5 stocks for the next generation Internet
Sigh, another thing to worry about. The U.S. is falling behind in the Internet race.
According to Akamai Technologies (AKAM), average Internet access speeds in the United States were just 18th fastest in the world at the end of the fourth quarter of 2009. And if you rank countries on the percentage of connections with speeds above 2Mbs (Megabits per second), the United States ranks just 40th.
I bet you can guess who’s winning. 62 of the top cities for speed were in Asia. The three top countries for speed, according to Akamai, were South Korea, Hong Kong (which Akamai counted as a country, but don’t tell the folks in Beijing), and Japan. Those three countries were also the only three to average connection speeds higher than 7.5Mbs.
Akamai, which in the business of accelerating Internet content over its global content delivery network (CDN) isn’t the only one to notice.
The FCC (Federal Communications Commission) has sent a 10-year plan to Congress that envisions a new high-speed, broadband Internet as the core of the U.S. communication network. The agency notes that roughly one-third of Americans don’t have high-speed Internet connections because they live in areas without high-speed service, can’t afford high-speed service, or have never signed up for it because they don’t see the benefits. The FCC has proposed diverting money from the Universal Service Fund, which now spends $8 billion collected from surcharges on telephone service to subsidize phone service for rural or poor Americans, adding that to money collected by auctioning off 500 Megahertz of over-the-air spectrum now used by TV broadcasters, and then using that funding for its 100 Squared plan to equip 100 million U.S. households with high-speed Internet at 100Mbs by the end of the decade.
Proponents of the FCC plan—and you might imagine TV broadcasters aren’t exactly thrilled—say that greater access to higher speed Internet connections is critical to U.S. economic competitiveness in the decades ahead. Slower speeds will raise costs for business and consumers by limiting such innovations as digital healthcare networks. New products that require high speed connections won’t be built or used here meaning that the jobs that go with the creation of these new products will go elsewhere. The comparative productivity of U.S. workers will suffer as workers in high-speed countries can more quickly communicate, share work, hold meetings or access data.
Anybody who now suffers with the inefficiencies of a slow or spotty mobile phone connection knows that argument is true.
The crisis, which is what the FCC argues that we’re facing, isn’t a solely U.S. phenomenon. Internet speeds are dropping all over the world, largely because increasing numbers of people are accessing the Internet over relatively slow mobile phone networks. Traffic from narrowband connections to Akamai’s network increased by 41% in the fourth quarter.
In crisis lies opportunity, investors know. So what companies and stocks might benefit from attempt to end the crisis?
Names to check out include
Akamai, of course. The company holds a 60% share of the content delivery network market, according to Morningstar, and handles about 10% to 20% of all Internet traffic. About 70% of the top online retailers use its network.
Verizon (VZ). The company is building out a high-speed 4G (for fourth generation) network based on LTE technology that will start with 30 cities in 2010 and eventually include the entire country by 2013. The 4G network will actually cover more of the country than the company’s existing 3G system because Verizon’s 4G license covers areas that aren’t included in its 3G license. Average download speeds, according to Verizon, will range from 5Mbs to 12Mbs with upload speeds of 2Mbs to 5Mbs. At the core of its rollout is Verizon’s plan to get 100MBS connections to each of its 4G cell sites. The stock is in my Dividend Income Portfolio as of April 28.
ZTE (ZTCOY.PK). Unfortunately the Chinese company only trades in the United States as a very lightly traded—average daily volume 928 shares—pink-sheet ADR. So I can’t recommend this one to you—yet. But watch for it. Tech chatter says ZTE is the supplier of the modems that will be the first product in Verizon’s 4G rollout. And as long as you’re watching China keep an eye out for Huawei, an Internet supplier that’s taking market share—at the end of 2009 it was the No. 3 mobile infrastructure equipment maker in the world–but that doesn’t yet trade publicly. (You can find its annual report here http://www.huawei.com/corporate_information/annual_report/annual_report_2009.do )
Ericsson (ERIC) lost the No. 3 spot to Huawei in the mobile infrastructure market in 2009, but according to industry analysts I’ve read it’s got the best technology for the next generation of LTE systems. AT&T (T) picked Ericsson as one of its LE suppliers this year.
And don’t forget Cisco Systems (CSCO). The dominant company in today’s Internet isn’t going to let this market get away. If you’re looking for a one-stock buy to track the growth of the sector this is it: You can count on Cisco to follow the trends. The company’s history is that if it doesn’t have the right product, it will buy a company that does. The stock is in my Jubak’s Picks portfolio as of April 28.
By the way, if you’ve got a stock that I’ve missed in this sector, let me know. (Or if you think you can make an argument for a stock that’s not a pure play in the sector, such as Apple (AAPL).) I’m sure I’ve missed more than one or two.
Full disclosure: I own shares of Cisco Systems in my personal portfolio.
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Jim,
What about ARRS? It’s in the modem business as well, isn’t it?
Fred
From my watch list but with no particular endorsement: TLAB, SEAC, FFIV, JNPR
I owned TLAB for a while but got impatient with it – lately it’s been more active…
RE: AAPL. I own AAPL stock and am wondering if it is time to sell yet. I already have a handsome capital gain, but should I hang on for more?
Jim:
Thanks for another timely posting and will take careful look into these companies.
