With the tech world in China turmoil, it seemed like now might be an interesting time to dig into the latest teaser pitch from Jeff Brown about his “brand-new 5G device” that he thinks everyone will have to buy.
The ad started running last week, when Brown made a “live presentation” at the Shubert Theatre at Yale (not sure why, other than the elite allure and borrowed gravitas you might get by saying you’re presenting at Yale University) — and it was all structured as a “reveal” story about a box he had on stage with him that held, he said, huge promise as “everyone will drop their current smartphone for this far better device.”
But presentation or not, it’s really just yet another ad for his Near Future Report ($49) from Bonner & Partners, which is his entry-level tech-focused newsletter, comparable in some ways to other heavily-marketed “exciting growth” letters like Rule Breakers from the Motley Fool or Nova-X from Money Map. And in order to convince us to buy that newsletter, he dangles a stock pick in the form of a “Special Report” about “The 5G Device Every American Will Need.”
So… what is it? Let’s dig through the ad and see if we can get you some answers.
First, the good ol’ tent revival meeting hype about 5G:
“The Internet was a revolution that put tools in American hands that we could only dream about 20 years before.
“Wireless Internet ushered in the smartphone revolution…
“And now 5G is the next revolution.
“In each of these cases, technology shot forward all at once….
“Incredible technologies — like the one on that table — are ready to use today.
“But without 5G speeds, they’re just dead instruments.
“The speed of 5G is what will breathe life into them….”
And then a claim that’s pretty far over the top…
“The first mobile network launched just a few weeks ago in Chicago and Minneapolis.
“By year’s end, nine of the ten largest cities in America should have 5G wireless service.
“That means nearly all 328 million Americans will be able to use wireless 5G by Christmas. And that’s just in the United States.”
That’s not likely to be true. Verizon, for example, is hoping to have 5G service up and running in 30 cities by the end of 2019, but it won’t be full coverage of those cities. The initial mobile coverage in Chicago, for example, is limited to a few neighborhoods… having 5G available in Chicago now doesn’t mean that all 10 million people in the Chicago metro area have real access to 5G coverage.
The requirements for equipment installation for full 5G coverage are pretty overwhelming, with small cells being placed in every block of a city to get anything like full coverage of an area, and most buildings will not have any 5G access indoors (5G signals cover a much smaller distance than 4G, and have more trouble getting through walls and other obstacles). All 5G phones will also be 4G phones for the foreseeable future, since 4G is much better for covering a large area with reliable service, so I guess how fast people begin to demand 5G phones probably depends on some combination of marketing and network rollout… 5G coverage is much more expensive and intensive for network operators to create, so the pace of development and the “tipping point” when coverage is good enough to create real demand is still up in the air.
Verizon is a bit further along with its 5G home coverage, which is essentially “fixed wireless” broadband that competes with cable internet service and offers much higher speeds, but that also requires neighborhood nodes and antennas and professional installation (since the 5G receiver will probably only work optimally in specific parts of your house). I’m guessing that will remain the real focus of the 5G providers this year (and that was the focus of Ian King’s pitch for Inseego’s “base stations”, if you recall), though who knows, maybe the next Samsung 5G phone will really take off (the folding one, not so much). I predict it will be an evolutionary adoption, at least in the context of newsletter hype (it will take several years, not a few months), though it is indeed a revolutionary technology.
More from Brown:
“Some countries, like Finland, are already using 5G in certain cities. The bigger countries like Germany, Russia, and the UK, won’t fully roll it out until 2020.
“None of these people, in America, China, and around the world, possess the technology in their current smartphone to access that wireless 5G service.Are you getting our free Daily Update
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“They will all need the simple, elegant solution on the table over there — which I’m going to reveal in just a moment….
“Trust me, when you see what 5G can do, you’ll see why everyone will drop their current smartphone for this far better device.”
