Today’s teaser ad that we’ll be feeding to the Thinkolator is for Bill Poulos’ Premium Income Alert ($1,997/year) from Profits Run, and it’s a doozy, funneling two hype-filled trends into one stock idea.
Premium Income Alert is not a service we’ve looked at before, but it’s billed as a “weekly trading service” (the “upgrade” option from their more conservatively pitched Premium Income Letter), so there’s probably some specific trade being hinted at which is more complicated than “buy this $9 stock,” but the focus of the tease is primarily on that single stock that could be boosted by “coronavirus stimulus” … here’s how that gets hyped early on in the ad:
“We just discovered a little-known $9 stock… that could solve a lot of your retirement problems.
“What’s going on is very unusual, and you need to hurry before it takes off.
“The financial media isn’t covering this revolutionary tech or its life-giving impact… but in-the-know investors are forecasting a potential 1,431% gain by June 19th…”
And though they don’t say so, one is left to assume that they mean June 19th of this year… which, of course, is absurd. That’s in nine days.
Because the copywriters know that using Donald Trump’s name is catnip to a certain percentage of their audience, and will at least draw attention, they throw it in as a catalyst…
“It’s too easy to miss the forest for the trees.
“Because if you come up for air…
“You’d see that President Trump is rising to the occasion, and breathing life into a new $12.3 TRILLION-dollar American industry…Are you getting our free Daily Update
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“… one quietly FUNDED by his just-passed Coronavirus ‘stimulus’ bill — yet never REVEALED in the document…
“With only one $9 stock capable of carrying out his orders.”
So what connection does this have to coronavirus? We get this from the ad:
“This company is days away from solving the #1 threat to your health and retirement…
“CNBC crowns their venture as…
‘America’s most important project’….
“This company’s groundbreaking tech makes it possible.
“In fact, it’s already being rush-installed at Harvard Medical School…
“Chicago’s most prestigious health institution…
“Silicon Valley’s finest hospital…
“And the U.S. Department of Veteran Affairs health center.”
And the ad ladles it on thick with these health connections and huge potential… here’s more of a taste:
“Business Insider says this company’s tech helps us in the march against, ‘treating deadly diseases without sacrificing the speed and quality of care.’
“Forbes Magazine calls it ‘the new frontier’ and it’ll without a doubt “change our lives forever.”
“The Financial Times dubs it a ‘game changer for humanity.’
“MIT Tech Review goes on record to say this company’s tech is ‘the Mother of Invention…’
“The Verge calls it a ‘mind-blowing milestone’ that the world needs…”
So what are they talking about? Some crazy new medical technology?
Not really, this is, again, all about 5G. More from the ad:
“See, while 5G makes your phone faster…
“The REAL STORY is the ‘online infrastructure’ 5G will create that connects every hospital… research facility… and deserving American like you…
“Within the snap of a finger.”
The connection is not direct, of course, but the general idea that a rollout of 5G will eventually help some parts of healthcare is certainly reasonable even if that’s not going to be the primary focus or profit center — making fast broadband access more available to provide telehealth visits and remote care, or more robust wearable devices that monitor your health, and Poulos even throws in the “self-driving medicine delivery and grocery drop-off” as 5G outcomes.
In reality, we probably won’t be able to imagine just what the most visible outcomes of widespread 5G adoption will be in a few years — 10 years ago we certainly weren’t envisioning Uber or Tinder or TikTok as eventually dominant companies that would be big beneficiaries of the coming 4G upgrade… but sure, some of the advances will no doubt continue to come in health care.
So what’s the stock they’re teasing? More clues…
“Smart Investors Know There’s Only One $9 Company That’ll Benefit When 5G Finally Hits The Mainstream On June 19th…
“It’s not Verizon… AT&T… or T-Mobile…
“Although they’ve each already inked deals with the company behind the $9 stock I’ll reveal in a moment.
“It is… however… the same company hedge funds like Cevian Capital has plunked $2.78 billion into…
“Investor AB hunkered $2.20 billion into…
“AB Industrivarden snagged over $801 million in shares…
“In fact, one of the most secretive funds – Primecap Management Company – just snatched over 100 million shares…
“And Blackrock, one of the world’s largest asset managers, scooped $1.1 billion of this $9 stock.”
Blackrock owning shares of a company doesn’t mean anything, of course, that just means the company is of a meaningful enough size to be bought by institutions — it could just be in index funds (Blackrock owns iShares, and manages more than $7 trillion in both active and indexed strategies)… but a couple of the others are interesting, even if we’re left without much context.
And one more bit of clues:
“With A Whopping 49,000 Patents Under Their Belt, Now There’s Nothing In This Jackpot Of A Company’s Way….
“Because in order for that upgraded cell tower to function, there’s an ultra-critical element that only this $9 company makes….
“It’s their keystone transmitter chip… without it, 5G fails.
