Category: Consumer

Here is a direct link to the 5G list of stocks spreadsheet: 5G List of Stocks 2020

300c2b14-9353-4a4a-bc1a-7309e2824cee_5G-List-of-Stocks-v1.pdf

5G: List of Stocks

For this analysis, please reference the 5G spreadsheet that includes a comprehensive list of the companies we are tracking across various metrics. We have also written an overview of 5G infrastructure and where we believe the most growth will occur in the 5G tech stack.

Access 5G spreadsheet here. Access 5G spreadsheet here.

As stated in our first 5G analysis, the goal is to balance optimism with a more conservative outlook. Nokia is a great example of where the 5G “hypercycle” can go wrong. The company chose a chipset that ended up being too expensive and this hurt Nokia’s profit margins. The stock is down 30% over the past year. 

The following from NXP’s earnings report was sent to me by a reader: “And clearly, there is a churn going on in China right now, not only with the suppliers but also with the different standards and the different combination of carriers and their technology…it looks like it’ll still be a couple of quarters out before we’ll see strong growth in 5G deployment. We clearly see that it’s coming, just don’t see it in the near term."

NXP Semiconductors provided guidance around base stations in their recent earnings report, with the serviceable market for power stations growing only 13% CAGR over the next five years to $2.5 billion by 2024. Meanwhile, NXP issued more optimistic guidance for macro base stations and last mile solutions with a broad-based roll-out in late 2020 to early 2021 at 30-35% CAGR. 

Cisco also reported declining revenue this week for fiscal Q2 2020 and stated revenue will continue to decline slightly 1.5% – 3.5% year-over-year in Q3. The CEO called 5G a “multi-year transformation” on the earnings call.  

With this in mind, we are evaluating companies that solve problems unique to 5G that did not exist in the fourth generation of wireless. We are looking for companies that supply the expensive 5G chips (like Nokia referenced) and last mile connectivity (like NXP referenced). Ideally, for long term gains, the companies we evaluate will serve both consumers and business/enterprises.

I was not surprised to see the Sprint and T-Mobile merger approved. I discussed this in the prior PDF. You can expect to see the government to subsidize 5G and also become lenient with regulations in order to push 5G ahead.

The United States is behind China on 5G and this is more important than any single argument around the merger. 

Top Stocks to Watch:

As of today, one of the more important takeaways from the spreadsheet is that Micron may be undervalued in regards to its impact on 5G. We will cover this stock in a full-length report as there are few competitors in data storage/DRAM. 

Qualcomm ranked high across a few important metrics and that is reassuring as we also like its competitive positioning across multiple manufacturers with the Snapdragon X55 solutions.  An example was found in our coverage of Inseego on hotspots and fixed wireless access, where we noted there are 33 OEMs that Qualcomm is working with on hotspots and FWAs (Inseego being only 1 of the 33). This level of diversification helps provide a safety net if one OEM stumbles or a 5G roll-out is delayed. 

Skyworks and Qorvo are market favorites with well-known stories due to being Apple suppliers. These companies provide radio frequency front end (RFFE) components with an increasing bill of materials (BoM) from 3.5% during the 3G era, to 14.6% in premium 5G mmWave smartphones. Some bullish analysts expect the BoM for RFFE components to increase by as much as 30%, including Gary Mobley of Wells Fargo. Keep in mind, average sales price (ASP) of smartphones will be tested – even for 5G. 

Regarding Qorvo and Skyworks, keep in mind, the bigger opportunity will be at the enterprise-level. Here’s a writeup on that with an overview of the 5G breakdown. 

Large Cap Stocks:

Micron:

•        Micron has nearly 150% forward projected EPS growth from $2.27 to $5.52. 

•        In addition, Micron ranks high across 5G stocks with forward revenue growth of 25% with healthy margins of 20%. 

•        Micron is guiding for weak sales and earnings over the next two quarters which has provided a lower valuation than most. However, the company is one of the only DRAM and NAND suppliers capable of serving the 5G market. 

•        Micron may be undervalued with a forward price to sales of 2.5 and forward EV/EBITDA of 8, which is half that of its 5G semiconductor peers. 

•        The company is developing a new memory chip, the 3D Xpoint, to provide both DRAM and flash. 

•        Micron extends beyond the consumer use case to include industrial IoT and other data and storage needs for 5G.