Everyone:
Re: “Sell in May and go away”. I began to see some blog or article on this subject now. Here is my 2 cents. This “wisdom” was formed during the old days when the world was relatively “slow” and isolated. Now a day, with all the latest technology that puts people in touch no matter where and when, the world becomes more and more “fluid”. This summer will be like last summer, investors will not go away. Even if they do, they’ll never leave the market. Just look our own Jubak. He filed reports from Bahama beach while on vacation in spring! Giving so many pressing issues hanging over the market these days, I may take a week off in the summer but will not sell out and go away. I’ll sell individual stocks only for profit taking not for “going away”. How about you all?
We have not yet been able to pester Jim into publishing an opinion on AAPL. However, an options traders at CBOE (don’t recall his name) has gone on videotape (with Angela Miles) saying he will stay neutral unless AAPL retreats to 252 and then go long. But if you’re already long wouldn’t it make sense not to limit your gains? I closed long calls after earnings because their theta was getting higher and I imagined the stock would take a rest. It didn’t, and meanwhile the rumors concerning AAPL’s pipeline of future products are certainly tantalizing.
I’m long AAPL and have ridden it for a nice gain since their recent blowout earnings (and even going into their earnings report on strength of iPad). I too am feeling “exposed” – this subtle tugging-at-me feeling that maybe I should sell some. What has kept me holding on is the almost certainty of a Verizon iPhone launch late this year or in early 2011. This will be big when it happens because they’ll more than double their current iPhone users in the US. In addition, the rollout of the new iPhone this summer (June or July) will help, too, although some of that is reflected in the current price. I think if all goes well, after this coming Christmas would be a good time to sell.
CSCO already did make an acquisition in mobile data — Starent, who is in Verizon’s LTE rollout.
http://www.cisco.com/web/about/ac49/ac0/ac1/ac259/starent.html
I like GOOG in this space too. Android is coming on strong as competitor to AAPL and RIMM. Lots of data to monetize — GOOG maps is the mobile app out there — and strong position for nascent mobile ad space.
Jim,
What do you think of GOOG after the big price drop in April? Also curious as to your take on the smartphone market — AAPL, RIMM, GOOG, MSFT, HTC.
I picked up a few shares of AKAM back in Feb based on one of your articles. It’s been a nice rally. Thanks Jim : )
If you’re feeling risky, take a look at CHTL
If you’re looking at a 10 year time frame, I suspect we really don’t know which company will leap to the head of the pack. ZTE has as much chance as a Microsoft or Apple at this point.
Here’s the million dollar question: Who is the chipmaker that will benefit most? INTC? TSM? Someone else? All of the above?
I’d add Baidu to the list. Any company that can dominate the Chinese search engine market already has a leg up on the rest of the competition. The only question with them is whether they’ll be able to capitalize on their dominant position there, like Google did in the U.S.
Clearwire (CLWR) looks promising. They’ve gone the WiMax route instead of LTE, but have already rolled out service in 62 markets with a fairly aggressive goal of covering 120 million people by the end of the year. Intel, Google, Comcast, Time Warner, and Sprint (who owns most of CLWR) are all backing it.
” Who is the chipmaker that will benefit most? INTC? TSM? Someone else? All of the above?”
Ed as a networking engineer, I am seeing more & more devices being built around off the shelf components. Broadcom & Marvel is a big chip supplier. currently marvel have higher performance chips, this balance will change when broadcom release its next generation chips.
Another company to look for is flextronics which fabricate boards for most of the major vendors including cisco, juniper, etc
Last one is IBM which does ASIC verification for high end switches.
Hope this helps.
Interesting article. For those who are curious about not only their own internet speeds but those of others should visit http://www.speedtest.net/index.php and take a free speed test. When you are finished explore the site and look to see what countries and ISPs are the fastest.
On the issue of broadband, Apple, Verizon and 4G take a look at the problems AT&T is having with the increased demand of smart phones, mostly the iPhone, for fast data access. AT&T is taking their traditional approach to customer problems by suggesting that the solution is to simply charge the users even more while doing little to nothing to expand their infrastructure. The number of customers that would jump to Verizon if and when it gets the iPhone is probably huge; however, it is questionable whether they would provide a superior service.
My own take on the near monopolistic cellular and internet providers is that they all are trying to delay any substantive progress which would make their own built out investments obsolete overnight in many cases. In some ways Apple is pretty much the same as can be seen by yesterdays tirade by Jobs concerning Adobe Flash. None of these companies is the least bit interested in opening their areas to any partners unless said partners are so small and weak as to be easily eliminated if the need arises.
As Ed states in his first sentence above, I suspect that it may well be some company we know nothing about that makes the leap to the next major move. Print media is heading for the exit as they could not adapt. The traditional music media companies ruined any chance they had to embrace new technology by their greedy blind insistence that customers adhere to an old technology while also trying to raise prices. The movie companies are where music was maybe 10 years ago. The future will be what it is and the odds are that many of the names we know today will be skeletons tomorrow. Xerox and Polaroid anyone?
Jim,
I always enjoy reading your column. You misssed a HUGE opportunity with Occam Networks (OCNW), but it is not too late to join the Occam party. Occam is the purest play to the Tier-3 broadband market which is about to experience very high secular growth. In addition, their products are already approved by the Rural Utilities Service and many of their customers are in the sweet spot of qualifying for the rural broadband stimulus package. Here is a link to an artcile that explains Occam’s opportunity:
http://seekingalpha.com/article/194160-national-broadband-plan-and-stimulus-a-secular-boom-for-occam-networks
I am really high on this one…….
Great article,thank you for sharing.
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Jim,
Thank you for the insight. Is there a reason, VZ is not included in your personal portfolio? In addition to the growth prospects as rightly pointed by you in this article, it’s got a very high yield. Please let us know. Thank you for all your help
nitin,
Thanks for the tip!