Imagine for just a moment that, back in the 1980s, you'd had the foresight to fully comprehend what mobile communications would come to look like today.
For most people at the time, it would've been difficult, even impossible, to fathom that within a few short decades, the amount of active mobile devices would come to outnumber the number of human beings living on the planet.
Who would have guessed that by 2016, the mobile device market would be churning out $430 billion in annual revenue and acting as the foundation for the top-five-most valuable companies on the planet? That's Facebook, Apple, Google, Microsoft, and Amazon.
Even having lived through it already, it all still seems unbelievable.
This is especially true when you consider that it all started with a giant $3,995 hunk of plastic: the DynaTAC 8000X.
Weighing a hefty 1.8 pounds and measuring well over 1-foot long, including its antenna, the Motorola DynaTAC was an instant success. But short supply lines and a heavy price tag made it destined for a niche audience.
Even so, if as an investor you'd foreseen how big mobile would become, there’s no doubt that you'd have taken a bite out of the companies behind the world’s first mobile phone. And you would've been rewarded handsomely as a result.
In 1983, the Motorola DynaTAC launched on the first mobile network in the U.S. It was championed by a little-known company by the name of Ameritech, which would later become AT&T.
By 1993, shares of Motorola’s stock took off from $11.28 to $70.24 per share — a 522.70% gain.
Ameritech also went on a run during that time, going from $5.08 to $23.31 — a gain of 358.86%.
These were the gains that savvy investors experienced from participating in the advent and rise of the first generation of mobile connectivity, now known as 1G.
But 1G, of course, was only the beginning. Following its decade-long reign, a new paradigm of connectivity arrived with the emergence of 2G.
The upgrade to 2G represented a crucial shift from radio to digital and allowed for SMS text messaging. This opened up the need for a wide range of new technologies and components. And once again, investors who got in at the onset were rewarded handsomely.
For instance, Sprint PCS launched the first 2G PCS network in the early 1990s. Shares ran from $13.38 to $70.93 in just over half a decade, a 430.12% return.
Ericsson provided terminal access equipment for the necessary GSM radio access networks used in 2G. Its shares exploded from $2.95 in 1992 to $131.02 until the dot-com bubble popped in 2000, a ludicrous 4,341.36% return.
This pattern would continue for the coming decades. Every new generation of mobile connectivity opened up new opportunities in the tech sector. With the dawn of 3G, the world of mobile opened up to video. And that, once again, sparked demand for new technologies.
Broadcom and Qualcomm built the necessary 3G compliant chipsets. This positioned them as powerhouses within less than a decade of 3G’s rollout. Shareholders saw gains of 245.1% and 286%, respectively, by the time 4G emerged.
Siemens provided 3G network infrastructure. And that paved the way for shareholder gains of 335.7%.
As you might have guessed, 4G was no different. It brought with it a wealth of opportunities for investors who were in the know.
Those who understood the technology early on were able to capitalize once again. And one of my favorite picks for that era was Crown Castle. It was one of many cell phone tower stocks that got a boost from 4G upgrades.
In the case of Crown Castle, investors are looking at a 546% gain. And it's still climbing.
But the opportunities in each of these previous generations have, for the most part, come and gone. Even though telecommunications companies are continuing to roll out 4G technology, the beginning of the next major network upgrade is already right around the corner.
It should be obvious by now that I’m talking about 5G — the fifth generation of mobile communication.
So, what exactly is 5G? And what will it do for the tech industry? Well, let’s dig into it...
5G: High Speed, High Capacity, and Low Cost Per Bit
In the simplest of terms, 5G is the next major upgrade to wireless network standards. It's designed to enable a faster and more robust network of connected devices.
It’s useful to start with some of the speed limits with each network generation to give you some perspective...
4G, the wireless network that most of us use today, has a theoretical download speed limit of 100 megabits per second (Mbps.). 5G has a theoretical download speed of 10,000 Mbps., which would make it up to 100 times faster than 4G on its best day. Download speeds measure the amount of data that travels to your device from the internet in a given time frame.
Further, 4G sports a latency of about 50 milliseconds (ms.), and 5G is aiming for 1 ms., which would make it 50 times quicker. Latency is the time that it takes to initiate every new instruction. And that makes it incredibly important in activities like gaming and live video communications.
But 5G isn’t only about speed. It’s also about capacity, or what’s referred to in the industry as ultra-high-connection density. Specifically, 5G network standards will need up to 1 million connections per square kilometer (sq. km.).
To top it all off, 5G systems are targeted to be 50 times more cost-efficient than 4G by reducing the energy used per bit...
How 5G Will Enable Tomorrow’s Tech
At this point, you might be wondering why this is all even necessary. After all, 4G is already quick enough to stream music and HD video. Do we even need a faster network?
