my no. 1 stock “behind” quantum computing’s rise
TRANSCRIPT
By Jeff Brown
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My No. 1 Stock “Behind” Quantum Computing’s Rise By Jeff Brown, Editor, The Near Future Report
“What the hell’s a portable cell phone?”
That’s what Rudy Krolopp asked his boss, Marty Cooper, when Cooper told him he had six weeks to build one.
This conversation happened deep in the halls of Motorola’s research and development center in December 1972. At the time, Cooper headed up Motorola’s communications systems division. Krolopp was a lead designer with the company.
Krolopp’s engineering team of eight men had to design a phone and how the entire wireless network would work, something that had yet to be done in 1972. After all, what good is a fancy new phone without a network to work on?
And time was of the essence…
AT&T was already in talks with the Federal Communications Commission (FCC) to build wireless networks for its car phones. At the time, the car phone was a 30-pound box of communications equipment people shoved into the trunk of a car. The user could then operate the car phone via a controller attached to the dashboard.
Cooper knew cellular phones could be more portable. And he didn’t want the FCC to approve these networks, giving AT&T a virtual monopoly
in the future of communications.
It took the team close to 12 weeks to fully test and build the phone.
On April 3, 1973, Cooper made the first call on a portable cellular network. He called his main rival, Joel Engel at Bell Labs. He said, “Joel, this is Marty! I’m calling you from a cell phone, a real handheld portable cell phone.”
While this was a huge win for Motorola, the company didn’t generate any revenue from this invention for 10 years. And it cost them over $100 million in development costs. That’s a quarter of a billion in today’s dollars. That was a big gamble, especially for a company that was only worth about $2 billion at the time.
Very few companies have that kind of capital or patience to put vast sums of money into the development of an unproven technology with a 10-year time horizon.
But this paid off for Motorola. At the beginning of 1983, the company was trading at $9 a share. By 1993, the stock was trading at $62 a share. And at its peak, the share price was $220. That’s a 2,300% gain from 1983 levels.
By investing well into the future, Motorola was able to double its stock price, on average, every
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3.5 years in the ’80s and ’90s.
This report’s company has the same mentality. It’s always looking forward at least five years. It was investing in its 5G products in 2014, years before the 5G rollout would bring in revenue.
And now it’s developing its products for 6G and quantum computing.
This forward-looking mentality has turned the company into a powerhouse in its industry.
Nearly every large tech firm in the world uses the testing, measurement, and verification equipment of this company to speed along research and development of bleeding-edge technological innovations.
And we’re investing in this visionary company. We’ll profit in the near term from the record levels of investment happening right now in 5G wireless technology. And as you’ll see in a moment, we’ll have early exposure to 6G wireless technology and quantum computing.
Welcome to The Near Future Report
Welcome to The Near Future Report. I’m Jeff Brown, your editor.
For nearly 30 years, I worked as a technology executive for firms like Qualcomm, NXP Semiconductors, and Juniper Networks. I’ve earned degrees from Purdue University and the London Business School.
I’ve also received professional certificates from MIT, Stanford, and most recently the University of California, Berkeley, School of Law. And I am also an alumnus of Yale University’s School of Management.
I’m also an active angel investor in early stage technology companies. I’ve invested in dozens of private deals. I don’t tell you all this to brag. But with so many so-called technology experts
out there, it’s important that readers know I’m truly committed to the world of bleeding-edge technology.
With this research service, we look for stable, mid- to large-cap companies with products enabling the newest technological trends. We can think of these as “sleep well at night” stocks with great growth potential.
In the past years, we’ve covered technology trends like 5G, artificial intelligence, and cloud- based software services.
And in this report, we’re focusing on one trend that has exploded over the past year: quantum computing.
Devices Are Getting More Complex
Before I share more about how the recommendation in this report will shape quantum computing, let’s take a step back to look at the bigger picture. Understanding these broad technology trends is a key part of our success here at The Near Future Report.
