by Travis Johnson, Stock Gumshoe | September 4, 2019 12:29 pm
The steady thirst for 5G fortunes is far from being slaked, it appears — pretty much all publishers have some tried some kind of promotion to convince us that they have the best and most lucrative idea for investing in the next upgrade cycle in mobile telecom… and today we’re looking at the latest spiel from Stephen Leeb, who has been a newsletter guy for decades and is currently peddling subscriptions to his The Complete Investor letter ($39/yr) by hinting at a “5G savior.”
Here’s a little taste of the ad:
“The impact 5G will have on the world will be every bit as transformational as the combustion engine, the light bulb, the personal computer, and the Internet.
“Maybe even all those inventions combined.
“But before any of that can happen…
“There’s a devastating 5G technology flaw the telecom industry needs to overcome….
“One of 5G’s greatest features is that it can send and receive data at speeds up to 100 times faster than 4G.
“5G can do this because it’s using a higher and faster range of the Radio Frequency spectrum… between 30 and 300 Gigahertz.
“Because they have a very small wavelength, signals in this range are called “millimeter waves” or mmWaves.
“But compared to 4G signals, mmWaves are 90-pound weaklings.
“A brand-new, high-speed, high capacity 5G antenna can only transmit a wireless signal just a little over 500 yards.
“Plus, if there’s an obstacle like a wall, a car, or even the leaves of a tree sitting between the antenna and your phone… no 5G for you.”
If you’ve been seeing the 5G hype over the past year or two, this is no surprise to you — yes, 5G is probably going to forever work in concert with 4G because it’s not going to be possible to cover every inch of the world with an antenna and base station every couple hundred yards… but in areas of high intensity data use, or where low latency is particularly valuable, there are several ways of beam-forming and antenna location that are hopefully going to provide something like 5G coverage in most urban areas.
So what’s the solution that this little $5 stock has come up with? more from Leeb:
“I’ll also tell you about the company I’ve uncovered that has single-handedly developed the solution.
“When regular investors discover the information I’m going to share with you today… the company with the $5 stock price and trillion-dollar solution…
“They’ll start loading up on shares faster than a Ferrari on the Audubon.
“Which means, if you follow my simple instructions today, you could quickly find yourself sitting on $117,385… $234,770… or even as much as $469,540… depending on how much you invest.”
OK, that was mostly just hype — if you want to be “sitting on $117,385” anytime soon, I hope you’re starting with $100,000 (that’s not what Leeb promises, just a rational assessment — he says that “the information in this report could help you turn $5,000 into $117,385 or more over the next 12 months,” which is close to being insane) … but let’s get to the hints about these solutions to the “devastating flaw”…
“The $5 “5G Savior” plans to solve the 5G Flaw in two very different ways.
“Fix #1: The Brute Force Approach
“If a 5G signal can only travel a few hundred yards from the nearest cell tower antenna, the surest way to increase its reach is… you guessed it… Install more antennas….Are you getting our free Daily Update
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“For 5G to offer similar coverage, a network of ‘repeater’ or ‘small cell’ antennas needs to be installed every 1,000 feet or so…..
“For 5G to offer the same level of signal strength and reliability, cellular carriers may need to install up to 50 times more antennas than are currently in use.
“That means within the next five years, we could see as many as 16 million 5G antennas installed… just in the United States.”
OK, so instaling 16 million anythings in short order probably means a business opportunity… how does this company come into it?
“Several years ago, the $5 company figured out there’d be huge demand for 5G antennas.
“So they invested heavily in designing and building some of the best, cutting-edge antennas in the world.
“… I believe the $5 company will be hired to supply a major percentage of America’s 16 million new 5G antennas.”
And, of course, there’s that second solution to the flaw…
“Instead of using the 4G method of spraying signals in all directions at once and hoping each one finds the right user’s smartphone…
“5G beamforming tracks the exact location of each connected device and sends a laser-focused ‘beam’ of data directly to it…
“Even when the user is moving.
“Beamforming technology is also smart enough to identify obstacles like trees, buildings, or cars when they’re in the way…
“This really is some next-level, futuristic technology we’re dealing with here.
And this $5 company is at the forefront.”
What other clues do we get?
“… the company does business in more than 130 countries around the world”
And it’s also a patent owner….
“Patent Licensing Will Generate Billions
“The company owns more than 1,000 5G technology patents….
“This means every time a smartphone manufacturer builds a 5G phone, it owes the company a licensing fee.
“My research shows this fee could be as much as $3.50 for every 5G smartphone sold anywhere in the world.”
