5G investment narrative is NOT phones

Almost every trending article highlighting the promise of investing behind a 5G wave is focused on phones – Apple in particular. However, the narrative that is behind our portfolio decisions is focused on ‘non phones’, and it goes in 3 distinct phases: a) infrastructure build out with the likes of NOK, ERIC, and others; b) the ‘phone crazy’ after initial 5G networks are in place with the likes of T, VZ, TU, KT; and c) the IOT explosion when true 5G networks enable use cases in ideation phase today (and AR).

That third wave is the one where the big money will be made. There are several different vectors to follow and an individual investor needs to carefully choose based on understanding and timing. The main vectors I see are: end point devices, components in end devices (radios, memory, sw), services making it easier for companies to manage IOT fleets and data, and finally the infrastructure required to enable new use cases: network, storage, analytics, and very importantly, security. My focus has been on the end point components (radios) and network infrastructure. The timing of both is still open imho driving by 5G rollouts – mmWave specifically – as well as network security (not endpoint).

A recent article in SA on Arista brought out this misunderstanding with glaring clarity.

Here’s the article https://seekingalpha.com/article/4389655-arista-phoenix-rising

Here’s the article summary:

  • Arista recently reported a quarter that marked an inflection in the company’s business.
  • The company beat expectations substantially for revenues and earnings and provided guidance above prior consensus.
  • The company specifically articulated a forecast for double digit revenue growth next year
  • While the shares appreciated 30% in the wake of the earnings release, there valuation still reflects the hangover from the past 2 years of below average performance.
  • The company, not known for making promotional statements, spoke positively about emerging from multiple disappointing quarters and reaching what I (or Winston Churchill) might describe a “broad, sun-filled upland” of robust growth and strong cash generation.

Here’s my first comment:

any idea on timing of the ‘campus upgrades’? My hypothesis is that the lion share will be driven by use cases not yet fully understood but enabled by 5g build out along withIOT big data push #2- campus backbones and networks and security are going to be really stretched. I think 1h 2021 could be a challenge for these names until network use cases become better understood and translated into viable capital spending.I’m inclined to consider both CSCO (long since 1998) and ANET. Well done article and appreciate the product discussion and not just finances and stock prices …

Here’s another commentator’s reply, quote: “First not sure how much business is in 5 G. I am posting this using a 5 G phone connected via 5g. Build out for 5g will impact the Verizon’s, ATT, etc. Also more cell towers will be needed. I believe it will move more traffic to wireless from desktops but not sure traffic on the Cisco networks will increase. I just don’t see a big impact. Also have tested my 5g phone next to a phone running 4g and I don’t see any difference.”

Here’s my reply (i did not post):

it’s not really phones … it’s everything else creating more data flow than phones – e.g., think ‘smart city’ and all the data created by an intelligent sensor rich infrastructure (the 5G vision) … all that data (small and large – video) will need networks to travel from endpoint to analysis and then to storage … most enterprises will want that data securely managed, as that operational data analysis will be strategic value – more networking.

mobile phones are well understood and their use cases even w/ 5g … it’s the non-phone world that will have some surprises – and most likely those surprises are going to be data-rich which require more networking – i have not even started w/ possible AR use cases 🙂 – yea, they’ll need more networking too.

The key point is that those non-phone use cases are still in ‘ideation’ phase – use cases will continue to evolve and their network requirements with them. How much data flows and where it flows to / from / back again securely will need to be answered and engineered – (my definition true 5G = mid/low band & mmWave – the mmWave is important for above).

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