The latest ad from Louis Navellier for his Growth Investor newsletter is a doozy… full of images of Louis Navellier driving his
midlife crisis Porsche supercar around and showing off the red “turbo” button, with that serving as a “you’re too dumb to get it otherwise” metaphor for the tremendous potential of 5G wireless.
As well, of course, as providing the healthy dose of greed that drives all newsletter subscriptions — I’ve been scouring these ads for well over a decade now, and I have to say, when they resort to using images of sports cars, waterfront mansions, sailboats, and, in the worst cases, even trophy wives, well, that means they’ve run low on ideas and are just pressing the marketing buttons.
Though I imagine it still works — they keep mailing similar ads.
So what’s the “turbo boost” 5G idea that Navellier is peddling today? Here’s a bit from the ad, where he starts out by quoting himself:
“Just know that I’m telling all my loyal readers,
‘Whoever controls 5G will own the internet through 2025.’ — Louis Navellier”
And then once we’re past the photos of the “red turbo boost button” in his Porsche, we move on to what he’s actually teasing — which is, of course, that new chips and technologies are going to be built into every phone and every mobile antenna to enable 5G, which itself will enable all kinds of super-fast stuff like rapid video downloads, remote surgery, self-driving cars, etc.
Really, if you’ve been reading your emails over the past two years you’ve certainly seen all that big picture stuff already — yes, 5G will be a big game-changer, just like 4G was (remember, before 4G really got fully into gear seven or eight years ago, you couldn’t even count on mobile video working at all.
More from the ad:
“I had my engineers rip the cover off to peek at what’s powering it.Are you getting our free Daily Update
"reveal" emails? If not,
just click here...
“Sure enough, they discovered the SAME kind of ‘turbo button’ technology that makes my Porsche 918 go so blazing fast —
“Can be found under the hood here, too.”
Yeah, it’s not the same technology. Not at all. But, of course, we’re too dumb to understand, so we’ll just conclude “Faster is good. Turbo go faster. Turbo good.”
What’s this “turbo” technology, you ask?
“It’s actually a ‘smart antenna.’
“Without it, your new 5G phone won’t be able to reach supersonic data speeds… Up to 1,000 times faster than what’s available today.”
Navellier does, interestingly enough, put in a rational forecast — unlike the folks who are promising that everyone on earth will have a 5G phone by March, he says this about the rollout:
“Cisco’s CEO Chuck Robbins put a number on it when he told Fox News last October…
‘5G will become reality within 3 years’
“A phased rollout will begin in 2020… with 5G dominating the market by 2023.
“If I could give you just one piece of advice, here it is…
“Get invested now, while close to 100% of the massive profit pie is still available.”
That makes sense, 5G is exciting but the rollout will take a long time to get to where it’s available in most of the US, most of the time… and, of course, we’ve got plenty of marketing talk around 5G that makes the rollout even more confusing (AT&T has its “5G Evolution” that’s faster but not really 5G, T-Mobile has something they call 5G that’s apparently “nationwide,” but it’s not the super-fast millimeter wave 5G, and “nationwide” means close to half of Americans are covered).
So what’s the stock behind this “turbo boost?” Is this just a strange speed metaphor, or do the photos of chips he includes actually have a specific connection to a stock? Let’s check out more clues…
“With 5G, you might be expecting me to recommend the stock of a leading mobile carrier like Verizon or Sprint…
“Or a leading handset provider like Samsung or Apple.
“But you’d be wrong.
“You see, for any of these companies to hit blazing-fast, gigabit download speeds…
“Not only will it require millions of 5G ‘turbo buttons’ inside every smartphone, tablet and device out there…
“… just as important…
“Every single antenna, on every tower across America, will need the same turbo technology built in, too.”
OK, so that still seems like he’s pointing at a chipmaker… though the images he provides from a phone teardown and the photo of a little “antenna” on a human finger (for scale) are not of the same kind of chip, so maybe this is just still metaphorical.
There’s a bit more about beamforming, the important technology that lets frail and fragile 5G signals get past big, tough obstacles like corners or leaves.
“While a regular 4G antenna can transmit to your smartphone up to 45 miles away…
“5G smart antennas need to be placed every 500 to 1,000 feet to allow for blanket coverage.
“Companies and industries have been working hard to overcome this hurdle.
“And ‘beamforming’ is the answer.
“Think of it as a traffic-signaling system in which smart antennas identify the most efficient data-delivery route to each user…
“And reduce interference in the process.”
That doesn’t narrow it down all that much, nobody owns the “technology” of beamforming, as far as I can tell, though every millimeter wave 5G installation will presumably use it.