Here’s a snapshot of data consumption over the next few years:

 Source: Cisco and Telecoms.com

Qualcomm:

•        Qualcomm ranks high on forward EPS growth of 45% from $4.21 to $6.10. 

•        Excluding small cap stocks, the company is second to Micron in the 5G category for forward revenue growth of 23%.

•        Operating margins are slightly better than Micron at 31%. 

•        Qualcomm has an EV/EBITDA of 14 which is double Micron’s.

•        Qualcomm’s Snapdragon X55 and platform will power the majority of 5G devices across many manufacturers.

•        We like Qualcomm as a diversified play across consumer and enterprise. The company works with many smartphone manufacturers and is in hotspots and fixed wireless access devices. 

•        Qualcomm has been trading at an important resistance zone.

•        Qualcomm was covered in the 5G semis overview. Please reference this for more information.

Skyworks and Qorvo:

•        Skyworks and Qorvo have EPS growth in the 20% range and revenue growth in the 10-15% range.

•        The only drawback to Skyworks is that it’s mainly a consumer smartphone play with 73% of sales coming from smartphone wireless chips. 

•        RFFE components are expected to have a 3x higher bill of materials for premium smartphones.

•        The market favors Skyworks and Qorvo as the story of being Apple suppliers is well known and easily understood. 

•        Qorvo was covered in the 5G semis overview. For more information, please reference this PDF.

Lam Research:

•        Lam Research provides wafer fabrication equipment with the majority of its revenue coming from NAND and DRAM memory manufacturing (like what Micron does).

•        Lam had a big rally in 2019 due to its strong financials.

•        We covered Lam Research in the 5G semis overview.

Taiwan Semiconductor:

•       TSMC is a fabrication plant for semiconductors that supplies integrated circuits to fabless semiconductor companies. 

•       Taiwan Semiconductor manufactures over 10,000 products for nearly 500 customers.  TSMC owns

50.5% of the foundry market and is a supplier to Apple and Huawei. 

•       The company is currently making a lot of lists for top stocks of 2020 and is a well-known story to the market. 

Small Cap 5G Stocks – Watch list:

We will be covering 5G small cap stocks throughout the next two quarters. As of today, our watch list is:

•       Boingo Wireless: 

We covered this early-on and have seen nearly 30% gains in the last 2-3 months. Please reference the PDF and Knox’s TA updates as the stock recently broke resistance. 

•       Inseego: 

This stock ranks high on revenue growth and has won over many analysts following the Huawei security concerns. Please be aware, the lead investor is H2C Holdings, which is ran by Phil Falcone. For disclosure purposes, he had a high-profile bankruptcy with LightSquared and an SEC investigation for using clients' funds to pay taxes. It's important to report all information on a stock and we will be issuing an update on our TA that comes out tomorrow. The stock has climbed 13% over the past week since we covered the company in a PDF.

•       Tower Semiconductor and Atomera: 

These small caps compete on 5G mobile-transmit receive chips that have the ability to deliver up to ten times the data rate as 4G LTE, as well as RF SOI technology that helps to increase battery life and boost data rates. These companies are having less-than-spectacular earnings reports with flat to declining revenue but look for a breakout in 2020. Tower works with Cavendish Kinetics, which Qorvo acquired. 

•       F5 Networks:

F5 Networks is a company I like a lot and plan to cover with a PDF as they specialize in network functions virtualization (NFV). NFV enables network slicing and software virtualization, which we covered in our 5G tech stack report. Network slicing will allow a physical network to be separated into multiple virtual networks that can support different radio access networks. F5 Networks recently acquired Security Shape, an AI-driven cyber security company. I am especially interested in F5’s recent acquisition of NGINX, which has an open source developer following, and will help F5 provide flexibility for software developers. 

•       Generac Holdings:

This company had an earnings beat last week and the stock responded with a 15% increase since the report. The company provides power generators and energy products with most of the gains reflecting the power outage issues in California. The company is also well positioned to provide backup power for 5G networks. 

•       By my estimation, Microvision and Appian Corporation will be slower to breakout because they require successful 5G roll-outs before the products or technologies can fully mature. We will keep them on our radar for now. 

o   Microvision could be an acquisition target for AI-powered assistants. 

o   Appian is an enterprise-level low-code programming platform for automation. 5G will drive a need for enterprises to release new applications very quickly, similar to Sprint.

