I’ve been mostly sitting on the sidelines during the “Crypto Mania” this year, because, well, anything “manic” makes me nervous and I still haven’t been able to come up with a rational price argument for any cryptocurrency….
… so I haven’t recently dug into all of the recent “Amazon is going to choose a cryptocurrency and make us all rich” ads (partly since I’m sure that’s not going to happen), but one of the folks sending out those ads, Jeff Brown at Bonner and Partners, also has another newish ad out about “invisible fiber,” so that made me breath a deep sigh of relief — aha! A crazy growth promise that’s actually about something real that I can (maybe) understand! The game is afoot!
We first covered this story back in July, when he was promoting these same ideas with a July 27 deadline… now, the new made-up deadline is October 1. I’ve gone through and updated the article as needed to catch up with the new version of the ad, and to update my disclosures since I have some investments in this sector, but much of what is below was previously published on July 25.
So what’s the story? Jeff Brown is selling his Near Future Report with a promise of big gains… and he says this “Invisible Fiber” is about to lead to a windfall for investors… let’s dig into the ad and see if the clues get us far enough that we can think for ourselves.
Here’s a bit from the ad:
“On January 28th, a secret memo was inadvertently ‘leaked’ in Washington, D.C.
“It exposes a secret strategy for defeating our enemies…
“China, Russia, and North Korea—
“And doing it in one fell swoop.
“In this exclusive presentation, I’ll show you how to turn this ‘leak’ into an absolute fortune.”
Intrigue! Secret memos! I love it. But I don’t get what they’re talking about yet, so let’s hear some more…
“… in this memo, the General laid out a sensitive plan for ensuring the government’s global dominance in digital technology.
“We’ve dubbed it ‘Invisible Fiber’…
“It has the power to transform almost ALL of America’s technology, practically overnight.”
Brown says that this “invisible fiber” will bring wireless connections that are 1,000X faster, enabling telemedicine, remote presence technologies, and autonomous cars… so it’s pretty clear that he’s just referring to 5G — the next wireless standard that’s expected to eventually supplant 4G/LTE for mobile phones and, more importantly, bring much faster connections that enable the internet of things, faster communication that makes autonomous cars safer and much cheaper (since they’d be able to “think” on the cloud, instead of carrying around supercomputers), and who knows what else.
The sky’s the limit, if you believe the 5G evangelists, though it might be a while before we reach that limit since it’s also going to be an expensive upgrade for wireless companies, and no one’s entirely clear on who’s going to pay for all this new equipment… or the throughput and bandwidth of all the data generated by all those potential connected devices.
He even references some military applications, which I guess makes sense — after all, most of our valuable technologies got their start with some kind of military funding, from the internet to GPS to autonomous vehicles…
“This gamechanger technology could strengthen a weapon that’s already making traditional missiles obsolete.
“The U.S. Navy’s Laser Weapons System (LaWS) is operational…
“A single ‘shot’ from the LaWS laser system costs about one dollar.
“While it’s devastatingly powerful by itself…
“The REAL goal is having a coordinated battle group equipped with these weapons…
“And being able to communicate 10x faster.
“This communication potential is why the Army, Navy, Marine Corps, and Air Force are salivating at the prospects.
“The hardware is here.
“All that is missing is the digital platform to make it work seamlessly.
“That’s where Invisible Fiber comes in.”
While the pitch is made with that
July 27 October 1 “deadline” to get rich, in the text of the ad he squishifies it a bit, talking up “a realistic shot to become one of the hundreds of new millionaires created over the next 18-24 months…”
And that’s a much more rational timeframe when it comes to thinking about 5G, of course — it’s still pretty early days, and the standards are just being agreed upon now as test projects go up around the world.
And there’s also quite a bit in the ad about that leak. He talks up the “secret” plans at the White House for 5G, and how one of the leaders of that effort on the national security front (that General) leaked the administration’s plans and was forced to step down… though what he really leaked was his aggressive memo proposing that the government essentially step in and take over the development of a 5G wireless network in the US instead of letting private tech and telecom firms invest and create these new networks.
