By MICHAEL A. ROBINSON, Defense + Tech Specialist, Money Morning • @Robinson_STI • October 12, 2020
Dear Red Alert Reader,
Pentagon watchers like me lit up when, last month, the U.S. Department of Defense asked for firms to help with a new approach that would blend military and civilian capabilities for the new, ultra-fast broadband cellular communications system.
This is a very big deal: The Pentagon would allow private companies to build up their 5G capacity using parts of the wireless spectrum hitherto reserved for the military.
That means companies would be allowed to access the system without the need to invest billions bidding for wireless licenses at auction.
The practical effect would be wider, faster adoption of the next-gen network by cars, factories, hospitals, offices – you name it.
And bear in mind, this is happening after the President signed a pair of bills designed to boost and secure 5G networks nationwide.
That new legislation, and the Pentagon's willingness to "open the door" on its corner of the broadband spectrum, are like rocket fuel for this new, high-profit technology.
All that is pointing us at one backend play that's set to double its earnings in less than 2.5 years…
5G's Growth Potential Is Staggering
The events of this summer just prove what I've been saying for some time now: 5G is set to become ubiquitous throughout the global tech ecosystem.
For instance, you can't have true autonomous cars on the road without this ultra-broadband wireless communication.
Driverless cars and trucks will need to communicate in what amounts to real-time if the roads are to remain safe. They will also "talk" with road infrastructure, such as sensors embedded in roads or traffic lights.
At the same time, it's impossible to have the $14 trillion Internet of Everything reach its true potential without the new wireless standards.
That's because, conservatively, well north of 50 billion devices containing as many as 1 trillion sensors around the world will be interconnected in a few short years.
Markets&Markets says that firms will be spending, on the low end, $33.72 billion per year on 5G by 2026. Another prediction, by Research&Markets, pegs the 5G sector at $251 billion by 2025.
That's just corporate spending. IHS Global Insight has pegged 5G's total economic impact at $12.3 trillion over roughly the next decade.
What we are looking for in a case like this is a broad backend play that allows us to tap the power of many firms at once.
And that's exactly what we get with Keysight Technologies Inc. (NYSE: KEYS).
The Best 5G Backend Play I Know
Don't worry if you've never heard of this firm before. It's been flying under the radar for some time now.
That's largely because it was spun out of storied Agilent Technologies Inc. (NYSE: A) in November 2014.
At the time, Keysight was stuck in first gear with just under $3 billion in yearly sales. That's because it was looking backward: In my view, it focused too much on the life sciences and electronics and other testing gear like oscilloscopes and atomic force microscopes.
Today, the revamped Keysight is heavily targeting 5G clients and had sales last year of roughly $4.3 billion. The firm provides testing tools for advanced wireless software, chipsets, devices, and networks.
Keysight execs say those tools will be needed to ensure 5G works as promised.
Getting 5G systems to work just right takes a lot of focus. The firm's gear can assess wireless signals across the wireless telecom spectrum, look at how 5G traffic coexists with other parts of the spectrum, and also identify potential security threats.
For 5G players to gain a strong foothold, they'll have to start moving faster to bring solutions to market and line up key supply contracts; major wireless carriers have already begun adopting this standard in North America, Asia, and Europe.
Little wonder, then, that Keysight has clocked double-digit 5G order growth over the past few years.
It's using targeted products to help snag more sales as the new wireless standard affects everyone from cellular providers to semiconductor firms to smartphone makers and everyone in between.
For example, Keysight offers a 5G New Radio-ready channel emulation solution. It's already been adopted by five major communications customers.
As the term implies, the platform allows clients to test their chipsets, network, and other gear in a lab emulating real-world conditions.
No wonder Keysight has such a great client roster. Among its 32,000 customers, it works with:
- All of the 10 top telecom equipment companies
- All of the 25 biggest semiconductor suppliers
- All of the 25 best technology companies
- And 24 of the 25 top telecom operators
Fortunately for us, the stock has taken a "breather" as of late; COVID-19 has slowed down what would've otherwise been an aggressive 5G rollout this year.
Still… Keysight has grown per-share profits by an average 31%. At that rate, they're on pace to double again in less than 2.5 years.
The bottom line is Keysight is the backend play on the multitrillion-dollar 5G revolution.
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