Today, our electronics are getting smaller, faster, and more powerful. Consider the bulky car phones from the 20th century I mentioned earlier. Now compare that to the small, ultra- powerful smartphones in our pockets.
Just as these devices get more powerful and compact, the components inside become more complex. We can just look at the difference in complexity between 4G and 5G devices.
Longtime readers will need no reminding. But for newer readers, 5G is the next generation of wireless technology. And 5G will be 100 times faster on average than our current 4G networks by the time the new wireless networks are completely built out. 5G is a game changer and one of the best investment trends of this decade.
5G devices will work on 5G networks, but they
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also need to work on 4G and 3G networks. That’s because the 5G network build-out will take several years to be fully constructed. And while the 5G infrastructure is being built out, 5G devices will occasionally have to “fall back” onto 4G and 3G networks when a 5G (or 4G) network signal isn’t accessible.
This creates significant engineering challenges. Dedicated radio frequency (RF) semiconductors are needed for a phone to connect to each of these wireless networks. And each network operates at different frequency bands. Basically, the phone needs to be able to filter out and focus on just the right frequencies in order to connect to the network. Once the phone does so, it can make calls, send and receive messages, and access the internet.
Wireless network operators purchase or license the rights to operate their wireless network over a specific area of the RF spectrum. The spectrum is typically thought of as a “public good.” Each country’s government usually regulates the spectrum and harmonizes it with adjacent countries to avoid unwanted signal interference.
The problem is, when data traffic continues to grow exponentially – doubling again and again – more efficient technology and additional spectrum are required to avoid network congestion, which results in dropped calls and signals.
The spectrum allocated for services transmitted over RF is jam-packed. The image above will give us a feeling for how busy the radio spectrum is. It represents the United States market, but most countries have similar spectrum usages and allocation.
As the world adopts 5G wireless technology, the frequencies used become even more complex. 5G spectrum ranges from low-band frequencies in the ultrahigh frequency (UHF) range all the way up to the millimeter wave (mmWave) frequency bands that start at 24 Ghz (gigahertz).
The higher the frequency, the higher the power and performance and the more precise the electronics need to be to filter the RF signals on smartphones, 5G antennas, and 5G base stations.
And Keysight Technologies (KEYS) – this report’s recommendation – develops the test and measurement equipment used to develop, tune, and maintain 5G wireless networks. Wireless network engineers literally can’t do their jobs without Keysight.
Keysight Goes Back Over 80 Years
Even though Keysight is a fairly new company, having gone public in 2014, it can trace its origins directly back to the formation of tech stalwart Hewlett-Packard in 1939. In fact, HP’s first products were electronic test and measurement equipment – what Keysight still does today.
United States Radio Frequency Allocations
Source: FCC & Millimeter Wave Wireless Communications
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Over the years, HP expanded into computers, printers, servers and other electronic devices and got away from its roots as a test and measurement company. To streamline operations, the company decided to focus on just its computer and printer businesses in 1999. So it spun off its testing and measurement company, which it called Agilent Technologies.
Agilent Technologies didn’t just focus on testing in electronics. It also helped scientists with testing and measurement applications in the life sciences and chemical analysis industries.
In 2013, Agilent decided it didn’t make sense to have electronics testing lumped in with its industrial and life sciences business. So management spun out the electronics testing business into Keysight Technologies in 2014.
From Keysight’s first investor day presentation that year, the company knew it would focus on developing or acquiring the technology needed for 5G testing and measuring. The company wanted to dominate this area of 5G wireless and other emerging spaces for growth.
Keep in mind that 2014 was still the “4G era.” But like Motorola, Keysight saw the next obvious evolution in mobile communications. And it positioned itself well ahead of time.
Its goal was to be the first to market with 5G-design solutions. The company achieved this through a combination of internal development and outside acquisitions. And that enabled it to grow into the leading testing equipment company in the industry.