OK, so that’s enough clues — the Thinkolator won’t even have to come out of the garage for this one… but let’s just see what other hype he throws in before we get you your answer…
“If expert estimates are even in the ballpark, as many as 1.9 billion 5G smartphones will ship between now and 2023.
“This means companies like Samsung, Apple, LG, Motorola… even foreign phone manufacturers like Huawei… will owe the company a licensing fee for every last one of those 1.9 billion phones.
“At $3.50 per phone, the $5 company stands to generate as much as $6.65 billion… just from licensing fees.”
Patent licensing is part of what built Qualcomm into a behemoth, so that’s exciting — licensing fees hit the income statement as pretty much pure profit, usually with margins of 80-90% or more, because the cost of developing those technologies or patenting those ideas was amortized years ago. So Leeb goes on to exaggerate that a bit…
“And with $6.65 billion pouring through the pipes, the company earns $4.6 million dollars a day… for doing literally nothing!
“For a moment, just imagine what a $6.65 billion patent licensing jackpot can mean for a $5 stock.
“It could easily soar 5x… 10x… 20x… maybe even 100x.”
That’s hugely misleading, of course, because you’re comparing a dollar figure for the whole company to a relatively meaningless share price for one little piece of the company… without knowing anything about the rest of the company or how many pieces (or shares) the company has been divided into… but more on that in a moment.
More from Leeb:
“Over the past few years, the company has developed a reputation as one of the few companies who can actually make 5G technology work.
“So as you might expect, cellular companies have been paying a lot of money for the right to partner with them.
“As of last count, the company has signed over 40 major contracts with telecom companies and governments around the globe.
“And since March 2019, they’ve closed an average of one major contract each week.”
And some flesh on those bones:
“So far, they’ve signed deals with companies in Europe, South America, Asia, the Middle East, Africa, and North America… including contracts with four top-tier U.S. cellular carriers.
“While the dollar value of these contracts isn’t public knowledge, my sources indicate one of them is a multi-year deal worth $3.5 billion.
“Even if the other 39+ contracts are worth only 20% of that amount, the company could secure as much as $31 billion in new revenue over the next few years.”
And Leeb says that they’ll also benefit from two catalysts courtesy of President Trump — first, that he wants 5G to happen fast… and second, that he has banned their biggest competitor, Chinese giant Huawei, which is also leading to Huawei bans in some allied countries.
So yes, I know, you’ve probably figured out the answer by now… but let’s close it out with some more (horrifically misleading) daydreaming…
“And with the company signing billion-dollar contracts in dozens of countries around the globe, it won’t be long before Wall Street catches wind of its momentum.
“When that happens, you can say goodbye to its $5 stock price.
“Where it goes from there is anyone’s guess.
“If it hits $100 a share… a $5,000 stake could turn into $100,000.
“When it reaches $250, that same $5,000 could add $250,000 to your account.
“An extra $250,000 could let you…
“Become debt-free for the first time in years…
“Put an addition on your home…
“Or walk into a dealership and buy a new Cadillac without a second thought.
“And the stock price could go much higher than $250.”
So who’s the cure for this “devastating flaw” and the owner of all these royalties? This is, surprisingly enough, our old friend Nokia (NOK), which is indeed a $5 stock (it’s seen $6 and $4.50 over the past year or so), though it ain’t exactly small or unknown.
One reason this ad works so well to draw in your attention is that investors are notoriously silly about per-share stock prices — it means a lot to some people to buy a stock that’s less than $20, or less than $100, and to some it feels like there’s more exciting potential if a stock is priced at only $5 a share (or less)… as if the share price signals something real about the size of the company (it doesn’t, since every company has a different number of shares outstanding — in Nokia’s case, they have 5.6 billion outstanding shares, it would be but a quick wave of a magic wand to consolidate that 10:1 to 560 million shares and turn NOK into a $50 stock… if that makes you feel different about it as an investment, then you need to think deeper). That’s also part of the reason why the Oxford Club pitch about a “little $3 one stock retirement company” is so popular and has been circulated so many times: Low stock prices make us daydream about huge gains.
But, of course, Nokia is not at all a small company. Neither is Oxford’s touted FoxConn, for that matter. Nokia has a $27 billion market cap now, and has been over $100 billion a couple times (back in the dot-com mania, when they were the dominant global supplier of cellphones, a business they’ve largely disposed of, and again in the early years of the iPhone when they briefly seemed capable of competing in the smartphone market).