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5G Premium Analysis: Semis Overview

Introduction:

Semiconductors are going through an important divergence between earnings and stock price. Earnings are flat to negative YoY and QoQ, and yet stock prices are reaching 52-week highs. Although a rebound was forecast for 2020, semiconductors have blown past price targets, leaving little left to be desired in their valuation. 

This is not a good time to initiate semiconductor positions purely based on 5G. My preference is to wait until forward earnings/guidance and valuations are more aligned, especially with the trade war risk, capex costs for cloud and 5G expansions that will affect some companies, and the slower recovery than current valuations suggest. For instance, only 12 of 30 semiconductor companies plan to return to growth next year. The majority are expected to report below 10% growth next year and will remain below 2017 sales levels. 

Regarding semiconductors for 5G, it will be important to differentiate between consumer use cases and business use cases. The latter is 5G’s true growth opportunity yet is much further out from deploying. To illustrate, Bernstein Research, a renown sell-side analyst firm, believes 5G will be more of a replacement cycle for 4G, so the unit opportunity will not be as significant as previous generations in the consumer category.

Another challenge, which I will cover in a separate analysis, is the end-to-end 5G infrastructure. Gartner predicts that half of communication service providers (CSPs) will fail to monetize back-end infrastructure due to systems not fully meeting 5G use case requirements. A complete infrastructure will be built by the 2025-to-2030 time frame, with 5G radio deploying first, then core slicing and then edge computing. 

Regarding the consumer 5G opportunity, Qualcomm predicts 200 million 5G smartphones to be sold next year and 450 million 5G smartphones in 2021. Currently, there are 1.5 billion smartphones shipped annually. The semiconductors below primarily benefit from consumer 5G. 

The global 5G infrastructure market is currently valued at $371 million in 2017 and is projected to reach $58 billion by 2025, growing at a CAGR of 95.8% from 2018 to 2025. We will cover infrastructure and business/industrial 5G use cases in a future analysis. 

5G Semiconductor Overview

Qualcomm is an interesting opportunity because they are dominating consumer 5G across many geographies and smartphone manufacturers while positioning themselves for business use cases in the future. This is unique compared to opportunities where you are confined to either consumer or business. I cover Qualcomm in length below.  

Lam Research is being aggressive with buybacks with one analyst forecasting the company will return about $12 billion to shareholders from 2018-2023. This is about 30% of Lam’s market cap. The company stands to gain from the upgraded memory that will be required from 5G.

This analysis also covers Qorvo, a company that exceeded analyst expectations recently. The company has quite a bit of exposure to Huawei and China, where 5G is ramping up quickly yet carries very high risk. However, 35% of revenue is derived from Apple and may help to offset any trade war issues with 5G in the United States. 

Broadcom had a peak year in 2018 with $20.8 billion in revenue and is expected to reach $16.97 in fiscal year

2019. According to current guidance, Broadcom will report $19.52 in fiscal year 2020 and $22.36 in fiscal year 2021. Like Qualcomm, Broadcom should make up to 50% more on chips from 5G than 4G (see Qualcomm for stats). 

Qualcomm

Qualcomm is a company that has been working towards the 5G rollout more aggressively than almost any other company on the market today. Qualcomm was a first mover in 5G technologies, such as mobile mmWave, flexible frameworks, scalable OFDM numerology and reciprocity-based massive MIMO. 

Basically, Qualcomm is well diversified and singularly focused on 5G. This market lead was demonstrated when Intel exited the 5G smartphone modem business last April and sold its offerings to Apple for $1 billion. This was around the time when Apple acquiesced and struck a deal with Qualcomm, their long-time nemesis. This supports Qualcomm’s assertion they have the best chip on the market as there had been rumors Apple was designing their own chip or would go with MediaTek. 

Qualcomm’s market lead has also allowed the number one chip designer to be the provider of 5G modem chips for Xiaomi, LG Electronics and ZTE – plus Samsung although not exclusively. Qualcomm estimates their serviceable market to be $65 billion now and $100 billion in three years (always consider the source).

On that note, Qualcomm can charge more for 5G chips. Analysts estimate 5G smartphones will offer Qualcomm the opportunity to sell 50% more dollar chip content per device versus the prior 4G generation, due to the increasing complexity and higher pricing. Dollar chip content refers to the dollar value of chips that a device holds. (source: Barrons). 