Keysight’s Products
Over six years ago, when Keysight spun out, it was primarily a hardware company. It produced equipment to gather test results for 5G devices.
These tests would show how a 5G wireless network was performing.
It’s not a perfect comparison, but we can imagine a car diagnostic device. A car diagnostic tool can show if there are any problems with the engine, transmission, exhaust system, or even brakes.
Keysight’s technology does something similar for wireless networks. It ensures that the network is functioning at optimum performance levels.
To give us a feel for what its equipment looks like, here’s what Keysight provides for customers to do an over-the-air (OTA) test for 5G. Any application sending or receiving mmWave signals (like 5G) needs to go through extensive testing to validate the signals. You can see an image of the equipment below.
Keysight’s Test Chamber
Source: Keysight Technologies
Inside the test chamber, engineers hook up a 5G device to the measurement equipment. Then these devices record up to billions of data points every second to ensure the phone has the proper frequencies and power levels. This helps guarantee a seamless connection to the wireless networks.
The testing instruments that connect to the phone inside the calibration chamber can include signal generators, signal analyzers, and oscilloscopes, as just a few examples.
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Keysight Testing Equipment
Source: Keysight Technologies
Now, collecting all this data with Keysight’s hardware is one thing. But interpreting that data is quite another.
Keysight needed to find a way to combine testing data gathered from the networks and the devices (phones) to display the final result.
Knowing this, Keysight went about transforming the company. It already was the best test and measurement equipment manufacturer. But for its devices to be really useful analyzing these new kinds of complex technology, the company needed to have the best software to enable engineers to quickly interpret the data and implement changes.
And that’s precisely what the company has been doing…
The Great Transformation
Since Keysight spun out, management has focused on transforming it into a software company. This has come in the form of a series of strategic acquisitions designed to put Keysight into a more dominant position in the industry.
Keysight started acquiring immediately in 2014 with its $606 million acquisition of Anite. This company was a leader in research and development software for designing wireless handsets as well as a leader in network testing to
maintain and optimize wireless networks.
And then in 2017, Keysight acquired Ixia for $1.6 billion. Ixia provides testing and security solutions across physical and virtual networks. This ensures networks stay safe. It also creates a smooth flow of data – from a smartphone to the wireless network, back to the wired network, and to the data centers that make up the backbone of the internet.
Keysight has slowly and methodically made several other smaller acquisitions to enhance its software capabilities throughout the past six years…
And Keysight isn’t done making acquisitions. Even though it has made 11 since becoming an independent company, Keysight is looking for more.
Chief Financial Officer Neil Dougherty said during a recent conference, “We have a strong [mergers and acquisitions] funnel of development process, and it does seem to be skewing toward targets that have a high software content.”
Keysight is prepared to put its reserves of more than $1.7 billion in cash to work. It will target acquisitions that have complementary products, will generate acceptable returns on invested capital, and will add to profit margins. All this simply means Keysight is focused on acquisitions of companies that are already healthy enough to generate free cash flow for its own business.
The pain point that Keysight is solving is one that I understand well. Early in my career, I used to work with the old HP test and measurement equipment and then the Agilent equipment. Taking measurements from the equipment was a manual process. It was basically all hardware without any software to help automate the process.
During a customer survey, Keysight found 49% of engineers spend over three months a year correlating data between different testing equipment and software. This is a huge time suck. It also takes these engineers away from
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their real task – developing better technology.
93% of Keysight’s customers wanted an integrated approach – somewhere for all the testing software and results to reside and work together. This led to Keysight’s latest undertaking: PathWave.
A Powerhouse for 5G Diagnostics Software
PathWave is the software that I wish I had back when I was working with design, test, and measurement equipment. We can think of it like a modular software platform with all sorts of functionality. It is also “open” to the extent that it allows plug-ins and data libraries to be used on the platform. A simple comparison would be a software platform like Microsoft Excel for design, testing, and measurement.
