquisition announced in this space by Microsoft last week. You can read about it here. As you’ll see, this is an important space for cloud-native telecommunications.
Basically, I am betting that F5 can maintain its lead in a space where it has the superior solutions (according to Gartner and partners like RedHat and Datadog). As stated, revenue growth is mid-single digits and there’s a chance F5 can’t maintain a moat. On the other hand, F5 has owned the space in the hardware equivalent for a very long time and has this singular focus. I think F5 is making the right acquisitions with NGINX and security (as outlined in the PDF). This is a very new space, however, and will require some patience for the right entry.