He describes this as “Phase Two” of the 5G rollout — the first phase is when the network is being built, and the network equipment providers and the tower companies and such are the ones who profit, and he thinks we’ve seen that already (I think we’re still in that phase, but we’ll see), and the second phase is when there’s enough coverage to create demand for devices that can use the networks (Phase Three is “services built on that new network capability”, which he thinks will also come quickly on the heels of device rollout).
Brown cites some examples to buttress his claims that “Phase One gains” have already come in 5G… the three examples he cites are Galaxy Next Generation (GAXY), Ameristar (AMWK), and Global Energy Networks (GBNW), none of which are what I would call “real” companies — they’re thinly traded penny stocks with no real business or revenue, and they all did have spikes up in their share prices… but those were almost certainly the result of “pump and dump” manipulation that is so common in such tiny names, none are actually connected to 5G in any real way and all of them gave up those headline-generating “gains” of 1,000%+, in most cases almost immediately.
So why are those examples in there? To impact you, dear reader — to make you daydream of 1,000% or 8,580% or 11,567% gains… if a copywriter can get you thinking about life-changing returns, it becomes ever easier to get you to open up your wallet and pull out the credit card to subscribe to The Near Future Report. After all, if you’re daydreaming about turning $500 into $58,335, well, what’s $49 for a newsletter subscription? Chump change!
Back to the ad:
“… as Phase Two begins, the device on that table should lead the way.
“There are two companies involved I think all tech investors should own right now — if they don’t already.
“One of those companies will have a virtual monopoly on that device…
“It’s my number one tech stock for 2019.
“You need to get into this stock in the next 4-6 weeks — or you’ll miss the big move up.
“That move will come as the 5G network rolls out to more Americans, allowing more devices to be sold.”
A monopoly? Yay! We love monopolies! Unless it’s Qualcomm (QCOM) and you’re getting squashed by the Federal Trade Commission, in which case maybe time to wait a few moments before getting too excited.
What else do we learn about this “device?”
“… the smartphone in your hand doesn’t have the capacity to access the powerful 5G network.
“And it’s because it’s missing a key part.
“But that part didn’t exist when your smartphone was made.
“It’s only been perfected in the last few months.
“This part adds the power and speed to connect to the 5G spectrum.
“And that makes all the amazing things you can do with 5G possible.
“By the end of the year, everyone will have this key piece.”
Well, not the Apple loyalists — there’s no chance that Apple will have a 5G device this year, and surveys indicate that something like 70-80% of iPhone users won’t consider switching to a new company, so that’s a ton of people. Maybe that changes if 5G is really widely available by this time next year and Apple isn’t on the verge of releasing a 2020 iPhone with 5G… but no, not even a quarter of “everyone” will have this “key piece” in their hands by the end of 2019. It may be big, and it will almost certainly grow from here, but let’s not exaggerate too much.
And what’s the “device?” The thing in the box he had on stage with him was a Samsung 5G phone, presumably the S10 that was recently released (that was formally released on May 16 in the US, the day after this “presentation” was made, though it had been available in South Korea for a while).
But it’s not the phone he’s talking about, he holds up a little chip and says THAT is the key part:
“This is what’s called an RF or Radio Frequency semiconductor.
“If you could open this new 5G phone, you would see this part in there.
“If you opened your current phone, it would be missing.
“This key piece is why every American will need a new smartphone this year. Because it’s your gateway to 5G speed.”
“RF semiconductor” is a dumbed-down phrase, of course, there are several chips in any phone that all work in slightly different ways to make sure that the phone can communicate over radio waves — which is, of course, a bit part of the point of a mobile phone.
But which one?
“Estimates say nearly 266 million Americans will replace their smartphone this year or next.
“And every single new 5G phone will have this part in it.
“One company makes the part for four of the top five smartphone manufacturers in America.
“Its piece will be in the bulk of those 266 million phones.”
OK… other hints?
“The company’s three largest customers — Apple, Samsung, and Huawei — are the top three smartphone manufacturers in the world….