In 2014, software sales were only $360 million, or roughly 12% of revenue. In 2019, software revenues were about $800 million, or 19% of revenue. And coincidentally, 19% of total revenue came from subscriptions or recurring revenue from software and services.
Remember, we love recurring revenue because it provides stable sales and allows analysts to predict the future growth of the company with more confidence. Both of these lead to higher valuations. And obviously, software tends to be a business with much higher gross margins.
Keysight has plans to incorporate software into most of its offerings. To help build out its software capabilities, Keysight has hired 83% more software engineers than it had in 2014.
Becoming a dominant player in software was imperative for Keysight’s aspirations of dominating the 5G testing market…
Release 16: A Catalyst for Keysight’s Technology
5G has been a major driver of revenue growth for Keysight over the past couple of years, rising over 100% in fiscal years 2018 and 2019. But even with that impressive growth, 5G revenues have much more room to grow.
We are still in the early innings of the 5G rollout. So far, most 5G deployments have been low-band 5G wireless networks. Both AT&T and T-Mobile are rolling out low-band 5G networks.
And I kind of think of the low-band deployments as “quick and easy” 5G. Low- band deployments will perform better than 4G networks, but they aren’t capable of the gigabit per second or better performance levels that 5G technology is known for.
There are pros and cons to this strategy…
The benefits of a low-band wireless signal are that it travels farther and is less costly to roll out. The cons are that it’s less than 1/10th the speed of the high-band, high-performance 5G wireless networks that Verizon is deploying.
Another way I think about low-band versus high- band networks is that the low-band deployments of AT&T and T-Mobile are marketing strategies. These deployments enable the wireless operators to say they have 5G in their marketing campaigns, but it isn’t the real 5G.
Consumers will quickly figure out the difference. The performance over a Verizon 5G high-band network is incredible. I’ve tested it myself across the country. There is no comparison.
Verizon is taking the hard route to invest in and build the real thing right out of the gate, but it will pay off. Verizon will have the best 5G network in the U.S. And it will take two to three years for AT&T and T-Mobile to catch up.
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The thing is, the higher the performance of the network, the more critical the fine-tuning of these networks becomes.
And the only way for these providers to fine-tune their networks is with Keysight’s technology. That’s why the top eight 5G testing houses use Keysight’s solutions. And 75% of all 5G equipment in the field today has been developed using Keysight’s testing and measurement tools and software.
Demand for Keysight’s testing equipment won’t slow down. As the networks get more complex at higher performance and frequencies – and offer a wider range of 5G-enabled services – the demand for Keysight’s products will only increase.
3GPP, the group that sets wireless technical standards, issued the final release of standards for 5G in 2020 – Release 16. These standards provide for more complex 5G functionality like ultra-low latency and industrial applications for IoT (Internet of Things) devices. These standards will begin going live in 2021.
The key point is that Keysight’s 5G revenues are still early in their cycle. The company has a multiyear run ahead of it to support this global build-out of 5G wireless networks. And while Keysight will be busy providing testing equipment for 5G technology in the years to come, the company is already looking ahead…
Keysight’s Plan for 6G
I know that it might be hard to believe, but the work has already begun to develop the standards for 6G wireless technology. With Release 16 out since last summer, that frees up bandwidth for working on the next generation of wireless technology standards.
And yes, it takes about 10 years for everything to come together. I can even tell my subscribers with certainty that in 2029, I’ll be writing about incredible investment opportunities in high-tech companies best positioned to benefit from 6G
wireless technology.
Believe it or not, the wireless industry took its first step toward 6G in 2019, before 5G wireless networks launched. How’s that for forward thinking?
Industry experts met at the first major 6G gathering in Finland in March of that year. That led to the launch of the 6Genesis Flagship Program (6GFP) in late 2019. It’s an eight-year, $230 million project to develop, implement, and test the key technologies needed for 6G.