He also throws Huawei into the mix, since that changed things for US-focused technology providers and gave some of them a leg up on the most competitive equipment maker…
“… the #1 player in the 5G competition just got ejected from the game.
“Which makes it even MORE urgent that you get a chance to reach out and grab a slice of a little-known company I like to call The King of 5G “Turbo Button” Technology .
“And it’s based right here in America.
“Here’s the FIRST
“5G ‘Turbo Stock’ I’d Recommend Anybody Buy … RIGHT NOW!”
So then we finally get to some specifics about that “King of 5G Turbo,” and a few clues we can throw into the ol’ Thinkolator…
“One American company has jumped out to an early lead — and is in the perfect spot now that the profits are beginning to roll in.
“I call this company The King of 5G “Turbo Button” Technology .
“It has only been in existence for five short years. In that time, it’s taken a chokehold on the emerging 5G infrastructure market.
“All without manufacturing a single smartphone… tower… or smart antenna.
“Instead, its unique ‘turbo button technology’ is getting built into all those things.
OK, what else?
“Its technology enables the mobile industry to “fast track” 5G product design — from product development all the way to deployment.
“Even after a new smartphone or smart antenna is rolled out…
“The King of 5G Turbo Button Technology monitors the situation…
“Optimizing performance so everything runs up to 1,000 faster than today.”
Oh, now this is starting to sound a little familiar… more clues?
“In 2015, it set out an ambitious goal to become ‘first in 5G Wireless’, and it is well on its way.
“It’s cracked all the key markets.
“Today, its exclusive ‘turbo button’ technology is inside 25 of the top 25 technology companies…
“78 of the Fortune 100 companies…
“And most crucially, 25 of the top 25 telecom operators”
OK, so this company is actually quite a bit older than five years… but it did get spun off on its own just over five years ago, and since then it has accelerated R&D and focused on developing a leading position in the testing equipment, technology and services that will be needed by next-generation 5G networks (and, eventually 6G… whatever that turns out to be).
So that’s a bit of a letdown… Navellier has been touting Keysight as the “master key” for 5G since May, and also own shares and just did a deeper dive into the numbers a few weeks ago, so I’ll share what I wrote then — the story hasn’t changed in the interim, other than perhaps a little worry about the short-term impact of coronavirus on sales:
Keysight was spun out of Agilent Technologies about six years ago, which itself was spun out of Hewlett Packard before that, and they specialize in testing and electronic measurement equipment — an area that has already seen substantial growth because of 5G investment and will, they think, continue to grow, though commercial communications solutions are still only about a third of their revenue. They set out a goal with their first investor day, in 2015, to be “first in 5G wireless”, and they think they’ve done that and that they are “well-positioned” to capitalize on their early lead. This is their basic “bio”:
“Keysight Technologies, Inc. is a leading technology company that helps its engineering, enterprise and service provider customers accelerate innovation to connect and secure the world. Keysight’s solutions optimize networks and bring electronic products to market faster and at a lower cost with offerings from design simulation, to prototype validation, to manufacturing test, to optimization in networks and cloud environments. Customers span the worldwide communications ecosystem, aerospace and defense, automotive, energy, semiconductor and general electronics end markets.”
Their investor presentation is getting a bit old now, but it describes their addressable market as about $15.5 billion, growing at 3-5% a year, and they think that they can expand their market share (which is currently estimated at 22%). That leads them to believe, as of last year at least, that they think they have a sustainable compound average growth rate on the top line (revenues) of 4-5%, which is not that dramatic, but they also think that their operating margin can improve, and that their earnings per share growth rate for the long term will be better than 10% annually.
So without knowing a lot about the dynamics of each of their business segments, or how much they might be lowballing those expectations (if any), what does that tell us about the current opportunity?
Analysts have had to increase their estimates several times in the past year, after Keysight posted substantial earnings beats (the past three quarters “beat” estimates by 15-20%). 2019 was the big earnings jump year, with growth of 45%, and that helped rerate the shares higher… but expectations are much more muted for 2020 and beyond, with an average analyst forecast of roughly 10% earnings growth for the next couple years… so if you’re just going from the PE ratio and penciling in numbers, it’s not a bad shorthand to start with a maximum valuation of about twice the growth rate for a “hot” sector — and that’s pretty much exactly where we are now.
So using forward estimates and ignoring this year’s huge growth surge, I would say $100 is a pretty decent “max buy” price for the shares for a relatively conservative investor who does want a taste of growth, the shares seemed reasonable at $104 a few weeks ago with a PEG ratio right at 2, and are more appealing now at $96 — with a forward PE ratio of 18 and an expected earnings growth rate of about 11% for a PEG (price/earnings/growth) ratio of about 1.6.
