Our office is closed today for the holiday, but since we’re getting a bunch of new questions about a Motley Fool 5G pitch heading into tomorrow’s iPhone release event, I thought I’d at least share a teaser solution that I (half-heartedly, I admit) included in a Friday File for the Irregulars a few weeks ago… and actually, let’s roll in a few of those other “5G iPhone” teasers that are circulating anew this week…
What follows was in response to a reader question in the Friday File I posted on September 25. It has not been updated…
From 9/25 Friday File: Let me close out my thoughts this week by taking a few reader questions… including one about a newer Motley Fool 5G tease:
Here are the clues that a reader sent along recently (I’m told it’s from the Motley Fool, but haven’t actually seen this ad yet):
“Because this under-the-radar Pennsylvania company makes a component so essential to the improvements in Apple’s 5G iPhone—that Apple is expected to include it in every single new iPhone they make.
“And that means that this tiny company could ring the cash-register every single time a new iPhone is sold.
“You don’t need to be a math whiz to understand what that kind of sales growth can do to a company’s share price.
“And that’s why so many investors are buzzing with excitement about the new report from David Gardner’s team at Motley Fool Stock Advisor.
“The name of this report is ‘5G Supercycle: An investor’s guide to Apple’s next must-have device.’”
The Fool’s most ardent pitches in recent years, at least when it comes to 5G, have generally circled around the wireless part of that leap forward, with teaser campaigns promoting American Tower (AMT) and Skyworks Solutions (SWKS) lying pretty thick on the ground here still, but the limited clues here tell me this is very likely to be our old favorite photonics company, II-VI (IIVI), which is one of the suppliers of 3D scanning technology for the iPhone (or, at least, has been in past iPhones — both under their own name and Finisar, the competitor they bought a couple years ago). IIVI and Lumentum (LITE) are the two big optical component/3D sensing providers that are usually mentioned in connection with Apple and other consumer devices, though they also are primarily dependent on optical networking for most of their revenue — providing the lasers and other equipment that make fiber-optic networks, well, work.
And on that front, they’re mostly seeing a drop in demand this year — other telecom suppliers like Ciena (CIEN), Cisco (CSCO) and Arista Networks (ANET) telegraphed that weakness, with activity slowed in network development and data center upgrading both because of the pandemic and because of supply chain issues with China, which themselves are partially pandemic-related and partially a result of the ongoing trade war.
I stopped out of my IIVI position earlier this year, quite near the bottom as luck would have it, but it is a solid company with some good prospects as we resume our spending spree on upgrades to optical networks in the coming years. I haven’t bought back in, and their merger with Finisar is not yet yielding much fruit in terms of improved earnings or margins but did bring some additional debt onto the books, so the weakness this year is probably worrying investors a little bit (Lumentum’s big merger with Oclaro was a little earlier, and their financials are actually holding up a little better at the moment, though the two firms are not necessarily directly comparable). I’d consider getting back into IIVI in the next few months, but we’ll see how that story develops. They’re expected to report on November 12, though the quarterly report a couple weeks before that from Lumentum, expected on October 30, might provide a little insight into the sector going into that update. We’ll see.
Back to October here: So there you have a quick tidbit to chew on, at least.
We’ll see plenty of other iPhone suppliers teased today and tomorrow, I expect, the other big one that I didn’t mention above, and that the Motley Fool has teased many times since 2017 (though for their Rule Breakers service, not so much for Stock Advisor) has been Universal Display (OLED), which they’ve often pushed with something like with a “goodbye, iPhone, this could be 40X better” spiel. If you’re curious about that one, I last covered it in some detail after they reported earnings in August — here’s a little excerpt from that 8/7 Friday File:
From 8/7 Friday File: My newest position in the portfolio, Universal Display (OLED), also reported this week — and while the shares ran up into earnings, investors were quite disappointed after earnings. I think that was an overreaction, and added meaningfully to my holdings when the shares collapsed during after-hours trading last night (though the stock recovered pretty quickly this morning)… but here’s how I see the situation now.
Universal Display has been hit far harder than expected by the coronavirus shutdowns… not only did revenue come in much lower than anticipated ($58 million vs. $74 million expected — also down from $118 million a year ago), but they also said cautious things in the press release about the timing of recovery — since they don’t really know when factories will be at full production or what the pace of new product introductions will be. Here’s the CEO quote from the press release that seemed to get all the yellow “caution” lights flashing:
“The challenges of this pandemic continued to impact us in the second quarter as customer orders and shipments declined. For the second half of the year, while there is cautious optimism in the industry, we believe significant uncertainties still loom over the consumer and macroeconomic environments. Long-term, we believe that the growth path of OLEDs remains robust.”
So with this weakness, estimates have come down a bit further for 2020… but everyone seems to be fairly certain that there’s still a big bolus of new business coming through the pipeline, it’s just that we don’t know if it will hit in late 2020 or will be pushed out into next year. Part of that includes the new iPhones, with the widespread expectation that Apple will release more OLED phones late this year, including having all of their 5G models use OLED screens, and the upgrade of the existing mobile phone installed base from all major manufacturers for 5G in the coming few years is a bit part of my rationale for owning OLED… they don’t sell 5G equipment, but the fact that most people will want a new 5G phone over the next few years will increase phone sales, and more or more phones are being made with high-end OLED screens, many of which use materials from Universal Display and pay royalties to the company. The more uncertain part is televisions, which use a lot more screen components than phones but sell in much lower volume, but the massive amount of at-home viewership this year seems primed to focus people more on high-quality screens at home, as well, which should be a longer-term tailwind for OLED.
I don’t see any real chink yet in my arguments for OLED as a strong long-term story, though the timing is certainly unknown. The stock has had some huge ups and downs in the past, as befits a royalty and materials company that doesn’t really get to decide when products are introduced or which products will sell in high volumes, so we should be cautious and the fact that they have such high margins means that relatively small revenue moves have an outsize impact on earnings, both up and down… but the story still looks strong to me with anticipated growth in OLED screen demand, and the valuation remains rational if we are anywhere near hitting that next wave of demand growth. I think we are, so I was willing to buy the panic dip, but I’ll keep my exposure to this one fairly small because of the high degree of uncertainty.
Have any thoughts to share on imminent 5G iPhone stories? We’re still seeing plenty of questions for Lou Basenese’s “hands down perfect” 5G stock, which he also touts as a October 13 story thanks to speculation that an Apple deal could add a “rocket booster” to the shares (that was and remains a tease for Resonant, we covered an earlier iteration here in July), but I’m sure there will be plenty of others coming out of the woodwork in the days leading up to when we actually get those 5G iphones in our grubby little hands and can start taking them apart to figure out who the suppliers are. If you’ve got predictions, or other 5G iPhone teases that are catching your eye, feel free to let ’em fly with a comment below.
Should be an interesting week… we’ll be back tomorrow to cover more of the action, have a great rest of your day!
Disclosure: Of the stocks mentioned above, I own Apple and Universal Display. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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