While 5G speeds are an average of 100 times faster than typical 4G speeds, we can expect 6G speeds to be another magnitude faster than 5G. I know it’s hard to imagine the kinds of services that 5G speeds will bring, let alone what will happen with 6G. But it won’t take long for consumers to feel that they can’t live without 5G. Going back to a 4G network will feel like stepping back into the Stone Age.
AI will be deeply ingrained into the design of 6G wireless networks. We can think of this as an intelligent, self-healing, self-optimizing wireless network. AI will help manage the incredibly complex wireless networks and services that run on these networks.
And here’s the important point for us…
Keysight is a major contributor to the 3GPP on 5G wireless technology, as well as 5G test and performance standards. And these two organizations have already been discussing the next generation of wireless standards – 6G.
So when companies start making 6G prototypes, Keysight will be ready with its design, development, test, and performance measurement equipment.
And Keysight isn’t just stopping at 6G. The company is also involved in a bleeding-edge technology that promises to reshape our world.
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The Key to Enabling Quantum Computing
Regular readers know that I’m excited about the emergence of quantum computing. It is the next generation of computer processing for large, com- plex tasks. Quantum computing is actually going to be responsible for accelerating Moore’s Law.
Moore’s Law says that the number of transistors in semiconductor integrated circuits doubles every 18–24 months. That, of course, increases computing power.
This “law” is the reason we’ve enjoyed an explosion of computing performance the last few decades. It’s the reason the smartphone in your pocket is more powerful than all the computers used to send a man to the Moon.
And if Moore’s Law applies to quantum computing, then that means quantum computers are coming much faster than most realize.
That’s right – things are not slowing down; they are actually speeding up.
I tend to study technologies at very early stages, sometimes when they are just in the laboratory and far from commercial availability. This gives me a large head start and advantage in making smart investments.
In 2020, I completed two courses at the Massachusetts Institute of Technology (MIT) on quantum computing to make sure I am up to speed on the most recent developments in this space. It is going to unfold quickly, which means that I need to stay on the bleeding edge of developments for my subscribers.
We’ve actually already reached the age of quantum supremacy – the point when a quantum computer can outperform the most powerful classical supercomputer. In September 2019, the Financial Times reported on a leaked post from Google on NASA’s website.
The report detailed tests that Google ran on its 53-qubit quantum computer. In those tests, it gave the quantum computer a task that would take the world’s most powerful supercomputer – at the time, Summit – 10,000 years to complete.
The quantum computer finished in three minutes and 20 seconds. That’s beyond amazing. A 10,000-year task was made trivial by one computer the size of a refrigerator.
And that means it is only a matter of time before we have quantum computers to solve a wide range of problems that we struggle with today.
I’m talking about things like accurate weather predictions weeks in advance, molecular analysis, protein folding, genetic analysis, nuclear fusion, and cosmology – quantum computing will tackle all of it. And quantum computing will supercharge artificial intelligence as well.
Think about how much our world changed with the adoption of classical computers in the mid- 20th century. Or consider the significance of the personal computer (PC) revolution in the 1980s and ’90s. These technologies transformed our society in ways that few could have predicted at the time.
Quantum computing will do the same thing. But the impact will be far more powerful. And it won’t take decades… We’ll see profound changes in a matter of years thanks to quantum computing. Changes that will make the exponential growth in computing power that we’ve witnessed over the last 40 years look slow.
And here’s where Keysight comes back into the story…
Back in 2016, Keysight acquired a small company called Signadyne, which specialized in electronic control systems. More specifically, the founder of Signadyne specialized in long-distance quantum communication.
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And then in March of 2020, Keysight acquired another quantum-focused company, Labber, which spun out of MIT’s Quantum Engineering Group. This was a very smart acquisition that has already led to a partnership between MIT’s Quan- tum Engineering Group and its Lincoln Labora- tory, which is also focused on quantum research.
