We agree with Donald Trump…
Overnight Trump signed an executive order that allows the US to ban telecom network equipment and services from foreign adversaries.
This is clearly aimed at China and its telecom equipment champions Huawei and ZTE. The Commerce Secretary can ban companies that have close ties to foreign governments as they could use their equipment to monitor or disrupt US telecommunications or other infrastructure. There are other ways to minimise the security issues, but it threatens to hurt China and therefore indirectly help the US.
Trump is right (something we say cautiously at Alphinity). He tweeted in February that the US should accelerate 5G investment.
The US has fallen behind China in the race for 5G deployment, and historically leadership in each generation of technology has led to commercial leadership globally in hardware and services. Huawei, China’s national champion, has 80,000 people working in R&D and owns the largest number of 5G patents. In September the US Federal Communications Commission released its 5G plan, a “comprehensive strategy to facilitate America’s superiority in 5G technology”. The race is on.
(Trump also suggested 6G should be rolled out as fast as possible – but he might have to wait as it hasn’t been invented yet!).
5G is the next major evolution in mobile network technology.
It’s not a single technical innovation, but rather a series of improvements combined with new spectrum to enable greater capacity, faster downloads and lower latency (signal delay) than prior standards. It is potentially revolutionary, with average download speeds 10-100x faster than 4G and round-trip latency 5-10x lower.
Roll-out of 5G networks have already begun, but for investors 5G doesn’t necessarily look like 4G.
5G is far more complex, with higher frequencies, advanced signal processing and new technologies. Higher frequencies mean far higher data capacity, but these waves don’t travel as far so many more base stations are needed. 5G will enable a new wave of ultra-efficient, internet connected devices, massively increasing the number and variety of network connections.
We don’t invest based on themes, however fundamental changes like 5G often provide interesting opportunities that are identified by our investment process.
American Tower has been in our portfolio for years. It owns the radio towers that host telecom transmission equipment, and has consistently outperformed as network operators race to keep up with demand for more data. Comcast re-entered the portfolio last year, with its broadband internet business growing faster than any time since 2010.
Signal testing is seeing the first wave of investment.
Last year we bought Keysight, the leading player in test and measurement globally with well over 50% share of the 5G R&D test market. In 2013 management increased product development with a specific goal of regaining their number one position in 5G after falling behind in 4G. Keysight is a typical Alphinity investment – its improved competitive position was clearly evident in order win rates and earnings trends (see chart below) before we made the investment, but importantly the improvement compounds and the market is still catching up.
Keysight – earnings expectations rising with its success in 5G
5G is useless without a fast fiber-optic network to connect the base stations.
Significant investment is required by telecom and data center operators to ready their networks for 5G. Early this year we bought Lumentum, a global leader in photonic products – lasers and other equipment – that enable super-fast low-latency networks. Its telecom business is growing rapidly as China and the US roll out their networks, with key parts of this business growing more than 100%.
There will be many opportunities to profit as 5G networks are rolled out globally, but be careful.
“5G” is one of the current overused investing buzz words – like “artificial intelligence”, “machine learning”, “internet of things” or “big data”. Some companies aren’t likely to benefit as much as it appears, or the share prices are already over-extended due to the hype. Having a business related to 5G isn’t an automatic ticket for investors to make money.
Author: Lachlan MacGregor, Portfolio Manager