I think this is likely to be looked back on as a decent “dip” buying opportunity, though it’s also, of course, quite possible that they’ll say something very negative on their next earnings call (February 24, after the market close) about Huawei (which is more of a customer than a competitor) or coronavirus or whatever else that might depress upcoming results. There is no particular reason for the decline over the past month that I’m aware of, other than that many Chinese manufacturers are signaling that the restart of production and normal economic activity will be bumpy and slower than expected — the stock dropped through its 200-day moving average in late January, and has been bouncing right around the 50-day moving average at the moment, so it might just be the jumpiness of technical traders that’s driving things these days.
Keysight has acquired other companies to grow their business over the past few years, and thinks that they are going to be able to begin returning cash to shareholders in earnest in the next year or two, probably mostly through share buybacks, so that could provide some boost to earnings.
Probably the biggest argument in favor of Keysight, at least story-wise, is that the world is getting far more complex — as we saw with the Boeing debacle, testing and assessing equipment vulnerabilities is increasingly difficult and critical, and everything I read about 5G reinforces the notion that these MIMO networks that operate on a variety of frequencies and with lots of wave-shaping and targeting are going to be far more complex than previous wireless networks… which, again should require a lot more testing equipment and software and expertise from folks like Keysight both in setting up those networks and in maintaining them.
Does that mean they’ll win? I don’t know for sure, but I’m betting they’ll continue to do well and maintain their leadership… it’s a reasonable story that holds up, conceptually, and it’s been a solidly run company that makes reasonable acquisitions and appears to me to be well-positioned.
Keysight’s Investor Day presentation is up on their website, and though it’s a little old it’s worth watching some of the video and checking out the presentation slideshow if you’re interested in this one. What might stick out for investors is the fact that they made a plan for KEYS to build into a growing company when they went public as a spinoff in late 2014, and they’re on track — they expected to use their cash for acquisitions to build the growth potential over 3-4 years, and they did that, but they are now moving into the “value creation” phase where they use appropriate leverage to help return capital to shareholders… and they did bump up their buyback authorization with an announcement that they have a stock repurchase plan now of $500 million (they had bought back about $200 million under their previous $350 million authorization). If you want some more recent numbers, the last quarterly presentation is here.
If the market crashes, KEYS will almost certainly crash with it — but I am very impressed with the discipline they’ve shown in restructuring and building the company over the past few years, and with their exposure to some of the most important end markets and trends in the world… those who are pushing the envelope to build 5G networks, next-wave 400G data centers, and self-driving cars are going to need increasingly complex and effective test equipment to build those systems, and Keysight is getting more closely aligned with their customers, pushing R&D to meet specific customer needs, and, they say, taking share in most of those markets. And 5G specifically is indeed a substantial driver, this is a diversified business but their communications division accounts for more than 60% of revenue, and is growing faster than their other divisions, mostly because of 5G investment by telecom companies and other customers.
That’s enough to reassure me that the next 3-5 years should be very strong for Keysight, and while it’s certainly possible that the trade war or coronavirus shutdowns of manufacturing in China will have taken more of a bite out of the business than anticipated when they report in a couple weeks (Feb. 24 is now the official earnings date for the quarter), and there’s always risk, I think this is a solid “growth at a reasonable price” investment. I started buying last May and have been gradually nibbling to build the investment over time.
Their long-term goal is to have sustainable core revenue growth of 4-5%, improving margins, and earnings per share growth of at least 10%. Given the tailwinds of current large-scale technological changes coming through, including 5G network building, I think that’s actually a pretty low bar, even for a company that is already large ($18 billion market cap, $4 billion in revenue), and there’s a decent chance they could do substantially better than that… they only provide guidance for the next quarter, so analysts are really just penciling in “10% earnings growth” for the next couple years until they’re told to do something different, and I’ll be surprised if the earnings forecasts for 2020 don’t soon climb above the current expectation (just a few months ago, the forecast was $4.86 for FY 2020 earnings per share, and it has already grown to $5.16… we’ll see what happens with the next guidance update from the company).
I don’t know where KEYS is going in the short term, of course, or whether the forecast they give next quarter (expected on February) will be above or below current expectations, but I think analysts are being too conservative right now… and even if they aren’t, the valuation is rational. I think I have a good start in building a position that could be a strong if relatively unexciting grower for at least the next 3-5 years.
Disclosure: of the companies mentioned above, I own shares of Keysight and Apple. I will not trade in any covered stock for at least three days after publication, per Stock Gumshoe’s trading rules.