Inseego Corp (NASDAQ: INSG): Why bet on 5G could drive near-term growth

We expect Inseego’s wins in the 5G space will come from seizing opportunities arising from the ban of Chinese networking equipment suppliers by the U.S. administration

Inseego Corp (NASDAQ: INSG): Why bet on 5G could drive near-term growth
Inseego Corp (NASDAQ: INSG): Why bet on 5G could drive near-term growth

Miami, FL–(EmergingGrowth.com Newswire – March 10, 2019) – EmergingGrowth.com, a leading independent small cap media portal with an extensive history of providing unparalleled content for the Emerging Growth markets and companies, reports on Inseego Corp (NASDAQ: INSG).

Inseego Corp. (NASDAQ: INSG) designs and develops products and solutions that enable high performance mobile applications for large enterprises, service providers and small and medium-sized businesses. The stock has outperformed its peers so far gaining about 31 percent while the computer and technology sector has returned an average of 13.6 percent on a year-to-date basis.

(Source: Yanoo! Finance)

Although the company doesn’t provide separate reporting for its various lines of business, its most recent 10-K filing revealed that hardware and software contributed 73.4 percent and 26.6 percent to revenue respectively.

Inseego’s business can be broadly broken down into two segments: the Telematics and Asset Tracking Business, and IoT and Mobile Business which has been driving advanced mobile technologies for a multitude of consumer and enterprise applications for over 20 years. This portfolio consists of intelligent mobile broadband solutions, HD quality voice VoLTE products, residential 4G routers and an advanced 5G portfolio of products under development.

The 5G market requires the company to design routers and antennas that meet certain technical specifications and in late 2017, Inseego announced a strategic relationship with Qualcomm (NASDAQ: QCOM) and Verizon Wireless (NYSE: VZ) to co-develop advanced technologies and devices for the next generation 5G NR (New Radio) wireless market.

5G NR encompasses two new radio frequency ranges that will be used in the initial roll out of this new network infrastructure. One frequency range will overlap and extend 4G LTE from 450MHz to 6,000 MHz with bands being numbered from 1 to 255 while the other will range from 24GHz to 86 GHz in what’s being referred to as New Radio.

An overview of 5G

According to industry trade group CTIA (Cellular Telecommunications and Internet Association), wireless providers eventually will invest as much as $275 billion in upgrading existing networks to 5G across the U.S. The shift to 5G is set to eventually boost network speeds by 10 to 100 times what is currently available, cut latency (the time it takes to load a packet of data) to less than a millisecond, as well as provide wider bandwidths.

(Source: EDN Network)

5G is also expected to be scalable and adaptable across a variety of use cases, which include,: empowering new industries and services, such as autonomous vehicles and industrial applications, through ultra-reliable, ultra-low latency communication links; and connecting a significant number of IoT service and devices such as connected home and smart cities devices, with connectivity designed to meet ultra-low power, complexity and cost requirements.

The technology is also expected to enhance mobile broadband services, including ultra-high definition (4K) video streaming and augmented and virtual reality, with multi-gigabit speeds.

One key differentiator of the 5G network is that it will require more antennas that are placed closer together than its 4G predecessor to allow for uninterrupted, high-speed communications between these devices. The small-cell antennas, which can be as large as a refrigerator, must be dispersed roughly one site per city block. As Verizon’s chief executive Hans Vestberg further explains, 4G can handle around 1,000 connected devices per square kilometer whereas 5G can handle one million.

The first phase of 5G networks are expected to support mobile broadband services in lower spectrum bands below 6 GHz as well as higher bands above 6 GHz, including millimeter wave. Although the 5G has been gaining widespread popularity, one major challenge emerging challenge has been how to succinctly explain what the technology encompasses.

According to IEEE Spectrum not even experts can tell us what 5G exactly is, but two of the most important brand new technologies emerging as the foundation of 5G are millimeter waves and small cells. While the technology can at best be described as being in its infancy, investors have a number of ways to reap huge returns from this new wave through an investment in companies such as Inseego.

Massive opportunity, limited competition

The 5G market, including the newly defined 5G NR standard, will begin accelerating from this year and we believe that Inseego is at the forefront of this newly emerging standard. In addition, further emerging 5G developments with anchor customers leveraging Inseego’s existing modem technologies will open it up to larger worldwide potential markets.

Most smartphones run on the 4G cell network today and the cost of building out the network hit $200 billion in 2015. A key benefactor of this spending was cell tower operator American Tower Corp (NYSE: AMT) which gained more than 150 percent since the beginning of the upgrade from 3G in 2011. It is due to this fact that we believe Inseego is also set to benefit from the momentum in 5G adoption as explained below.  

A recent study by the consulting firm Accenture estimates that the 5G upgrade will require 769,000 small-cell antennas to be erected across the country from 2018 to 2026. At the end of 2017, about 320,000 4G cell sites were in service — meaning about 449,000 new antennas will be raised in the upgrade.

The only problem here is that 5G mobile networks won’t be available nationally until late 2020 according to T-Mobile US (NASDAQ: TMUS) which has been the only wireless company committed to deploying a nationwide 5G network.

There are no direct 5G devices right now except for Samsung’s (OTC: SSNLF) recently unveiled S10 5G which is powered by Qualcomm’s Snapdragon 855 platform combined with the Snapdragon X50 modem to support multi-gigabit connectivity and Huawei Mate X. As such, the initial deployments are going to be built around the mobile hotspot concept which will allow other devices to take advantage of the new technology, though indirectly. Mobile hotspots will convert the 5G signal into another form of data transfer, usually some form of ubiquitous Wi-Fi which is where Inseego comes in.

