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The Big, Safe Tech Company at the Heart of the Gadget BoomBy Larsen Kusick, analyst, Phase 1 InvestorMonday, March 12, 2012 It's the biggest number in the tech sector you never hear about: 18.
By 2016, global mobile data traffic will be 18 times higher than it was in 2011.
Thanks to the billions of smartphones and other mobile devices out there, the amount of data moving through mobile networks is booming.
Mobile carriers are scrambling to keep up. And it's going to mean a LOT more business for the companies that supply the "picks and shovels" of the country's data network.
Two weeks ago, at the Mobile World Congress, I got the latest look at how companies are coping with the growing data flood.
The Mobile World Congress is an annual gathering of mobile industry insiders. Gadget-makers like Samsung, Nokia, and LG showcase their latest hi-tech devices, like smartphones and tablets. Every news outlet from Time magazine to CNet publishes articles about which of the latest gadgets are "must-haves."
For investors, that's not the real story.
The "underground buzz" at this year's Mobile Congress was all about "small cells" – small base stations that can handle a portion of the surging data.
Right now, the growing data traffic is swamping the base stations that transmit wireless signals to phones. Small cells work like a mini-base station. When a user is in range, their mobile device will start using the nearby small cell, instead of the traditional base station responsible for a much bigger area.
During the Congress, Informa Telecoms & Media – an industry research firm – published a new report predicting a 20-fold increase in the number of small cells deployed worldwide over the next four years. There are about 3 million small cells out there now. The firm expects to see more than 60 million by 2016.
This month, Verizon submitted a filing to the FCC saying that it plans to deploy small cells to help deal with the growing strain on its network. The wheels are in motion, even if Verizon isn't sure how many it's going to need... which cities need the most... or even when it will add them.
The only certainty is that the carriers will have to spend a lot of money over the next decade to deal with their customers' growing appetite for data.
That's going to create a long-term tailwind for Cisco (CSCO), the world's largest builder of Internet "plumbing."
There's still a ton of uncertainty about what kind of small cells will become the standard. Between 3G, 4G, and Wi-Fi, there's no "one size fits all" solution for people using a variety of devices. Cisco has close relationships with all major carriers. It's also one of the few companies big enough to create whatever kind of equipment they need, even as those needs change.
More important, Cisco's equipment already appears in 12 million existing WiFi stations. Each of these can be upgraded with the latest Cisco equipment – specifically its new small cell that supports WiFi, 2G, 3G, and 4G.
Even better, Cisco is cheap. It's trading at less than 11 times 2012 expected earnings. Once you take into account its $46 billion in cash and investments, shares are trading around 6 times earnings. Considering the long-term opportunities, the stock is a steal.
Small cells are the latest opportunity. Cisco gets less than 4% of its total revenue from its "wireless" business. However, sales from the wireless unit are growing three times faster than its switching and routing businesses. I expect that growth rate to surge as it sells millions of small cells in the next few years.
Small cells are just the latest attempt to solve the data problem. It's a safe bet that Cisco will also manufacture the next generation of equipment needed by big telecom companies.
As I said, it's still too early to tell how much equipment will need to be rolled out. However, it's not a question of "if" Cisco (and its shareholders) will benefit... it's a question of "when."
Good investing,
Larsen
Further Reading:
The long-term bull market in mobile devices will generate huge profits for the industry's best players for years to come. Get the details below...
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