This ad is being circulated again, and sending a lot of questions our way, so I’m re-posting our solution (which first appeared on September 4, 2019) and taking an updated look — the ad itself has not been updated at all, as far as I can tell, but I’ll add my updated thoughts throughout and post some longer updates at the end.
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.Are you getting our free Daily Update
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“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 Autobahn.
“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….
“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 was indeed a $5 stock last September, though it ain’t exactly small or unknown (and it hasn’t seen $5 in the past six months or so, not after their disastrous announcements of reduced guidance and slashed dividends in October — more on that in a minute).
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 $25 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 has been a more value-priced one. Nokia acquired Alcatel-Lucent several 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 built a Nokia (NOK) position in 2018 and 2019, and owned the stock when I first covered this teaser last September, so you can see my more optimistic take from before their “October Surprise” here if you like… but I sold my shares about a month after that.
Nokia was a reasonable slow-growth story, and a dividend growth idea, but definitely was not a stock that should rationally have been expected 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 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… and those three companies are getting the lion’s share of all cellphone technology royalty payments for 4G as well. 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 possible growth boost, even a likely one, 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 (as they’ve also noticed Nokia’s operational challenges over the past few years, challenges which got highlighted in October).
Nokia was a very widely-touted and well-known stock last year, with lots of newsletters pitching the 5G angle and the hoped-for growth, so this idea wasn’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 tried 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 couple years, but, in the end, even that wasn’t enough to keep me in the shares.
And that’s because Nokia (NOK)reported a quarter last October that was a genuine shock. This is a company that showed every sign of being in an upswing in earnings, with 5G investment by telecoms widely expected to bring a boost to high-margin new-product revenues late in 2019 and throughout 2020 and into the future.
That quarterly update, however, was a return to the “old Nokia” of cost overruns, margin pressures, a lack of visibility on earnings despite tight customer relationships, and a need to invest more heavily than they thought into building that 5G business. The business was and probably is still growing more or less as expected on the top line, with some hiccups, but the profit just isn’t there. There was a good Bloomberg opinion piece after the report entitled “Nokia Has No Excuse for Failing,” and that pretty well matched my thinking.
The slash their numbers took was dramatic in October, considering that the company was reiterating its guidance just a few months prior in the second quarter earnings report on July 25 — they reduced their 2019 earnings guidance by at least 17-20% and maybe as much as 38% (new range was 18-24 euro cents in earnings per share, had been 25-29 cents), which is incredible given that they had been guiding to a big fourth quarter all year. Perhaps more importantly, they dramatically cut their guidance for 2020 (guiding for 20-30 euro cents, down from 37-42 cents, so that’s almost a 40% cut in expectations at the middle of the range), and are now saying that 2021, not 2020, will be when growth really shows up. (when the actual fourth quarter did come out, in February, it at least was in the top half of that range — so they didn’t disappoint a second time in a row).
And as a final nail in the coffin, they also sent a terrible signal of distress by canceling (“suspending”, they say) the dividend for the rest of last year (they extended that “suspension” this year, so no dividend for 2020 at least). European companies do not consider the steady/rising dividend as sacrosanct as US companies typically do, but still, Nokia had spent the past year telegraphing that the dividend was a priority and that they were determined to grow the dividend. That turnaround signaled to me that they were actually worried about being in a cash crunch.
It might be that I’ll be willing to take a chance on Nokia again at some point, and today was actually the day that CEO Rajeev Suri was originally due to be replaced by Pekka Lundmark in the top job (they actually accelerated that by a month, so Lundmark is already in place now), so maybe change is really coming… but right now I don’t think the possible reward if they are able to manage through this perilous period is worth the risk that we’re counting on growth that might not materialize (and yes, when you stop paying a dividend to preserve your ability to invest in the business that you should be leading already, that’s “peril”).
Yes, they have a lot of 5G deals, and that business should be there whether it hits the income statement in 2019 or 2021, but it doesn’t look like they’ve been able to ink early 5G deals that are actually profitable. When a company botches its forecast this dramatically and has enough of a cash problem to cancel the dividend, you only want to consider buying shares if they are really cheap. Nokia is cheaper now, and I guess it was genuinely cheap at the bottom in March, when pretty much everything was cheap on the COVID overreaction crash, but the business is clearly more competitive than I was expecting a few years ago, and Nokia and Ericsson and everyone else is competing on price and struggling with margins — which hurts Nokia more than most, probably partly because they have the largest (“most bloated,” says the cynic) corporate structure, and the most wide-ranging suite of products to support following their far-more-difficult-to-absorb-than-expected Alcatel-Lucent merger.