It’s a very different company now, however, and generally a more value-priced one. Nokia acquired Alcatel-Lucent about three years ago, sold off its handset division before that, and licenses its brand name to phonemakers around the world instead of selling millions of its own phones (sort of like Blackberry now does)… but the old core of both Nokia and Alcatel-Lucent is telecom equipment, and they have really doubled down on that. They are licensors of basic patents and technology for cell phones, just like Qualcomm and Ericsson are, so they earn a few dollars per each high-end phone, but they are primarily a builder and seller of networking equipment and software to run computer networks and telecom networks, with most of the business in wireless networks… and, yes, that includes leadership, in these early days, in 5G installations (the assessments of market share that I’ve seen have them well behind Huawei, which is very aggressive, but with larger share than Ericsson or Samsung or the other smaller equipment makers and vendors).
I’ve been building a Nokia (NOK) position over the past year or so, one that’s still a little bit in the red, and this is what I noted for the Irregulars last week when I last added a little nibble:
“Speaking of 5G, which I still expect to be a very powerful tailwind for a lot of different telecom hardware and, after that, tech companies, I also added slightly to my Nokia (NOK) holdings today when it dipped under $5 a share again. Nokia is now, for the first time, sneaking into my top ten holdings after a very gradual process of building a position over the past year (a position that’s under water right now, I should note).
“Next year should provide the big moment of truth: If Nokia is really able to ramp up sales late in 2019 and throughout 2020 as 5G networks are built out, posting a 30%+ jump in cash flow next year as analysts expect, then the stock will not likely languish in this $4-6 neighborhood far into the year — the expectation is for more than 40 cents a share in earnings in 2020, which would be a 50% pop, and that won’t be an ongoing surge but gradual growth should continue, and it will reset earnings at a higher level for at least a few years as infrastructure demand heats up. NOK shouldn’t trade at a PE of 12 with a 4.5% dividend yield in that world. I think a double over the next 18 months is possible, though a 50% rise is more likely… assuming, of course, that things progress as Nokia and the analysts expect, and we don’t see the whole market clobbered by the next barrage of trade war tweets.”
So sure, I can see the possibility that Nokia could double from here in the next year or two… though I don’t think that’s the most likely outcome, and it’s far from guaranteed. A slowdown in 5G investment (or a resurgence of Huawei globally) could easily cut into that. This is not a tiny technology startup, it’s a gigantic global blue chip in the telecom equipment space. I like it for its steadiness, and I agree that investors are probably underestimating the growth potential over the next few years, but I also like it for the dividend and the potential for dividend growth. Here’s what Nokia said in the annual report earlier this year:
“The dividend to shareholders is Nokia’s principal method of distributing earnings to shareholders. Over the long term, Nokia targets to deliver an earnings-based growing dividend by distributing approximately 40% to 70% of non-IFRS diluted EPS”
So in addition to the expected growth in earnings next year, it’s very likely that Nokia will again increase the dividend — though probably not so dramatically, since they are growing into that 40-70% payout goal and paid out more than that last year. The forecast in euros is for 36 cents in earnings per share, and that’s probably using non-IFRS numbers because analysts tend to use the same numbers the company likes, so under those guidelines that would allow for a potential dividend of anywhere from 14 cents to 25 cents, but they’ve been clear about their intention to raise the dividend over time so I’d assume we’ll get at least a token increase from the current 20 cents (and those are euro cents, so that’s 22 cents in the US… though there’s also dividend withholding in Finland, and an ADR fee that can eat into that a little, particularly if you invest in a tax-deferred account and can’t claim your foreign tax as a credit). Personally, I expect NOK to increase the dividend by at least 3-4% for 2020, and to therefore have a forward yield of about 4.7% at this price ($4.90 or so)… the current yield, at 5 euro cents per quarter, should be just under 4.5%.
Which is lovely, and I think it’s an attractive opportunity (obviously, since I’ve been buying the stock), but it’s definitely not a stock that’s going to go from $5 to $100 in a year or two… and even $10 requires some optimism. Nokia does have technologies for mimo antenna arrays and other ways to deal with the inherent challenges of mmWave bandwidths for 5G, but so do Qualcomm and Ericsson and others. They arguably have an edge in small cell technologies, partly because they can build on and integrate with their 4G equipment that providers are already using… but they are certainly not providing the only solution to 5G’s well-known challenges (can’t penetrate buildings, need base stations every 100 yards or so for full coverage).
It is, I’m sure, sadly quite possible to build and maintain a 5G network without using Nokia at all (though you might have to license some of their technologies, as Nokia presumably has to license in tech from Qualcomm, Ericsson and others from time to time).
