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The 5G Race Is ON!

Written by Briton Ryle
Posted September 16, 2020

Earlier this week, one of the most important corporate acquisitions in recent memory went down. Artificial intelligence heavyweight NVIDIA (NASDAQ: NVDA) bought ARM from SoftBank for $40 billion. This deal will boost NVIDIA's earnings by around 10%, and that's always nice. But the real significance of this deal runs much deeper because ARM owns the architecture for basically every chip that goes in a mobile device. If you want to make chips for iPhones or laptops, you license the design from ARM. 

And really, the ARM chip architecture is even more ubiquitous than that. Data centers are starting to use ARM chips in their servers, too. You'll find ARM chips in gaming consoles, digital TVs, digital cameras — the list goes on. 

Now you may be wondering why SoftBank would part with such a significant company. I mean, $40 billion is a good chunk of change. But still, why bail on such an important sector, and one with so much growth ahead of it? My answer: I have no idea. SoftBank acquired ARM in 2016, and I thought it was a coup then. All I can come up with is that SoftBank may not be that smart after all.

You remember the WeWork fiasco, right? SoftBank was on the verge of bringing the "shared space" company public, only to have the whole deal fall apart. Without the IPO cash, WeWork was insolvent and faced bankruptcy. SoftBank had two choices: take a total loss or bail WeWork out. Predictably, it chose the latter, throwing another $9.5 billion into the company. And that sum included $1 billion for WeWork's founder and CEO to just please go away.

It was a complete and utter debacle. And I suppose selling ARM was one of the only ways SoftBank could raise any cash. Yep, mistakes can compound in unforeseen ways.

But back to NVIDIA... 

The Data Center of the Universe

Whenever you hear someone say "the cloud," they're basically talking about data centers. In the old internet, most individual companies managed their internet businesses on site. That is, they had the servers and the IT staff to make it all work. That's changed. Online business today is way too big for companies to handle on their own. So the internet is dominated by cloud companies that host your website, handle security, optimize for mobile, do customer service, and so on. Whatever you might need, Microsoft Azure, Amazon Web Services, and a host of smaller companies can do it for you. And they'll do more and do it cheaper than most companies can on their own. 

(If you want to read a little more about how the cloud came to be and how Amazon Web Services started, it's a pretty fascinating story. Amazon's founder and CEO Jeff Bezos had the idea all the way back in 2002. I wrote about it HERE.)

Right now, data centers are the tip of the iceberg. It's easy to see the growth and the significance. Take a company like AMD (NASDAQ: AMD). It has run from $17 to $80 largely due to its data center chip business. In addition to competing with Intel, which still has around 90% of the data center chip market, AMD will now be competing with NVIDIA. This may not be great news for AMD. But for the record, I don't think it's necessarily bad news for AMD. But for Intel and its dominant market share, yeah, bad news. I've been bearish on Intel ever since it abandoned the 5G market a year or so ago. 

Speaking of 5G....

So if data centers are the tip of the iceberg, mobile computing, internet of things (IoT), and AI are maybe not so visible just yet. In two years, analysts say the data center market will be worth $80 billion in annual revenue. Throw in devices (phones and laptops) and IoT stuff and that number jumps to $250 billion. 

Now, it is clear that America's tech companies are investing heavily in fancy chips, powerful servers, and nifty AI software. NVIDIA's $40 billion move to take out SoftBank is probably all the evidence anyone needs to see that tech companies are thinking big.

But there's just one thing missing... a network powerful enough to make it all work. 

Of course, I'm talking about 5G mobile networks. You've probably heard my colleague, Jason Williams, and me talk about this before. You may even be getting tired of hearing about it. But there's a reason we keep talking about it; it is our job to identify irresistible trends and then dig into those until we unearth the hidden investment gems. And that's what we've done with 5G. Amazingly, almost incomprehensibly, we've found a $10 stock just under $2 billion that is sitting smack dab in the center of the 5G network buildout. Words like "indispensable" and "mission critical" come to mind. 

And the thing is: This company already has deployment deals with Verizon, Cox, AT&T — the list goes on. 

Literally, every time I see news like this NVIDIA-ARM deal, I think here it comes; the rush into 5G stocks is starting. And the fact is: For companies like NVIDIA, Qualcomm, and several others, the rush really has started. Investors will come around at some point, probably soon. Act now and you're ahead of the curve.

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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