Keysight is also engaged with the Quantum Economic Development Consortium led by the National Institute of Standards and Technology to help guide future quantum standards.
Keysight has already emerged as the leader in quantum control systems and test and measurement for quantum computing. It is a real pick-and-shovel play on this explosive trend in bleeding-edge computing that is right around the corner.
The race for a universal, fault-tolerant quantum computer is on. Companies and nation-states are spending over $10 billion combined in pursuit of this goal.
This is a strategic market for Keysight that will start to generate meaningful revenue within the next two years. Just like with 5G and 6G, Keysight has been investing early so that it will be perfectly positioned when these technologies leave the laboratories and are widely adopted.
Keysight’s Valuation
Keysight is already a cash cow. Keysight has $2.1 billion of cash on the books, and generated over $1 billion in free cash flow in 2020. This healthy cash flow has allowed the company to spend about 16% of its annual revenues on research and development. That number is much higher than most tech companies, which is what I like to see
when companies are developing bleeding-edge technology in order to have a strategic position in rapidly emerging markets.
Its healthy cash flow also puts Keysight in the position to continue to make additional strategic acquisitions, which I fully expect it will do. Furthermore, we should expect that Keysight will continue to make acquisitions in the software space to further grow its high-margin software revenues as a percentage of its overall business.
At the start of this report, I promised readers we would be on the right side of market history. That’s what we’ll do by establishing a position in Keysight Technologies.
Action to Take: Please refer to our model portfolio for the most current recommended buy-up-to price for Keysight Technologies (KEYS). Be sure to use a limit order when placing trades. For the time being, we will hold KEYS with no stop loss. Always remember to use rational position sizing.
Risk Management: Because we will be holding Keysight without a stop loss, I encourage all readers to establish rational position sizing. We should remember to never go “all-in” on any one investment. Our mission is to build a portfolio of our companies. That’s how we’ll optimize our success.
Regards,
To contact us, call toll free Domestic/International: 1-888-493-3156, Mon-Fri: 9am-5pm ET or email [email protected].
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My No. 1 Stock “Behind” Quantum Computing’s Rise By Jeff Brown, Editor, The Near Future Report
“What the hell’s a portable cell phone?”
That’s what Rudy Krolopp asked his boss, Marty Cooper, when Cooper told him he had six weeks to build one.
This conversation happened deep in the halls of Motorola’s research and development center in December 1972. At the time, Cooper headed up Motorola’s communications systems division. Krolopp was a lead designer with the company.
Krolopp’s engineering team of eight men had to design a phone and how the entire wireless network would work, something that had yet to be done in 1972. After all, what good is a fancy new phone without a network to work on?
And time was of the essence…
AT&T was already in talks with the Federal Communications Commission (FCC) to build wireless networks for its car phones. At the time, the car phone was a 30-pound box of communications equipment people shoved into the trunk of a car. The user could then operate the car phone via a controller attached to the dashboard.
Cooper knew cellular phones could be more portable. And he didn’t want the FCC to approve these networks, giving AT&T a virtual monopoly
in the future of communications.
It took the team close to 12 weeks to fully test and build the phone.
On April 3, 1973, Cooper made the first call on a portable cellular network. He called his main rival, Joel Engel at Bell Labs. He said, “Joel, this is Marty! I’m calling you from a cell phone, a real handheld portable cell phone.”
While this was a huge win for Motorola, the company didn’t generate any revenue from this invention for 10 years. And it cost them over $100 million in development costs. That’s a quarter of a billion in today’s dollars. That was a big gamble, especially for a company that was only worth about $2 billion at the time.
Very few companies have that kind of capital or patience to put vast sums of money into the development of an unproven technology with a 10-year time horizon.
But this paid off for Motorola. At the beginning of 1983, the company was trading at $9 a share. By 1993, the stock was trading at $62 a share. And at its peak, the share price was $220. That’s a 2,300% gain from 1983 levels.