Probably the best way to “cool your jets” on Nokia, after reading through Leeb’s presentation and getting overly excited about the huge billion-dollar numbers he throws around, is by looking at Nokia’s actual numbers today to get a little context.
Yes, $6.5 billion in 5G royalties is (remotely) possible over the next four or five years (not in a single year, but cumulatively as 5G phones get adopted globally). NOK has capped its per-smartphone 5G royalty for its “standard essential patents” at about $3.50, lower than the royalties Qualcomm and Ericsson are hoping for, though will presumably also negotiate that down with some customers. That’s a core part of the business that has existed for years, roughly 6-8% of the wholesale price of a new phone, on average, likely goes to pay royalties to a variety of technology owners, with those three getting the lion’s share of all cellphone technology royalty payments for 4G as well, and part of the reason Nokia set its rate surprisingly low last year was a desire to avoid Qualcomm-like backlash and litigation (Qualcomm has demanded as much as $16 per phone in royalties, in addition to providing actual chips and modems for many customers).
It’s not going to flow in dramatically, however, 5G will take years to get built and adopted — estimates that I’ve seen are that we won’t even see 100 million 5G phones shipped in a year until at least 2021, perhaps 2022. If that leads to $350 million in additional royalties in a year that would be meaningful for NOK, and quite welcome in the context of the past few years, when they’ve mostly been losing money because of the slowdown in network equipment and troubles with Alcatel-Lucent integration… but even if it went straight to the bottom line and was entirely an add-on to the current business, that would only be “new” profit of about six cents a share. Helpful, but not the kind of thing that sends a stock soaring by 1,000%.
And yes, adding $31 billion in new 5G business is a good thing for Nokia over the next couple years, as Leeb intimates is likely. But Nokia has posted annual revenue of between $25-27 billion since acquiring Alcatel-Lucent, and some of that revenue gets replaced by the new business (royalties on older technologies drop, investment in 4G networks has slowed a bit as people prepare for 5G)… this is a growth boost, but not necessarily a wild sea change in the business. And, of course, this isn’t a surprise — 5G has been in development and testing for many years, Nokia is one of the most widely-followed 5G “ideas” out there, and analysts see that growth coming (though they might be underestimating it a bit to be conservative, given Nokia’s operational challenges).
You can see Nokia’s own assessment of the situation in their latest investor presentation, which came with their second quarter results at the end of July. Their expectation at the time was for a soft third quarter and a very strong fourth quarter, mostly because of the pace of 5G dealmaking, though that could easily, of course, be thrown off by trade war talk or anything else that causes executives to think twice about investments or slow things down at all.
The expectations of analysts are that the revenue is not going to grow that dramatically, but that new products and services (largely for 5G) will be a little more profitable than their older businesses, so they see revenue climbing only about 1-2% a year over the next few years, but earnings jumping sharply next year by about 50% and then staying at roughly that level for 2021. That would be 41 cents in EPS (in US$), so that’s where I get the PE of about 12… quite reasonable for a low-growth dividend payer, and, if the growth beyond next year is better than hoped, maybe downright cheap.
The analysts might be wrong, of course, it could be that the rampup of 5G investment is a lot faster, as Leeb implies, and perhaps Nokia will win more business… but it’s as possible that the future will be less good than they hope. Their home European market is still a major market for Nokia (28% of sales, versus 31% for the US), and they report in Euros, so the worries about Europe sinking into recession and slowing investment are real… and they’ll also see quite a bit of fluctuation in earnings as the euro rises and falls.
Nokia is a very widely-touted and well-known stock, with lots of newsletters pitching the 5G angle and the hoped-for growth, so this isn’t terribly new — we’ve seen it touted with similar urgency by Michael Robinson (“mysterious m-boxes”) and Jeff Brown (“$6 digital king”) over the past year or so. I’ve continued to try to keep my expectations much more muted than these pitchmen, since I think Nokia has very little chance of more than a decent 20-50% rise over the next year or two, but, thankfully, we can separate the daydreams from reality — thinking the wild promises are silly doesn’t mean I have to hate the stock.
That’s just what I think, though, and when you’re dealing with your money you should be careful to make your own decisions… so I’ll turn it over to you, dear readers. We’ve covered Nokia many times, and I know many of you have followed it or may even own shares… what do you think of their chances now? Let us know with a comment below.
Disclosure: I own shares and/or call options on Nokia, Ericsson, Qualcomm and Apple among the companies mentioned above. I will not trade in any covered stock for at least three days, per Stock Gumshoe’s trading rules.
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