Nationalizing communication networks is probably not going to win any fans on either side of the aisle in Congress, of course, and even the conservative head of the FCC spoke against it, so it’s not terribly surprising that that “leak” was treated like a trial balloon and shot down immediately. There’s also some argument to be made that the government was just trying to kick Verizon and AT&T in the butt a little bit and get them to accelerate their investment in 5G with a “if you don’t do it, we will” scare message.
But regardless of what role the government plays in accelerating or decelerating 5G buildout, everyone seems to agree that it’s going to be a big deal and it’s going to be expensive — 5G is much faster and more robust than LTE, but it also requires a LOT more “cell sites”, with smaller antennas that are much closer together to give good coverage.
And then, finally, Brown gets into the pitch about who will “win” ….
“… three companies leading the charge during this exciting time.
“As they race to exploit this game-changing technology shift for mammoth profits…
“I am confident you will experience a huge payday in your own account.”
After that, most of the pitch is just for the first of these three companies — a firm he calls the “$6 Digital King.” Here’s some more from the ad…
“new towers are an obvious need.
“But the latest digital revolution also means we’ll need new cells, radios, antennas, chips, base stations, switches, modems, and data center storage.
“And tons of fiber, too.
“But here’s what almost no one is talking about…
“Hundreds of thousands — perhaps millions—of containers the size of refrigerators will be discretely placed on or near the ground.
“There are none today.
“These ‘magic mailboxes,’ as I call them, will transmit signals up to 1,000 times faster than what’s possible today.”
And, of course, on the receiving end there will also be a gradual overhaul of the mobile handset universe, as new phones begin to include modems that can take advantage of the new standard… as happens with each wireless upgrade cycle.
Brown thinks that we’ll hit the peak “investment cycle” for the 5G upgrade in 2020 or 2021, but that, of course, you’ll want to be in before that to take advantage of profits as investors start to think more about that near future. Most of the big global wireless carriers are at least testing 5G now, typically in a select few cities, and the expectation among most folks seems to be that the first consumer rollouts will be sometime in 2019 and will take several years to really gain critical mass. Then we get to that “king” …
“At the center of this frenzy is the ‘$6 Digital King’
“There’s one company that is head and shoulders above anyone else.
“They’re using patented technology and covert negotiations to get ahead of the competition.
“To say this company is in the catbird’s seat would be an understatement of epic proportions.
“Their stock is hovering right around $6.
“A price that low might conjure up a startup with barely any experience.
“But this is NOT your ordinary $6 company.
“The ‘$6 Digital King’, as I call it, already has operations in 50 countries.
“This year sales could reach a staggering, mind-blowing $28 billion.”
Any other hints on this one? This is what we get:
“They just won a contract from the world’s biggest mobile phone company.
“I’m talking about a telecom titan with 894 million customers….
“… a company able to do it all when it comes to Invisible Fiber…
“Provide cloud services, IP routing, transport of many kinds, fixed wireless access, networking and more.”
And apparently they’re getting more aggressive…
“… the CEO isn’t content to stay still…
“During a media event on the eve of Mobile World Congress 2018…
“He surprised journalists by saying the rollout of Invisible Fiber is happening faster than expected, and the company is racing to line up more deals.”
And, finally, one last key clue:
“The $6 Digital King currently has a dividend yield of 3.88%.”
So that, sez the Mighty, Mighty Thinkolator, must be our old friend Nokia (NOK).
(Which means that I should note that I personally took a small flier on some Nokia LEAP call options, just in case 5G investment does accelerate faster than expected — a flier that’s made easier by the fact that it’s a very low priced stock, and the options require putting very little capital at risk. It’s kind of fishy to write about a stock when I have a leveraged derivative position, however small it might be, so I’ll extend the trading moratorium on this — I won’t trade in Nokia or those options I hold for at least a month after this article is posted, that should be plenty of time for any influence this article might have on those options prices to be washed away).