“As you read this now, their keystone transmitting chip is being installed across the nation, and soon to your hometown. So far, there are about 600,000 of these upgraded towers.
“There’s more where that came from as this company just fast-tracked their next generation transmission towers out…
“And my research shows that’ll hit mainstream news by June 19th.”
So what is it that Poulos is teasing here? This is the Swedish telecom equipment giant Ericsson (ERIC), which has been one of the two main infrastructure equipment providers benefitting from the blockade of Huawei (the other being their Finnish competitor Nokia (NOK)).
And no, they don’t really have a health focus, but they are, of course, very much tied in to the expansion of 5G networks — the problem over the past few years, for both them and Nokia, has been that they have trouble competing with Huawei when it comes to speed of innovation and costs, and that the pace of investment in 4G networks has cooled off dramatically before investment in 5G networks has really picked up enough to make up the difference. Throw in the fact that everyone’s competing and trying to establish a beachhead in 5G, which means the margins are not as good as expected, and you’re left with a couple Scandinavian giants that should be in the sweet spot and poised to enjoy a five-year revenue growth tailwind as 5G networks are built out, but haven’t actually been able to show that in their order books or income statements just yet.
Probably they will — Nokia has also been beset with some real management blunders, and an integration of ALcatel-Lucent that went about as badly as you could imagine, and Ericsson has reportedly done a better job in designing modern software tools than Nokia and taken some edge over its competitor, but a rapid global 5G deployment, particularly if Huawei is blocked from selling into large parts of the world, will eventually be a strong revenue driver for both. There really aren’t any other competitors, the network infrastructure has to come from Huawei, Samsgung, Ericsson or Nokia, and most telecom companies will use at least two of those providers to some degree, if not all four.
Does Ericsson have a “keystone transmitter chip” that’s required for 5G? Well, I guess you could say “sort of” in a theoretical way, since Ericsson has some 5G patents that others will have to license (as do Nokia, Samsung, Huawei, Qualcomm et al), but they do not sell a specific unique chip that everyone has to use. They do design some of their own silicon for their routers and base stations, but so do the others, and they also have committed (along with Nokia) to use Intel’s (INTC) new 5G base station chips as part of their builds. As with many tech companies who are teased as having a “linchpin” device that must be used, it’s probably more accurate to say they are among the leaders and have a substantial piece of the market.
China’s big mobile network providers are also important customers of all of these companies — they don’t rely just on Huawei, either. Ericsson is actually increasing its footprint in China, though at the same time taking a big writedown on their existing 5G inventory in China earlier this week — this is what they said in the press release, and it kind of sums up the whole 5G business for everybody right now:
“Overall, Ericsson’s 5G business in China is expected to have healthy profitability over the life of the contracts. However, the margins during the second quarter of 2020 are expected to be negative due to high initial costs for new products.”
Ericsson is widely expected to grow its profit, with the best bump in growth coming next year, but this is also a very large and complex company and the revenue growth is not dramatic even with 5G — so earnings growth depends on small improvements in margins and cost containment that can be really challenging to predict. The forecast is that revenue will go from $23.85 billion last year to $27.6 billion in 2022, which is revenue growth of about 5% a year, fueling earnings growth of about 15% a year.
That’s a really pretty ordinary “big cap growth” story, a little bit better than average but not as sexy as you’d expect for this massively hyped 5G story… and at the current price it’s pretty reasonably valued. If analysts are correct, then ERIC will earn 52 cents/share over the next four quarters, so for that anticipated 15% annual earnings growth you’re paying 18X forward earnings.
So on that front, I’ll just leave you with a repeat of the same comment I shared a couple weeks ago when Ian Wyatt was teasing the same company: I’ve been wrong about these stocks in the short term, and was stopped out of both over the past year — they seem like they should be in a very strong position, with fast-growing 5G network buildouts around the world, and yet they haven’t been able to turn that into revenue growth or even optimistic forecasts of late. I pretty much just have to throw my hands up in the air with these two and let you make your own call.
And as to June 19, that doesn’t mean anything specific for Ericsson. There was some substantial news yesterday, with the FCC meeting on June 8 helping to smooth the way for 5G upgrades by at least a small degree (trying to remove what they see as local approval “red tape” problems in cases where existing facilities are just being upgraded, among other things, though the ruling was not without controversy).
If I were to guess, I’d say that the June 19 reference might be for an options speculation — the June options contracts expire on June 19, so perhaps Poulos is trying to finagle a 1,000% return by speculating on penny options, that would be the only way to get that kind of quick profit from a slow-moving large cap stock like Ericsson (if you buy the June 19 $10 calls for five cents, for example, and ERIC shares jump up 10% to $10.35 in the next week or so, then that’s a 600% gain — not at all likely, the most probable outcome there still has to be a 100% loss, but as with all options it can certainly be dramatic if you get lucky).