As stated in the intro, Bernstein Research, a renown sell-side analyst firm, believes 5G will be more of a replacement cycle for 4G, so the unit opportunity will not be as significant as previous generations. This is because 4G delivered mobile broadband with smartphones being the primary benefactor. The next generation will deliver the wireless edge with 5G New Radio (NR), with the main benefactor being new platforms of interconnected devices and M2M communication. 

It helps that Qualcomm is diversified. The number of 5G-capable devices will rise from fewer than 5 million in 2019 to more than 50 million in 2020 due to phones, routers and hot spots.

Qualcomm is positioned for both consumer and business use cases through over-arching infrastructure. The global 5G infrastructure market was valued at $371 million in 2017 and is projected to reach $58 billion by 2025, growing at a CAGR of 95.8% from 2018 to 2025. 

Here is the list of the suite of 5G related technologies offered by Qualcomm:

•       Private networks

•       5G internet of things (IoT)

•       5G broadcast

•       mmWave evolution and also Sub-6Hz spectrum

•       XR Devices such as Augmented Reality and Virtual Reality  

•       Shared, unlicensed spectrum

•       5G NR C-V2X smart transportation (autonomous vehicles)

•       Industrial IoT with eURLLC

Holistically speaking, 5G will enable fully-distributed artificial intelligence rather than cloud-centric AI. This goes beyond lower latency and customized/local value. Soon, AI will occur on-device for internal optimizations. This will create:

•       On-premise control for factories and manufacturing robotics and machinery

•       On-device intelligence assisted by the cloud; critical for autonomous vehicles to operate

•       Distributed processing for XR devices.

•       Cloud computing, storage and instant access

•       Low-latency gaming 

•       Better AI voice assistant and AI user interfaces

For enterprises, Qualcomm offers 5G New Radio (NR) mmWave private networks. The most likely industry to adopt private networks is the industrial sector. Release 16 for 5G will occur in the H1 of 2020 and private networks will begin to scale in 2021. Private LTE provides a clear and committed upgrade path to 5G. 

The term “private networks” refers to networks with radio core, and transmission resources dedicated to the enterprise. Most importantly, the private network is under the control of the enterprise. 

Less industrial businesses are unlikely to upgrade to 5G until there is a clear cost-benefit ratio. There are also other options which leverage LTE and WiFi that are less expensive than 5G mmWave technology.  

Cellular vehicle-to-everything (C-V2X) will be included in future 5G releases for autonomous driving. The enhanced network communication proposes vehicle-to-vehicle, and vehicle-to-infrastructure communication. For instance, not only will the vehicle you’re driving communicate with the vehicles around you to assist with braking and lane changes, but the vehicle will also communicate with street light infrastructure. This is a future technology and not a serious catalyst at this time. 

Fundamentals

Qualcomm’s fundamentals reflect many of the risks involved with the stock. The first is the ongoing lawsuits Qualcomm is involved with, and the second is licensing fees, which Huawei is currently withholding. To put it plainly, most of Qualcomm’s partners do not like Qualcomm.  

The current semiconductor rally would cause one to believe we have found a bottom for semiconductors. By my estimation, this is not true for Qualcomm. Next quarter, the company is forecasting $4.8 billion in sales and $0.85 EPS, which is relatively flat. Combined with the current stretched valuation for semiconductors, there should be a lower entry. 

With that said, expected sales increase for Qualcomm for 2020 is 17%. For 2021, a sales increase of 21% is expected. This is substantially better than the previous three years, which posted negative sales growth.

Risks:

Qualcomm’s Snapdragon X50 5G modem is considered the industry’s most advanced offering. However, Huawei openly challenges this assessment. Last March, the CEO of Huawei stated that the Balong 5000 modem can download at double the speed of the Qualcomm X50. 

Whether this is true is irrelevant. Huawei is essentially stating it has no plans of using Qualcomm, and China overall is likely to be less dependent on foreign chipmakers in the 5G era. 

As of now, Huawei builds up to 60% of their Kirin mobile processors. Bernstein Research has stated they expect HiSilicon Technology to be Asia’s biggest chip designer by revenue in 2019. HiSilicon Technology has tripled its revenue from $2.4 billion in 2014 to $7.6 billion in 2018. MediaTek supplies Oppo, Vivo and Xiaomi. Samsung has developed its own 5G modem chip for high-end devices in markets, such as South Korea.