By investing well into the future, Motorola was able to double its stock price, on average, every
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3.5 years in the ’80s and ’90s.
This report’s company has the same mentality. It’s always looking forward at least five years. It was investing in its 5G products in 2014, years before the 5G rollout would bring in revenue.
And now it’s developing its products for 6G and quantum computing.
This forward-looking mentality has turned the company into a powerhouse in its industry.
Nearly every large tech firm in the world uses the testing, measurement, and verification equipment of this company to speed along research and development of bleeding-edge technological innovations.
And we’re investing in this visionary company. We’ll profit in the near term from the record levels of investment happening right now in 5G wireless technology. And as you’ll see in a moment, we’ll have early exposure to 6G wireless technology and quantum computing.
Welcome to The Near Future Report
Welcome to The Near Future Report. I’m Jeff Brown, your editor.
For nearly 30 years, I worked as a technology executive for firms like Qualcomm, NXP Semiconductors, and Juniper Networks. I’ve earned degrees from Purdue University and the London Business School.
I’ve also received professional certificates from MIT, Stanford, and most recently the University of California, Berkeley, School of Law. And I am also an alumnus of Yale University’s School of Management.
I’m also an active angel investor in early stage technology companies. I’ve invested in dozens of private deals. I don’t tell you all this to brag. But with so many so-called technology experts
out there, it’s important that readers know I’m truly committed to the world of bleeding-edge technology.
With this research service, we look for stable, mid- to large-cap companies with products enabling the newest technological trends. We can think of these as “sleep well at night” stocks with great growth potential.
In the past years, we’ve covered technology trends like 5G, artificial intelligence, and cloud- based software services.
And in this report, we’re focusing on one trend that has exploded over the past year: quantum computing.
Devices Are Getting More Complex
Before I share more about how the recommendation in this report will shape quantum computing, let’s take a step back to look at the bigger picture. Understanding these broad technology trends is a key part of our success here at The Near Future Report.
Today, our electronics are getting smaller, faster, and more powerful. Consider the bulky car phones from the 20th century I mentioned earlier. Now compare that to the small, ultra- powerful smartphones in our pockets.
Just as these devices get more powerful and compact, the components inside become more complex. We can just look at the difference in complexity between 4G and 5G devices.
Longtime readers will need no reminding. But for newer readers, 5G is the next generation of wireless technology. And 5G will be 100 times faster on average than our current 4G networks by the time the new wireless networks are completely built out. 5G is a game changer and one of the best investment trends of this decade.
5G devices will work on 5G networks, but they
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also need to work on 4G and 3G networks. That’s because the 5G network build-out will take several years to be fully constructed. And while the 5G infrastructure is being built out, 5G devices will occasionally have to “fall back” onto 4G and 3G networks when a 5G (or 4G) network signal isn’t accessible.
This creates significant engineering challenges. Dedicated radio frequency (RF) semiconductors are needed for a phone to connect to each of these wireless networks. And each network operates at different frequency bands. Basically, the phone needs to be able to filter out and focus on just the right frequencies in order to connect to the network. Once the phone does so, it can make calls, send and receive messages, and access the internet.
Wireless network operators purchase or license the rights to operate their wireless network over a specific area of the RF spectrum. The spectrum is typically thought of as a “public good.” Each country’s government usually regulates the spectrum and harmonizes it with adjacent countries to avoid unwanted signal interference.
The problem is, when data traffic continues to grow exponentially – doubling again and again – more efficient technology and additional spectrum are required to avoid network congestion, which results in dropped calls and signals.
The spectrum allocated for services transmitted over RF is jam-packed. The image above will give us a feeling for how busy the radio spectrum is. It represents the United States market, but most countries have similar spectrum usages and allocation.
As the world adopts 5G wireless technology, the frequencies used become even more complex. 5G spectrum ranges from low-band frequencies in the ultrahigh frequency (UHF) range all the way up to the millimeter wave (mmWave) frequency bands that start at 24 Ghz (gigahertz).