This is the same question that’s been asked at the turn of every new network generation.
For instance, before 2G, very few people foresaw that cell phones would be used to download images.
Before 3G, few people guessed that mobile devices would be used for downloading music and video.
And before 4G, it wasn’t clear how commonplace HD streaming would become.
In the case of 5G, there's a plethora of new technologies brimming with potential and awaiting a network upgrade to break out to their fullest potential. Let’s take a look at a few reasons why 5G will be necessary...
- The Internet of Things (IoT) — Machine-to-Machine Communication:
- Cisco predicts 50 billion connected devices by 2020.
- Garnet expects 25 billion by 2020.
- MIT expects 28 billion.
- A former International Data Corporation (IDC) Vice President Vernon Turner says 80 billion by 2025.
- Cloud Traffic:
- Cisco says cloud traffic will likely rise 370% by 2020, increasing 3.9 zettabytes (ZB.) per year.
- IDC expects 180 ZB. of cloud traffic by 2025.
- Driverless and Connected Cars:
- Google’s driverless car gathers nearly 1 gigabyte (GB.) per second, according to Google exec Ray Kurzweil.
- According to Intel, the average autonomous vehicle will use 4,000 GB. of data a day.
- For perspective, the average mobile phone user transmits only 2 GB. to 3 GB. every month.
- According to Intel, today’s average total internet use is only 1.5 GB. per day.
- Intel CEO Brian Krzanich says: “Each car driving on the road will generate about as much data as about 3,000 people.”
- Hitachi says driverless cars will produce 25 GB. of data every hour.
- 4K and 8K — Ultra HD TV:
- The TV industry has pledged to make this new resolution standard widely available in time for the 2020 Olympic Games.
- 8K has 16 times as many pixels as standard HD and requires a lot more data.
- According to Cisco, mobile video will increase by 870% over the next five years. And live mobile video will increase by 3,900%.
- Augmented Reality (AR) and Virtual Reality (VR):
- AR and VR devices have much higher computational demands than today’s mobile devices. This is due to frame latency and high screen resolution.
- 3D physics calculations, tracking, and rendering will have to occur in real time.
- According to AT&T, target response latency for both AR and VR systems is three to 10 times lower than today’s standard.
- According to Cisco, global VR traffic will grow by 952.63% between 2016 and 2021, from 13.3 petabytes per month (PBpm.) to 140 PBpm.
- Global AR traffic will grow by 600% within the same time frame, going from 3 PBpm. to 21 PBpm.
Simply put, 5G will be the foundation for a long list of tomorrow’s hottest technologies. All of which will contribute to the exponential growth in mobile data traffic.
Cisco reports that in 2016 alone, mobile data traffic grew by 63% and by 1,800% over the past five years.
Through 2021, the company is expecting traffic to continue growing at a compound annual growth rate (CAGR) of 47%, a total 700% increase.
Ericsson shares a similar outlook with an expected CAGR of 42%.
As for how to get into position as an investor, here’s our take...
Investment Opportunities Throughout Deployment
Just like with every network deployment before it, 5G will open up a number of opportunities for investors from the early onset of development all the way through deployment.
As we explored earlier, these bull markets tend to last around eight to 10 years. 4G is currently approaching the end of its bull market, and 5G is just entering its own.
As you’ve come to expect, our strategy is to approach 5G from a pick-and-shovel angle. Meaning, we want to focus on companies that provide the underlying technologies necessary to make it work.
Now, throughout the deployment of 5G, there will be an array of niche business segments that will benefit. Here are a few key pieces of the puzzle that are worth keeping an eye on...
1. Small Cells
Small cells are low-power radio-access nodes with short transmission ranges. The basic idea of deploying small cell nodes is to tighten the net — or web, if you will.
If you think of the internet like a spiderweb, every point where the spider’s silk strands intersect represents a node. The tighter these nodes are together, the more effective the web will be at doing its job.
If you’ve ever watched a spider build a web, you may have noticed that it starts by making far-apart connections. In mobile networking, these far-apart connection are known as macro nodes.
Macro nodes can send signals — represented in our metaphor by the spider’s thread — for far distances. But they're only so effective without more nodes in between. That is, a spider can’t catch its prey with a loosely constructed web.
That's why as the spider works its way in, or sometimes out, it makes those nodes closer and closer together. Eventually, the nodes of the web are so tightly connected that no prey could make it through.
In our metaphor, these tightly woven intersections are the equivalent of small cells. That is, small cells bring the network closer to the user.
According to Small Cell Forum, the deployment of small cells could reduce a network's load by 50% and improve performance by a whopping 315%.
Given small cells' many benefits, Technavio estimates that the small-cell market will be worth $10.65 billion in 2021, as compared to $4.50 billion last year...