Therefore, it’s very possible that whatever United States mobile technologies gain from 5G will be offset in what these companies lose from China’s nationalist stance. Also, Qualcomm enjoyed 5G hegemony in fiscal 2019 with 230 5G design wins across 40 OEMs, and this will be challenged in 2020 and beyond. 

Qorvo

Qorvo is a provider of radio frequency chips for mobile products (MP), and infrastructure and defense products (IDP). The mobile product is a radio frequency solution that performs various functions in the cellular radio front end section of smartphones and other cellular devices. The IDP segment supports global applications, including high-speed network connectivity to the cloud, data center communications, and internet connectivity. 

Qorvo has beat quarterly estimates for the past four quarters. The company recently experienced a surge in stock price due to reporting Non-GAAP EPS of $1.52 versus $1.30 and also beat the revenue consensus by 7%. On a GAAP basis, Qorvo reported revenue of $807 million with gross margins of 40% and diluted EPS of $0.70. The company also announced $1 billion in buybacks.

Notably, despite beating earnings, the company has had relatively flat revenue growth of 4% in 2019 following negative growth in 2018, and continues to forecast for minimal growth of 2.3% growth in 2020. Compare this to 2015-2016, when Qorvo saw about 50% revenue growth YoY. 

Earnings are expected to grow at 56.9% annual growth through 2022, which exceeds the industry average of 19.6% and the market’s 14%.  

Qorvo is an Apple supplier with 35% of revenue derived from the iPhone. The Huawei ban is an important consideration for Qorvo. There continues to be extensions on the entity list that bans US suppliers from selling components to Huawei. The extensions on the ban have allowed chip companies to recover from May lows.

As of now, another reprieve will be needed when the extension expires in December. According to author KwanChen Ma on Seeking Alpha, a full Huawei ban knocks off 13% of Qorvo’s revenue.  

Notably, according to Mayfield Recorder, institutions have taken gains on Qorvo recently with outflow exceeding inflow for the first time since Q2 2017.

Lam Research

Lam Research provides micro-processors, memory devices, various processing solutions and fabrication equipment for semiconductor companies. Front-end wafer processing solutions from Lam Research help to create chips and applications for nearly every edge device on the market. Wafer processing create transistors, capacitors and wiring for semiconductors. 

Lam Research has a potential growth opportunity due to the increase in demand for memory from artificial intelligence, IoT devices, and 5G mobile communication. Down the line, memory will also be needed for autonomous vehicles. Memory manufacturers need wafer fabrication equipment. 

Despite negative year-over-year growth and only 5% growth forecast for 2020, Lam Research has rallied. The stock is trading 116% higher from December lows. One catalyst is Lam’s buyback program. The company is returning 50% of its free cash flow to shareholders through dividends and buybacks with plans of returning a total of $12 billion to shareholders by 2023. This will lead to a 11.5% decline in shares. 

One argument for Lam Research is that the company is protected from supply and demand in memory as memory manufacturers will continue to buy from Lam even during a low point in the cycle. This was proven during 2015 when Lam did not feel the effects of the memory trough. Secondly, Lam spans across Micron, Samsung and Intel, and therefore, is more diversified. 

As recent as last July, Lam Research’s profits were nearly 50% less than the year-ago quarter at $541.8 million compared to $1.02 billion a year ago. Sales were $2.36 billion compared to $3.13 billion in the year-ago quarter. In current quarter, Lam reported -8% year-over-year sales. As stated, the company is forecasting only 5% growth next year. 

Although Lam is situated nicely for memory growth, the numbers are not reflective of the opportunity. It’s likely we see a lower entry for this stock.

Broadcom

Broadcom is one of the rare semiconductor companies that is expected to post increasing revenue and EPS this year. Next year, the company is expected to grow 4-5% across the top line and bottom line. Historically, Broadcom has been on a nice trajectory compared to many semiconductor peers, with 50%+ increases in annual revenue and some years posting triple digits (2015-2016). This growth has clearly slowed down yet earnings are forecast to grow from $16.97 in fiscal year 2019 to $19.52 in fiscal year 2020 and $22.36 in fiscal year 2021. 

The only drawback to Broadcom is the 5G push will be consumer oriented only. The company sells a variety of chips that enable wireless capabilities in smartphones, such as Wi-Fi, Bluetooth, and cellular. Apple makes up over 60% of Broadcom’s overall wireless revenue. Similar to Qualcomm, Broadcom will make more from 5G chips than from previous generations.