Nokia is best known, of course, for being the world’s dominant handset maker back in the 2G days, before smart phones, when it seemed like pretty much everyone had either a Motorola or a Nokia phone — and outside of the US, it was almost entirely Nokia. That business died, and Nokia has spent a lot of time in the past couple decades reinventing itself, first by trying to become a me-too smart phone maker to catch up with first Blackberry and then Apple (which failed), then by buying up other service providers (they bought NavTeq, for example which was one of the pioneering digital mapping firms that made stuff like MapQuest possible), but they’ve now returned to their strengths and are just focusing on the fixed side of the mobile network infrastructure — divvying up the market for wireless equipment with other leaders like Sweden’s Ericsson (ERIC) and China’s Huawei.
Before the 5G explosion, though, they’re facing the 4G letdown — capital spending on 4G/LTE networks has apparently dropped quite a bit as telecom companies prepare for this next adventure, and that’s at least part of the reason that Nokia’s business is expected to shrink quite a bit this year, going from almost $29 billion in revenue last year down to less than $26 billion, and with earnings per share expected to be 28 cents for 2018, down from 41 cents last year. Context is important — it sounds exciting when Brown says in the ad that, “this year sales could reach a staggering, mind-blowing $28 billion” … but they’ve been doing roughly $26 billion in sales per year over the past couple years, and a decade ago this company was doing $75 billion in sales at its peak (though, of course, Nokia was a very different company ten years ago).
The reason for optimism, if that’s what you seek, is the future — where optimism often lives. That’s where analysts see the expanded investment in 5G returning Nokia to growth, with 38 cents in earnings per share in 2019 and 44 cents in 2020. So if that does indeed happen, as is eminently possible but far from guaranteed, then paying $6 today is not crazy — getting a dividend along the way, and paying ~15X 2020 earnings. And the dividend looks high, but it could easily be sustained even if growth is weaker than expected — Nokia, after jettisoning many of its unprofitable businesses and paying back debt over the years, has more than $6 billion in net cash on the books (and current cash flow more than covers the dividend).
July 27 did actually have some roots in reality as a deadline, Nokia reported earnings on July 26, so certainly things could have changed a bit with that new data… in fact, the earnings didn’t mean much, with expectations still pretty light. October 1 doesn’t have any particular catalyst associated with it that I’m aware of — most recently, Nokia has announced a few big deals, including a $3.5 billion network agreement with T-Mobile and a $500 million loan from the EU to spur 5G development, and has gotten some press for publicly announcing that their maximum royalty rate for their standard essential patents will be $3.50 per 5G handset (perhaps competing with Ericsson, which has announced $5 as their maximum, or Qualcomm at $16.25, though probably some devices will have to have licenses from all those players, and I’m sure the courts will end up having to play a role in deciding whose technology is really being used by which device maker).
We’ll see how things work out over the next year or two, but it’s certainly not a crazy idea — cheap company, very competitive marketplace, and the stock has disappointed for a decade or more so investor expectations are probably quite low. That’s no guarantee of success, to be sure, and you could certainly have said the same thing about Nokia in the past and been frustrated by the stock’s subsequent performance, but it’s a fairly conservative play on 5G that pays a dividend and has plenty of cash and isn’t likely to drop 20% in a day and give you a heart attack.
And what else is Brown hinting at? He doesn’t get into the details as much with his other two “invisible fiber” teasers, but we’ll see what we can do with some guessing…
here’s the first one:
“A Picks and Shovels Play that Will Generate 100%+ Returns in 24 Months—Remember how I said we’ll need more than 1,000,000 cell phone towers to support the Invisible Fiber rollout? That’s a 5X increase from where we are now. This Picks and Shovels business is surprisingly simple… it builds towers and leases them to wireless carriers. Plus, they own the most valuable ‘real estate’ in the country.”
This could apply to any of the big tower companies in the US, Crown Castle (CCI), SBA Communications (SBAC) or the larger American Tower (AMT), all of which are structured as real estate investment trusts (REITs) for tax purposes. AMT is probably the more likely target for Brown, since it’s bigger and a bit more flexible (CCI pays a higher dividend, and pays out more of its operating cash flow than AMT does… SBAC is still trying to spiff up its balance sheet before they start paying a dividend), but all face essentially the same market forces — they’re both at risk of losing a major customer if Sprint and T-Mobile merge, and they’re both investing to try to be able to offer 5G networks, but it’s not entirely clear if the “cram the tower with antennas” model will work as well in 5G, as little antennas and “small cells” need to be on essentially every street corner to provide urban coverage.