And once we get to the order form, Poulos makes it seem a little more clear that he’s talking up some kind of options speculation… this is how he puts it there:
“The best part? I’ll also show you how to play the $9 stock at the helm of the 5G revolution, for as little as 9 cents each.”
He does give some past examples of big winners to try to buttress his claims…
“Crown Castle, a similar tech company, gave investors 8,834% gains when they unveiled their network infrastructure…
“If you had gotten in at the right time with $2,000, you’d be potentially sitting on $176,680.
“Would $176,680 help you sleep tighter at night? Help pay off some bills? Or grant a nice boost to your current nest egg?”
OK, so just to be clear — that would have been the profit you would have earned if you had bought Crown Castle (CCI), now one of the dominant cell tower REIT stocks, at the very bottom in 2002, following the dot com crash, and held it for 18 years (including holding tight during the 60%+ drop in 2008). It was a great investment then, and has been for much of the past 20 years, but as with all stocks that’s easy to say in retrospect.
Actually, it gets a little better because you might have added another 1,500% or so to that number by reinvesting your dividends when Crown Castle converted to REIT status and started paying dividends in 2014… but still, that’s a now-dominant company, chosen by looking in the rearview mirror, and those are easy to find — it’s the future successes that are a challenge to identify. SBAC, another example he gives, is essentially the same story, another tower owner, though it grew faster.
These are both real estate technology companies who established an oligopoly (with American Tower (AMT)) thanks to the short-sighted telecom companies deciding to spin out their tower assets to become more “asset light” (a decision that they largely regret now). AMT, CCI and SBAC didn’t bring a brand new technology to the world or usher in a new idea, they were just playing their game of Monopoly a little more cleverly than Verizon and AT&T… and it worked amazingly well, here’s the 20 year chart of those five companies:
All of those firms, of course, benefited greatly from the rapid expansion of cellular data use and the need for more antennas as mobile phones became mainstream and then 3G and eventually 4G mobile services began to proliferate. And all have made shareholders quite happy, only AT&T in that group has meaningfully lagged the broader market.
So will Ericsson be the next Crown Castle? No, their businesses are quite different. But they certainly might grow, they are investing in tower climbers to try to accelerate the install pace for 5G, and the stock is not cheap but is probably rationally valued given the potential step-up in growth from 5G.
The coronavirus pandemic in general is both a long-term positive for 5G and a short-term negative, most likely — it’s positive because it highlights the need for ever more robust networks and much better broadband availability when we’re all working remotely (though the current networks have held up shockingly well), and negative because the supply chain and the general pace of field work have been hampered by stay-at-home orders to varying degrees, and companies have in many cases slowed their decision-making to preserve cash during a risky period… but over the next five years it seems exceedingly likely that progress will accelerate in these 5G rollouts, and Ericsson and other established infrastructure leaders will see a boost to their revenue. They won’t be the biggest winners, but they’ll probably be among the most stable.
If you want one final piece of “wait a minute” skepticism to encourage you to research the fundamentals and make your own decision, I’ll just leave you with a few images.
This is Ericsson’s stock price chart since 2002, which is when the first 3G networks were just starting to go live in the US (Japan launched theirs a few months earlier, but nobody was really using them yet — networks were being built, so ERIC should have seen a boost in business, but 3G was still a few years from real consumer impact)….
That might not be fair, since in 2002 ERIC and other tech names were also still coming down from the deflation of the dot-com bubble, but if we push it out to summer of 2008, when the first revolutionary leap forward in mobile data hit real people with the release of the first 3G iPhone, it’s still pretty weak… this chart shoes the performance of Ericsson, Nokia, Qualcomm and the S&P 500 if you bought three months before the 3G iPhone was introduced (so, March 9, 2008), just because that’s roughly how long it will be until the 5G iPhone is rumored to be announced later this year:
And you might have noticed I didn’t include Apple in that chart — but that’s only because including Apple makes all the other players look irrelevant and makes comparison difficult. Here’s the same chart with AAPL included:
Will the network infrastructure plays work out better with this transition than they did in the past two (the first 4G network upgrades were started in 2008-2010, the first 4G iPhone was released in 2012)? I have no idea, it seems logical to expect them to see a growing revenue in the next five years… but it also seems that the biggest winners of past network upgrades have mostly been the consumer-facing companies with popular brands, often riding on the infrastructure built by companies like Ericsson, and the near-monopolies like the tower companies or dominant chipmakers. History has ample examples of companies in growth industries and with important businesses who still didn’t really make much money.
Thankfully, I don’t have to decide for you — it’s your money, so you can make the call. Think 5G will bring fortunes for Ericsson, either next week or over the next few years? Have other companies that you think are better-positioned? Let us know with a comment below… and thanks for reading!
Disclosure: of the companies mentioned above, I own shares of and/or call options on Apple, Intel, Nokia and Crown Castle. I will not trade in any stock covered for at least three days after publication, per Stock Gumshoe’s trading rules.