“On top of that, smaller niche companies like Xiaomi, Oppo, Vivo, and Motorola are all key customers of this company….
“No wonder this year’s revenue estimates are over $3.5 billion.”
If he was doing the presentation today, instead of last week, I imagine he would have left out that ugly six-letter word that has chip investors all a-twitter of late (“Huawei”), but otherwise, yes, that paints the picture of a company that’s got good market share.
What else does he say about it?
“As 5G smartphones spread across the world… revenue will grow rapidly. And so will share prices.
“That’s why I’m so excited about this tech stock. And why I think it will be the best performing stock in the market this year.”
So who is it? Going by those clues, and by the fact that the chip Brown is holding looks a lot like a FEM from Skyworks, the Mighty Mighty Thinkolator sez he must be teasing Skyworks Solutions (SWKS), which is tied up in the Huawei and trade war panic these days but is certainly also very exposed to 5G device rollouts — they specialize in RF chips that handle amplifying and processing radio signals, with the most widely-used device described by them as a “front end module”, and those chips have gotten more complex and gotten more “spend per device” as phones have gotten more complex and require the processing of more and different frequencies… they have risen with 4G, and it’s widely expected to rise with 5G.
The challenge for Skyworks in recent years, as I see it, is that the device business has become a near monopsony — Skyworks arguably makes the best products and is in the best position to supply RF front-end modules at scale, but it is also dependent on a few huge customers, particularly Apple and Samsung, for the majority of its revenue. A “monopsony” is a situation where suppliers have to deal with only one buyer (as opposed to all buyers having to go to one monopoly provider of a product), and we’re not quite there, but it’s close — and that means the buyers have the ability to put quite a lot of pricing pressure on the suppliers if there is any kind of competing product they could use. Sometimes it seems like the only thing worse than not getting a slot in the next hot iPhone… is getting a slot in the next hot iPhone.
That is, of course, an exaggeration. Getting more sales is good, and the scale of the huge buyers helps to make semiconductor companies more efficient, something that they’ve all had to get very good at over the past few decades thanks to the relentless cost-cutting pressures across essentially every aspect of the chip sector. But it does mean that margins are always seen as “at risk” in the semiconductor space, and more so if there are viable competing products and you rely on a few major customers, as almost all chipmakers do these days thanks to the dominance of Samsung and Apple in the US and Huawei and a few Chinese competitors elsewhere.
We’ve seen these “guts” stocks for 5G teased several times before, of course — and, indeed, Skyworks has been teased as a 5G pick by other folks. Their one real competitive disadvantage in building integrated front-end modules, it appears, is that they don’t dominate the filter business like they do the amplifier business, so their SkyOne systems rely on some outside partners to supply bulk acoustic wave filters, but it’s hard to see that as a critical problem… filters seem to be quickly commoditized, even though there are some exciting-sounding new RF filter stocks that do get teased now and then — Akoustis (AKTS), teased by Jeff Brown for his more expensive letter last month, and Resonant (RESN), hinted at recenty by Chris Wood, are the two that have caught our eye most recently (in case you’re curious, no, they haven’t gotten quite as beaten up by the Huawei/China news as the big guys… but that’s because they’re effectively startups trying to create products and find customers, they don’t really have any business to “lose” just yet).
And yes, Skyworks is expected to have about $3.5 billion in revenue this year, which is what makes it the clear solution to the teaser over somewhat similar stocks like Qorvo (QRVO)… but that’s actually a decline from last year, when they had almost $3.9 billion in revenue. That can mostly be laid at the feet of Apple (AAPL), since the declining volume of iPhones sold hurts suppliers who sell those chips — even if the revenue per phone continues to rise a bit (when Apple raises prices that helps Apple’s revenue, but it doesn’t mean they’re going to pay more per-chip to their suppliers).
The hope for Skyworks is that the investments they’ve made in 5G and Internet of Things (IoT) connectivity over the past few years will pay off — that they’ll continue to get a growing presence inside new 5G phones and other products, and that they will also see rising orders for their industrial, automotive and other markets as more and more things become “connected.”