2. Multiple Input, Multiple Output (MIMO) Transceivers
Multiple input, multiple output (MIMO) is a smart antenna technology for wireless communications. With it, multiple antennas are used at both the source (transmitter) and the destination (receiver) of a base station.
In conventional wireless communications, a single antenna is used at the transmitter. When a signal is physically obstructed by buildings, hills, utility wires, etc., the wave fronts are scattered and take multiple paths to reach their destination.
The late arrival of these scattered portions of the signal can cause problems, such as fading, cut out, and intermittent reception. What all this means is a reduction in data speed and an increase in the number of errors.
By using more than one antenna on a base station, MIMO enables multiple data signals to be sent at the same time and in the same frequency domain. In short, MIMO takes the scattered signals and decodes them into the original information. And this means huge gains in capacity, throughput, and reliability.
According to Transparency Market Research, the global smart antenna market will reach $30.12 billion by 2023, representing a respectable 8.5% CAGR...
3. Millimeter Wave Technology
If you’ve gone through a TSA checkpoint recently, you’ve likely come into direct contact with millimeter waves. It’s what the full-body scanners use to construct a 3D image of your body and whatever you may be carrying.
But millimeter waves have other applications, as well. Because conventional wireless radio frequencies — between 3 kilohertz (kHz.) and 6 gigahertz (GHz.) — have become increasingly crowded. And because carriers have begun experimenting on shorter millimeter wave frequencies — between 30GHz. and 300 GHz.
Opening up the millimeter wave spectrum is a near necessity for implementing 5G at its full capacity. That's because the current spectrum will soon be too congested. But there’s a catch: Millimeter waves are easily obstructed and can’t travel particularly far.
In other words, millimeter waves will be used in short-range but high-rate applications. Think urban areas with nodes on every corner.
This is part of why smaller cell nodes, including picocells, will need to be deployed en masse: to catch the signals before they dissipate. And it’s why companies are developing precise millimeter wave sensors to accurately read those signals.
According to RnR Market Research, global millimeter-wave-technology revenue is expected to grow at a CAGR of 45.09%. And the total addressable market is expected to be $12.2 billion by 2020...
4. 5G chipsets and modems (Intel and Qualcomm)
5G will also need wireless chipsets from companies like Intel (NASDAQ: INTC) and Qualcomm (NASDAQ: QCOM).
These will be safe blue-chip bellwethers when 5G rolls out, but the upside is a bit more limited. As 5G chipset demand grows, 4G chipset demand will shrink and cut into existing revenue streams.
The wireless chipset market is positioned for a CAGR of 3.5% through 2022. It’s not a terrible place to be, but the growth is limited.
The Profit Opportunity for Early Investors:
5G Testing Equipment
Over the next few years, we plan to follow 5G and the other technologies outlined above. And we'll be sharing opportunities as they present themselves. But we aren't getting ahead of ourselves yet.
Right now, 5G is only in its initial stages of deployment: the testing phase.
But this doesn’t mean that investors will have to wait. In fact, it presents a strong bull case for companies that produce network testing and monitoring equipment.
There are two of these companies that are worth following in the public space. The first is Exfo Inc. (NASDAQ EXFO). And the second is Viavi Solutions Inc. (NASDAQ: VIAV).
We'll likely take a close look at Exfo down the line. But for now, we’re focusing on Viavi Solutions.
5G Stock to Watch:
Viavi Solutions Inc. (NASDAQ: VIAV)
Viavi Solutions is a network test, measurement, and assurance technology company. It has a true Silicon Valley history. Way back in 1979, it started in a California garage as a manufacturer of lasers for chipmakers and scanners.
Today, Viavi manufactures testing and monitoring equipment for wire line and wireless networks. It also develops optical technology used for a range of applications. Those include material quality control, currency anti-counterfeiting, and 3D motion sensing.
This includes the motion sensing for Microsoft's Kinect video game controller. That represents a whole separate bull case in AR and VR. But we’ll get to that another day...
Viavi has already announced its GEOson network automation and management tool for 5G network testing. Viavi developed this with technology from earlier acquisitions of networking companies Reverb Networks and Arieso.
This tool was recognized at the 2016 LTE & 5G World Awards as the “Best Test & Measurement Solution”:
Its other products include base station analyzers, handheld modular test sets, and handheld network testers, to name a few.
Viavi trades at a market cap of $2.56 billion. Its price-to-share (P/S) ratio is 3, and its trailing price-to-earnings (P/E) ratio is 30.7. It’s not exactly a value play. But then again, what is in this market right now?
The company operates at a healthy profit margin of 13.3%. Debt is $958 million, with an annual revenue of $837 million and net income of $85 million.
For the initial stages of 5G deployment, Viavi is a stock you'll need to watch.
Keep an eye out for more details and stock coverage from our team of experts.