The Cold War Over Airspace Gets Nasty

by Louis Basenese
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The Cold War Over Airspace Gets Nasty

2013 was full of records. So many, in fact, that we’re prone to grow numb to their significance.

But don’t let that be the case with this one, otherwise you’re certain to miss out on the next big profit opportunity in the technology market.

For the first time ever, smartphones outsold feature phones.

What’s the big whoop? Well, pick up your smartphone, put it in airplane mode, and then try to use all of your favorite applications.

Now you understand. Without a data connection, smartphones are completely useless.

We can’t browse the web, post on Facebook (FB), stream video, access maps – nothing.

Simply put, smartphones and mobile data access go hand-in-hand. And that’s a big problem . . .

“As more and more folks jump on the smartphone bandwagon, the demand for data will continue to grow exponentially,” says Engadget’s Michael Gorman. Precisely!

Yet, as I alluded to yesterday, telecoms never expected mobile technology to be this big.

In the words of Verizon Communications (VZ) Chief Financial Officer, “[We] did not anticipate that amount of growth in the network.”

Or, more bluntly, they got caught with their pants down. They didn’t invest in an infrastructure that could handle the demand, and now they’re playing a nasty game of catch-up.

So much so, that RootMetrics CEO, Bill Moore, says a mobile “arms race” is underway among the major telecoms. But there’s only one way to win the race. And therein lies the biggest opportunity in the tech market for 2014…

The Small Solution to the Big Mobile Data Problem

Cisco (CSCO) estimates that mobile data traffic will grow nearly 60% per year in North America through 2017. Meanwhile, other industry insiders believe that there’s a need to prepare for 1,000 times more growth.

But building out the infrastructure to enable more and more high-speed mobile internet access takes time and costs a ton. Companies can’t put up a macro cell tower overnight.

Enter small-cells, which fill in gaps in mobile coverage quickly and on the cheap.

For those of you who are unaware, small-cells are basically miniature cell towers that can be mounted on street posts or rooftops to expand mobile coverage – from as little as 10 meters to as much as one or two kilometers. And multiple small-cells can easily link together to form an extra layer of capacity.

Without them, there’s simply no way for telecoms to keep up with the demand for mobile broadband connectivity.

So, yes, the next big thing in technology, ironically, will be small.

But don’t just take my word for it.

“Small-cells are a big deal,” says former FCC Chairman and current private equity honcho, Julius Genachowski. He’s convinced that they’re the next step toward increasing coverage and speeds, and he thinks they’ll drive enormous change in the industry. Agreed!

Meanwhile, AT&T’s (T) Senior Vice President of Technology and Network Operations, John Donovan, says, “Over half of our [network] densification over the next three years is going to be the result of deploying small-cell technology.”

Of course, talk is cheap. Money matters most, which is why Qualcomm’s (QCOM) actions are most instructive.

Last July, the company invested roughly $113 million in small-cell vendor, Alcatel-Lucent (ALU).

At the time, Executive Chairman Paul Jacobs said, “When you get a partner like [Alcatel], other companies see that and accelerate their plans, too. It’s our way to catalyze change in the industry.”

And guess what? It’s working.

Let the Small-Cell Revolution Begin

As Ina Fried of AllThingsD noted in December 2013, “Much of the attention is starting to shift to the ways in which carriers are improving LTE speeds and capacity.”

The latest comments from AT&T’s Associate VP of Small-Cells, Gordon Mansfield, underscore this reality: “Right now I can say we’re in a fast walk. But we’re right at the cusp of stepping on the gas and going into a full-blown sprint.”

Brace yourself! Industry-wide, we’re talking about upwards of 75 million new small-cells being deployed over the next three years.

So what’s the best way to profit from the growth? I thought you’d never ask…

Rest assured, he’s not exaggerating to make headlines.

A Track Record of Proven Winners

We’re all too familiar with small-cells at WSD Insider. And I say that because we’ve been investing (profitably) in the space since 2009.

First with Airvana, which was acquired one month after our recommendation by a private equity firm (one backed by SAC Capital and the Blackstone Group).

Then with Zarlink, which was ultimately acquired, too.

For years, we waited anxiously for PicoChip to go public. But it didn’t get a chance because semiconductor firm, Mindspeed Technologies Inc. (MSPD), bought the company outright in early 2012.

At the time, Mindspeed was publicly traded, so we pushed our chips in on the company’s stock.

Sure enough, in November 2013, M/A-Com Technology Solutions Holdings, Inc. (MTSI) announced that it was acquiring Mindspeed for $272 million – or about a 65% premium to the current price.

Notice a pattern? So do we. Time and time again, the leading small-cell firms get gobbled up. I expect that trend to continue, too.

That makes $700-million M/A-Com an attractive acquisition candidate. Ditto for Alcatel-Lucent. In fact, Qualcomm is sitting on enough cash to bump up its ownership of Alcatel to 100%.

Other companies with leverage to the small-cell revolution include PMC-Sierra Inc. (PMCS), Vitesse Semiconductor Corp. (VTSS), Cavium Inc. (CAVM) and Semtech Corporation (SMTC).

Although solid choices, none of these companies represent the most profitable option. Why? Because they fail to address another critical factor in the mobile market.

It’s important to understand that small-cells aren’t a silver bullet. In order for them to truly ease mobile bottlenecks, carriers must also figure out a way to link those dispersed cells back to their core networks. These vital connections are referred to as “backhaul.”

Therefore, a company providing backhaul services, with existing broadband infrastructure, and available real estate in the most densely populated markets represents the absolute best way to play the boom.

And yes, such a company exists.

In fact, we added it to our WSD Insider Innovators & Disruptors Portfolio last month.

This portfolio is reserved for the market’s most innovative companies with the greatest upside potential. By virtue of that, only the world’s top “visionary” companies make the cut.

This small-cell play – with a $200-million market cap, trading for about $3 per share – is already living up to our high expectations. In less than a month, the stock is up 35%.

By my estimates, though, shares could still easily double in price from here.

Bottom line: Small-cells are the next big thing in technology.

After years of testing them in every way imaginable, major telecoms are embarking on a large-scale rollout starting right now. Thanks to exponential growth in mobile data demand, they don’t have a choice.

If you want to find out the identity of the very best opportunity in the space and access our full research report on the company, all you have to do is sign up for a risk-free trial to WSD Insider here.

Ahead of the tape,

Louis Basenese

The post The Cold War Over Airspace Gets Nasty appeared first on Wall Street Daily.

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