The estimate for 2020 that they provided in February was for some potential earnings growth, though the range was very wide — they guided investors to expect something between 20-30 euro cents in adjusted earnings per share, which would be US$0.21-0.33, and then those expectations dropped again with COVID in the March quarter. The latest update was an improvement on that, as they opted out of competing in some of the lower-margin wireless projects in China — which meant their revenue dipped a bit, but profits increased a little. They lowered their market share expectations as a result of opting out of some of that lower-margin business, but did also raise their earnings forecast back to where it had been pre-COVID, at 25 euro cents per share (give or take five cents, so it’s still a 20-30 cent range). Analysts are more or less in agreement, with the average forecast now for US 29 cents in earnings in 2020 and 35 cents in 2021, so at $4.75 Nokia is trading at about 16X current year earnings estimates (halfway through the year) and 14X next year’s forecasted earnings.
A forward adjusted PE of 14 is obviously not a super-rich valuation, and there is some fundamental revenue-generating power in this business even if they haven’t really figured out how to make much money yet… but I don’t think we’re at maximum pessimism for Nokia shares, (though $2.40 might have been that point in the coronavirus trough in March). They’re still priced for some growth at $4.75 or so, I’d argue, and I have trouble building up any faith that the chances of them hitting their numbers are any better than 50/50… maybe my opinion will change, particularly if the management change is effective and the new CEO builds some sort of disciplined plan that he can communicate to the market, but Nokia is still nearly in a crisis at a time when they should be flexing their muscles, and that worries me. Maybe I just haven’t been quick enough to embrace the improvement of the last quarter, but I guess I’m siding with the skeptics here… this is what Liberum analyst Janarden Menon said after the last quarter:
“While the improvement in profitability from extremely low levels is clearly very encouraging, we are unsure on how much further Nokia can take such an improvement when sales are coming under significant pressure.”
One never knows for sure what will happen, but there was a flurry of takeover talk in April, and they reportedly hired Citibank to help them deal with one or more potentially hostile suitors who might try a takeover during their time of stress… that talk seems to have gone away with the recovery in the share price, but I imagine we’ll hear more rumors again if the sharks smell weakness.
Which is a little crazy on the face of it, because Nokia should have been, by all logic, in an extraordinary position… we’re on the verge of a global upgrade to 5G mobile networks over the next several years, and there are only a few major companies that make this equipment, with Nokia having an edge in at least some markets because they’re the only ones who make the full suite of network products and might not pose the same state-sponsored security risks as Huawei.
And yet, still they’re in so much trouble competing with Ericsson, Samsung, Huawei and a few others that they’re apparently hiring advisers and bankers to consider selling assets or merging with another competitor, and for a while were thought to be on the verge of getting a takeover “stink bid” from private equity. It’s really hard to imagine Finland approving a full-on merger that would lose them their major “national champion” company, but I suppose more asset sales aren’t out of the question (clearly, the acquisition of Alcatel-Lucent, which is what gave them such an impressive end-to-end networks business, turned out to be snake-bitten in pretty dramatic ways). There has even been talk in recent months of a tighter relationship with the US, and some more formal backing from the US government, to help counter the influence of Huawei, though it’s hard to see that happening.
Really, this is a company that should be doing great, heading into a multi-year tailwind, and yet has been desperately troubled, mired in costs and expense pressures and competitive markets where they’re not winning enough… I don’t get it, you would really think that this large company could be much better-managed considering the huge business and the tailwind trends that are on their way (even a small amount of revenue growth could really shift perceptions, sales have been almost stagnant since the Alcatel-Lucent merger three years ago), but I accept the current situation as being the truth, and I’ll just sit on the sidelines and watch the nuttiness. I do still have some call options on NOK, and I did stop out of what was a pretty large position last year at $4 and change, below where the shares currently trade. I don’t see anything here to really spark my optimism again, but you never know what the future might hold… and as we’ve seen in the market recovery in recent months, it doesn’t take that much good news to shift the sentiment — Nokia is no longer trading as a disaster in the waiting like it did from October to April, which is a good sign, but the actual business does not seem to have improved very dramatically just yet.
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. I’ve left the comments attached at the bottom from our last update to this story, back in April, so you can see what your fellow readers were thinking then.
Disclosure: I own shares and/or call options on Nokia 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.