Asymmetrical Investments (A)
With telecommunications key to the data-driven economy, investments in the development of 5G networks and development overseas are both low-risk and carry the promise of additional rewards. Below is a summary of these markets along with our picks of companies that are likely undervalued compared to their potential, thus increasing the potential payoff.
- IDC, a market intelligence firm, expects the 5G infrastructure market to "soar from $528 million in 2018 to $26 billion in 2022."
US News & World Report considers the following seven 5G stocks to be the best for investors:
- Xilinx (XLNX)
- Qualcomm (QCOM)
- Ericsson (ERIC)
- Crown Castle (CCI)
- Verizon Communications (VZ)
- VMWare (VMW)
- Marvell Tech (MRVL)
Of these, we judge Marvell Tech to be the most under-valued while still having little risk:
- To quote US News, Marvell is a "consumer semiconductor products company [which] has its hands in a number of high-growth, interrelated areas, including 5G, cloud, artificial intelligence, enterprise hardware and the automotive space."
- While Marvell's stocks have underperformed the market (and may have lost some traction due to the 2018 acquisition of Cavium for $6 billion), overall value has increased in the last 5 years.
- Marvell's stocks show greater volatility than the overall market, opening the possibility of turning a greater profit in the short- and long-term. Those stocks are down slightly from their most recent July 27 peak, so immediate investment could take advantage of this dip.
- Marvell recently won a contract "with Samsung to provide chips to power LTE and 5G base stations, which are integral to improving connectivity." This has already resulted in Marvell stocks recovering from their 2018 slump.
- Should Marvell lock down design contracts with other manufacturers, their stock could see a significant boost in both the near- and long-term. With their stocks undervalued in 2019, there is little risk beyond the risk of underperformance and a good possibility of strong gains, as when the stock nearly doubled in value over the last nine months.
- According to Sara Ketterer, CEO and Fund Manager for Causeway Capital Management, Asian telecoms benefit from "controlling the bulk of market share and enjoying favorable regulation," and yet are undervalued when one considers their markets and history.
- Bloomberg's choice picks in this region are iShares Global Communications Services ETF (IXP), China Mobile, and NTT Docomo in Japan.
- Given the uncertainty of how the current US-China trade war will play out, investments in Chinese companies carry an unknown risk which, in our judgment, makes it difficult to say that they don't outweigh the potential reward.
- Of the other two recommendations, Docomo stock has remained relatively stable over the last few years and is likely a low-risk investment.
- IXP has recovered from a drop-off in late 2018, but still down from its peak in 2016 and may be undervalued compared to its growth potential.
SOUTHEAST ASIAN OPPORTUNITIES
While we do not have a specific recommendation for a company, due in large part to translation issues making it difficult to evaluate them, we do believe that telecoms in Southeast Asia in general and Vietnam in particular are also undervalued compared to their growth potential.
- Vietnamese telecom firms, on the other hand, are currently converting from 3G to 4G and building more transceiver stations to meet demand.
- According to Viet Nam News, experts believe "the number of 4G subscribers will increase by nine times by 2023, and will reach a peak in 2024," having already added 11.7 million subscribers for a total of 57.6 million in 2019.
- This is fueled by a growth of the middle-class in Southeast Asia as well as a younger population (over half are under age 45) which is eager to access new technologies, especially video-on-demand.
- Over the top (OTT) content services in the Asia-Pacific region alone are expected to grow from USD $8.3 billion in 2016 to $24 billion by 2022.
We began our research by studying the concepts behind asymmetric investments (aka asymmetric "betting"). This gave us a reasonable, if layman's, foundation and also discovered several firms, including some very prestigious financial institutions like JP Morgan, which advertised asymmetric returns on investments. However, these were generally simply ad copy for mutual funds which did not indicate what the specific investments in the fund were. Since we understand the request to seek specific, individual investment opportunities, we passed these by. However, these initial findings were instrumental in showing how ad copy could obscure the true target of this brief.
So armed, we decided to back into the request. We pulled several lists of "best" upcoming investments from reputable sources like Bloomberg and conducted quick research into each. While finding the term "asymmetric" in conjunction with the investment would have been convenient, we were less concerned with this than with finding potential investments with a very high reward-to-risk ratio with low buy-in thresholds. We have explained our reasoning our picks in our findings above.
The assumption of a recession or downturn in the market in the next 1-2 years could be read in two ways. First, that the investment should be able to produce asymmetric profits despite the downturn, or second, that the investment should be able to produce asymmetric profits because of the downturn, i.e., that the investment would be made after the market had hit bottom. In the end, we split the difference, with one investment that, being based on a new technology that is just now coming online, is likely to see minimal fall-out from the market downturn. The other, namely, investing in overseas telecoms, may be affected by the potential recession, but given the long-term viability of this industry, any downturn simply provides a better entry-point to the market.
As requested, we have not included cryptocurrencies in this brief, though several sources expect the cryptocurrency market to surge again in the coming year. It may be beneficial to explore this area in a separate report.