Verizon recently unveiled the Inseego 5G hotspot, the first of its kind that will be offered by the wireless carrier. The hotspot introduced during the Qualcomm Snapdragon Technology Summit in Maui will launch at Verizon sometime in 2019, enabling customers to access the carrier’s 5G mobile network for use with other mobile devices.

Like the new generation of Samsung’s smartphones, the Inseego 5G hotspot will come equipped with a Snapdragon X50 modem and S855 SoC.  Already offering 5G as a home Internet service in parts of four cities, Verizon has said it will debut mobile 5G in “more than 30 U.S. cities” later this year.

However, Inseego isn’t the only networking gear maker angling for a piece of the 5G market through hotspots. Netgear (NASDAQ: NTGR) in partnership with Verizon’s biggest competitor AT&T (NYSE: T) also revealed that that they would be offering customers a similar 5G hotspot running on Qualcomm’s technology in order to access the carrier’s network.

“We announced the release of the world’s first millimeter wave 5G network device, the Nighthawk 5G mobile hotspot with AT&T. It’s the first standard-based mobile 5G network device in the world and is available on AT&T’s mobile 5G Plus network for early adopters,” said Netgear’s chief executive Patrick Lo during the company’s fourth quarter earnings call. On the bright side, it should be noted that the market is certainly large enough to accommodate both Inseego and Netgear as research from Ericsson estimates that the 5G-enabled industry digitization revenues for ICT players is likely to top $1.2 trillion by 2026.

Investment summary

According to Inseego’s chief executive Dan Mondor, the wireless home hotspot supporting Verizon’s 5G Home is the company’s entry into the wireless consumer gateway market – a new product category with at least $30 million addressable market in the U.S.

While some investors may be wondering why Inseego is a better bet in 5G as compared to Netgear which is larger and better capitalized, the answer lies in the partnerships made. Verizon’s $3.1 billion acquisition of Straight Path Wireless last year brought it the largest holding of millimeter-wave spectrum licenses resulting in the carrier holding 76 percent of the available 28GHz band and 46 percent of the available 39GHz band compared to AT&T’s 30 percent holding of the 39GHz spectrum. This means that until 5G devices come to the mass market, Inseego will be responsible for supplying customers with the means of accessing the 5G network for the time being. 

In addition to this, the capital intensity of building out a 5G network using millimeter-wave spectrum and small cells could weigh on AT&T considering its huge debt load. That debt could likely limit how quickly the company builds out its 5G network thereby further cementing Verizon’s lead in the space which bodes extremely well for Inseego.

Going forward, we expect Inseego’s wins in the 5G space will come from seizing opportunities arising from the ban of Chinese networking equipment suppliers by the U.S. administration, a move that essentially limits competition for the company. The ban coupled with Inseego’s solid partnership with Verizon, the largest 5G spectrum license holder implies that gaining just a third of the addressable 5G gateway market in a year would add roughly $10 million to the top line which is nothing to scoff at considering the company had $95.3 million in revenue for the first nine months of 2018. 

In Q3 ’18 non-GAAP gross margin for IoT & Mobile Solutions was 23.4 percent compared to 22.8 percent in the preceding quarter, and increased 9 points year-over-year from Q3 ’17, due mainly to cost reductions, operational efficiencies and engineering services. Inseego’s management believes that its mix of new products scheduled to hit the market before the end of the year such as the 5G home and industrial gateways as well as hotspots will have much higher gross margin profiles. As a matter of fact, the company expects that the IoT & Mobile Solutions business could grow to roughly 25 percent gross margins in the near-term and progress over time to at least 35 percent, reaffirming the importance of capitalizing on the 5G opportunity.

Although Inseego’s stock price has gained strong momentum since mid-last year rising to a market capitalization of $415 million, we are confident that there is still more upside to come driven by 5G adoption. Over the past couple of weeks the stock has experienced a moderate pull-back and currently trades at $5.2 per share representing an attractive entry point for the risk tolerant investors.

At the moment, the stock’s risk/reward appears skewed to the upside going by recent analysts’ recommendations. Northland Securities analyst Michael Latimore maintained a Buy rating on Inseego and set a price target of $6 while Lake Street Capital restated their buy rating on the stock with a price target of $6.5 in a research report sent to investors last month.

Even institutional investors haven’t been blind to the brightening prospects of Inseego.  BlackRock Inc. increased its stake in the company by 3.1 percent during the second quarter of 2018 and now owns 1,047,118 shares of the technology company’s stock valued at $2.1 million after purchasing an additional 31,469 shares during the last quarter.

The only major cause for concern that investors are likely to encounter is the company’s weak balance sheet. Cash and cash equivalents, inclusive of restricted cash was $31.6 million at the end of Q3, increasing $12.7 million from Q2 and up $11.6 million compared to the same period last year.

(Source: Simply Wall St)

In spite of this, Inseego is able to meet its short term commitments with its holdings of cash and other short term assets and has sufficient cash runway for more than 3 years based on current free cash flow regardless of whether the free cash flow continues to reduce at historical rates of 32.3 percent each year.

Conclusion One emerging theme appears to be that both carriers and hardware companies appear to be positioning themselves in such a way that they are not tied to a particular 5G use case but agile and well-resourced enough to exploit whichever one might take off. Therefore, since Inseego seems to have struck the right partnerships, its position as the go to equipment supplier for 5G network access through its hotspot and gateway devices means that investors can be assured of reaping substantial returns before 5G ready devices hit the mass market next year.

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