So I don’t know if the tower companies are as much of a slam-dunk for the 4G to 5G transition as they were for the 3G to 4G, but it’s certainly possible that they’ll do well. As REITs, they’re pretty expensive… as tech infrastructure companies, perhaps a little less so. I’d probably gravitate to CCI, since I came close to buying that a couple years ago and since they’re more aggressively focused on shareholder returns, but they’re clearly second-place in the industry to AMT… SBAC is an outlier, since they don’t really fit with REIT investors yet because of the lack of a dividend, so that stock could certainly react once they do start paying dividends, though they could delay that for years if they want to (they have a few years worth of capital loss carryovers, so they won’t be generating income — REITs have to pay out 90% of their income, but aren’t required to pay dividends if they don’t have taxable income). On current cash flow, SBAC is trading at about 21X their expected $7.40 AFFO per share for 2018 (AFFO is adjusted funds from operations, a REIT cash flow measure meant to simulate the cash-generating power of their properties), AMT is trading at 20X the expected $7.30 AFFO per share for this year, and CCI at 20 its expected AFFO of $5.49 per share… so they’re all basically trading at similar valuations on current-year outlook. SBAC and AMT own substantial overseas assets, which complicate the results a bit (and have depressed results recently, partly because of the strong US$, though they could also boost results in the future), CCI is US-focused and pays a far higher dividend.
And if you’re prone to search for weakness before buying a stock, it might be that a wave of positive news for the Sprint-Tmobile merger could bring a buyable dip in any of the tower stocks, though that’s just a guess (the FCC is accepting comments in opposition to the proposed merger until next week). Any merger could have a meaningful negative impact on revenue for the tower companies in the next couple years, I expect, but the growth of 5G antenna locations will be dramatic whether it’s three telecom companies or four who do most of the investing, so if they can lock up those locations then they will probably do well in the end, anyway. (CCI, for example, gets almost 75% of its revenue from the big four US mobile operators… so if one of those disappears through a merger, the fear is, network investment and the number of antennas on each tower will fall).
And theres one more as well…
“The Millennial Money Maker—This tech upstart is already a magnet for young fans. Now my sources in the tech world tell me it is ready to attract more advertisers, too—contributing $3B in annual revenue within a few years. That’s massive.”
This is not an obvious call, but my guess is that he’s talking about Snapchat owner Snap (SNAP), which is expected to get to $3 billion in revenue probably in 2021 or so (they’re almost at $1 billion for the trailing twelve months, with analyst expectations of roughly 50% annual revenue growth for the next several years).
I don’t have much interest in SNAP, which seems to be losing out to Instagram from my extremely unscientific observations (I’ve never even tried Snapchat, so take that observation with a lot of skepticism)… but SNAP is coming from such a low base as a stock, and has such low investor expectations now, that perhaps it’s worth speculating. And yes, one of the things that 5G will make possible is an even more entrenched addiction to all forms of social media, particularly faster transmission of live video, which will presumably continue to be the focus of most of the social media companies… though I don’t know that 5G alone would be the reason to bet on SNAP over its competitors, so you’ll have to form your own opinion on that one.
And… we’ve come to the end of our parade, dear friends, so I’ll send the microphone out into the audience — have any thoughts about 5G investing to share? Favorites in the space? Feeling fond or foul when it comes to Nokia or American Tower or Snap, or any of the other companies we’ve glossed over along the way? Let us know with a comment below… and we’ve left the comments from the original July article below so you can see some older perspective. Thanks for reading!
P.S. We’re always looking for feedback on newsletters you’ve subscribed to… so if you’ve ever tried Jeff Brown’s Near Future Report, please click here to share your thoughts on it with your fellow investors. Thanks again!
Disclosure: I own call options on Nokia, Qualcomm, and Ericsson, mentioned above. I also shares of Apple and Skyworks Solutions, which are mentioned. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.