How Telecom Infrastructure Spending Is Driving Growth for This Undervalued Stock
More mobile users, more connected devices, and more applications are spurring big upgrades of communications networks, both at the carrier and enterprise levels.
According to Bloomberg, mobile-phone companies, chipmakers, device manufacturers, and software developers are expected to spend $200 billion a year in research and capex to usher in next generation 5G wireless networks.
Most mobile-phone companies are targeting 2020 for the initial rollout of the technology, which promises 10 times faster speeds and lower latency, or lag time, in transferring data when it’s requested, while some carriers, including Verizon (NYSE: VZ), are already moving from trials to deployments.
Top 5 Service Providers Expected to Spend $50B on Capex in 2018
According to FierceTelecom, the five largest telcos alone plan to spend approximately $50 billion on capex in 2018, up from nearly $45 billion in 2017, as the move to 5G accelerates.
For investors, finding where this money is being spent could lead to big profits.
Most large enterprises and telcos contract network infrastructure work to regionally based solution providers. While many of these contractors are small, private operators, there is one publicly traded company that gives investors the opportunity to profit from this spending: Spectrum Global Solutions (OTC: SGSI).
SGSI’s client list includes major carriers (Verizon, AT&T, Sprint, T-Mobile, etc.), aggregators (Crown Castle, ExteNet, American Tower etc.), OEMs (Nokia, Samsung, Ericsson, etc.), utilities (Entergy, Southern Company, etc.), and more.
These customers regularly turn to SGSI (through its wholly owned subsidiaries) for the deployment and maintenance of both next-generation and legacy wireless and wireline networks and infrastructure.
“We’re in a high-growth market. Telecommunications is going through a technology evolution and explosion that’s continuing through 2025, and its just in the beginning of that now,” stated Keith Hayter, President.
5G: Transforming More Than Telecom
Like every new generation of wireless technology, the fifth generation, or “5G,” will dramatically increase the speed and volume of data transfer through the airwaves. However, the transition from 4G to 5G will be more significant than previous transitions as unprecedented speeds—in some cases up to 50 times faster—as well as significantly larger carrying capacity, will allow wireless technology to move past three technical thresholds, each representing a significant milestone in its own right.
The first threshold is that 5G wireless internet speeds will, for the first time, exceed that of cable broadband and potentially also fiber-optic cable (Verizon Fios, Google Fiber, etc.).
Achieving this threshold will allow users to flip through high-quality video content on mobile devices, including 4K, 3D, and virtual-reality content, and have the same or better experience as watching cable television.
Secondly, 5G will enable the “internet of things,” or “IoT,” which will have broad industrial and city-wide applications for the first time, connecting billions of devices.
Not only will consumer products such as fridges and thermostats be increasingly connected to the internet via the “consumer IoT,” large-scale and complex processes such as industrial agriculture, supply-chain coordination, fleet management, and city traffic flow will increasingly be guided by connected devices as part of the “industrial IoT.”
Importantly, 5G will provide the necessary bandwidth for connected vehicles to send and receive the huge amounts of data at the speed required for effective vehicle coordination, thereby representing a vital component in the development of autonomous driving.
The third threshold that 5G technology is predicted to surpass is the reduction of network latency, or lag, to one millisecond, faster than the speed at which humans perceive audio, visual, and physical response as instantaneous.
For comparison, 4G/LTE latency is currently between 20 and 50 milliseconds.
All of these advancements are driving nearly unprecedented spending, and SGSI is positioned to capture a growing share of that spending.
“We’re a full-service provider. With this explosion in technology and the need to expand telecommunications network infrastructure, the resources, companies such as ours, are in short demand,” added Hayter. “Larger companies that need our services find us attractive because we have an excellent safety record, national engineering licenses throughout the U.S., Canada, and the Caribbean, enabling us to provide comprehensive services in a single-source engagement with our customers, mitigating the need to hire and manage multiple contractors.”
Valuation Yet to Reflect Growing Operations
For investors, SGSI represents an extremely compelling opportunity right now.
SGSI entered the telecom landscape in 2017 through the acquisition of established solution providers.
One of its acquisitions (ADEX Corp.) generated revenue of $20 million last year and is well-positioned to generate similar revenue in 2018.
The company has also announced a string of contract wins this year, totaling millions of dollars.
Overall, SGSI is expected to report more than $33 million in revenue this year. According to recent news it has already reached a $35 million revenue run rate.
Despite this outstanding operational performance, the stock trades for a $2 million market cap.
Investors buying at fire sale prices like this, which not only are completely out-of-sync with the company’s future potential, but are also even drastically undervalued for its current performance, could win big.
Rapidly Growing Pipeline of Business
For much of 2018, SGSI has been reporting millions of dollars in new contracts, adding even more business to its already impressive backlog.
Eventually this growth will attract investor interest, ultimately propelling shares to a more realistic valuation.
Trading at just one times its estimated 2018 minimum sales would put the company at a $33 million market cap, more than 15 times where it is today. And for a company generating double and/or triple-digit growth, 1x sales is an extremely conservative valuation.
Add in contract growth, extremely favorable industry trends, and a management team with a proven ability to execute, and SGSI could be one of your biggest winners over the next 12 to 18 months.
“Telecommunications is in a high-growth cycle. We are there with all of the services the carriers need to perform and deploy their networks. Comparable companies trade for 1x-2x revenue, we currently sit at less than 10% of our forecasted revenues, creating a great growth opportunity,” concluded Hayter.