The big volume sales of 5G phones, though, will probably not come before 2020 and might not come until 2021, even if the rollout goes well. There’s no real driving consumer advantage to a 5G-enabled phone yet for most people in the world, given the very early stage of network development, which is why Samsung (which likes to be first) has one but Apple (which usually waits until things work perfectly) does not.
Apple is definitely the most important customer for Skyworks, and they could come out with a 5G phone as early as 2020 now that they’ve made nice with Qualcomm (QCOM), the only company capable of providing a 5G modem chip at scale in time for next year’s iPhone release (before the QCOM fight was resolved, Apple was likely to have to wait until 2021 for Intel to get its modems ready)… but mobile 5G may not be ready for prime time in a year, and sometimes Apple really waits until things are smooth and obvious before releasing products. 5G for the next year will mostly be the province of early adopters, most of whom will see little to no real advantage because of the lack of robust networks that can handle mobile devices — and yes, early adopters can be a meaningful market (just look at the lines we still see at the Apple store on “new iPhone day!”), but what will really matter is getting early adopters on line, adapting the networks to handle that new traffic and getting it right, then delivering something so delightful that the next wave of buyers rush in… and that part, which is when the big volume is expected for 5G smart phones, will probably take longer.
It seems likely that 5G won’t immediately work so great with stuff that moves around just yet, like, say phones, which is why all the first 5G phones will get an exciting boost in some circumstances, in some cities, but be really dependent on 4G to provide seamless coverage and will probably only get a dramatic boost from 5G when they stand still in a good coverage area, holding the phone in the right way. There’s an interesting field test story here for one of the test 5G networks, Verizon’s in some neighborhoods of Chicago, and a new Samsung S10 5G.
So 2020 and 2021 are the going to be the years of initial 5G excitement at the device level, I expect, not 2019, but that doesn’t mean we can’t invest in it — buying into the future, after all, is what growth investing is all about, and what we should really care about are what earnings are going to look like for Skyworks in 2021 and 2022, not 2019.
The big question in the near term, as I see it, is not really 5G, most folks seem pretty sure that it will roll out pretty aggressively over the next few years and lead to a new upgrade cycle for mobile phones that starts in earnest in 2020 or 2021 and picks up from there, and that Skyworks is still leading in its space and will continue to get a growing “dollars per device” number as RF handling becomes more complex with the addition of 5G to the existing (and still needed) 4G/LTE capability.
Debate ranges mostly over how fast this will roll out, and how long it will take for it to bring a long-awaited recovery in smartphone sales volumes, particularly in the US and China but also elsewhere around the world (What I read mostly is that South Korea is leading in the 5G rollout, with the US and China pretty close behind, most other countries are substantially earlier in the process).
No, the big question for the stock right now is not whether 5G hits volumes in 2020 or 2021, it’s what the heck is going to happen with the trade war?
Sentiment seems to get worse with that showdown each day now, and the Huawei news in particular is key because it tells us that semiconductor companies are now really a chip in a much larger poker game. The US is forbidding sales to Huawei, though with a slight reprieve for 90 days now that reinforces the notion that this is a negotiating tactic, not an actual immediate security threat… and Huawei, as the biggest device maker in China and one of the largest in the world, in both mobile phones and network infrastructure equipment, is a major customer for many of the big US chip companies… including Skyworks, which got about 10% of its revenue from Huawei in 2017 (it was lower than that in 2018, so not specifically disclosed, but is presumably still large).
Lumentum (LITE), Qualcomm (QCOM), Inphi (IPHI), Qorvo (QRVO), lots of US suppliers get ~10% or more of their revenue from Huawei, and that sudden disappearance of a major customer will hit revenues, and will likely hit income more dramatically than it hits revenue (since they can’t immediately cost-cut their way out of the investments they’ve made in capacity to serve their large and growing customers, including Chinese cust