The higher the frequency, the higher the power and performance and the more precise the electronics need to be to filter the RF signals on smartphones, 5G antennas, and 5G base stations.
And Keysight Technologies (KEYS) – this report’s recommendation – develops the test and measurement equipment used to develop, tune, and maintain 5G wireless networks. Wireless network engineers literally can’t do their jobs without Keysight.
Keysight Goes Back Over 80 Years
Even though Keysight is a fairly new company, having gone public in 2014, it can trace its origins directly back to the formation of tech stalwart Hewlett-Packard in 1939. In fact, HP’s first products were electronic test and measurement equipment – what Keysight still does today.
United States Radio Frequency Allocations
Source: FCC & Millimeter Wave Wireless Communications
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Over the years, HP expanded into computers, printers, servers and other electronic devices and got away from its roots as a test and measurement company. To streamline operations, the company decided to focus on just its computer and printer businesses in 1999. So it spun off its testing and measurement company, which it called Agilent Technologies.
Agilent Technologies didn’t just focus on testing in electronics. It also helped scientists with testing and measurement applications in the life sciences and chemical analysis industries.
In 2013, Agilent decided it didn’t make sense to have electronics testing lumped in with its industrial and life sciences business. So management spun out the electronics testing business into Keysight Technologies in 2014.
From Keysight’s first investor day presentation that year, the company knew it would focus on developing or acquiring the technology needed for 5G testing and measuring. The company wanted to dominate this area of 5G wireless and other emerging spaces for growth.
Keep in mind that 2014 was still the “4G era.” But like Motorola, Keysight saw the next obvious evolution in mobile communications. And it positioned itself well ahead of time.
Its goal was to be the first to market with 5G-design solutions. The company achieved this through a combination of internal development and outside acquisitions. And that enabled it to grow into the leading testing equipment company in the industry.
Keysight’s Products
Over six years ago, when Keysight spun out, it was primarily a hardware company. It produced equipment to gather test results for 5G devices.
These tests would show how a 5G wireless network was performing.
It’s not a perfect comparison, but we can imagine a car diagnostic device. A car diagnostic tool can show if there are any problems with the engine, transmission, exhaust system, or even brakes.
Keysight’s technology does something similar for wireless networks. It ensures that the network is functioning at optimum performance levels.
To give us a feel for what its equipment looks like, here’s what Keysight provides for customers to do an over-the-air (OTA) test for 5G. Any application sending or receiving mmWave signals (like 5G) needs to go through extensive testing to validate the signals. You can see an image of the equipment below.
Keysight’s Test Chamber
Source: Keysight Technologies
Inside the test chamber, engineers hook up a 5G device to the measurement equipment. Then these devices record up to billions of data points every second to ensure the phone has the proper frequencies and power levels. This helps guarantee a seamless connection to the wireless networks.
The testing instruments that connect to the phone inside the calibration chamber can include signal generators, signal analyzers, and oscilloscopes, as just a few examples.
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Keysight Testing Equipment
Source: Keysight Technologies
Now, collecting all this data with Keysight’s hardware is one thing. But interpreting that data is quite another.
Keysight needed to find a way to combine testing data gathered from the networks and the devices (phones) to display the final result.
Knowing this, Keysight went about transforming the company. It already was the best test and measurement equipment manufacturer. But for its devices to be really useful analyzing these new kinds of complex technology, the company needed to have the best software to enable engineers to quickly interpret the data and implement changes.
And that’s precisely what the company has been doing…
The Great Transformation
Since Keysight spun out, management has focused on transforming it into a software company. This has come in the form of a series of strategic acquisitions designed to put Keysight into a more dominant position in the industry.
Keysight started acquiring immediately in 2014 with its $606 million acquisition of Anite. This company was a leader in research and development software for designing wireless handsets as well as a leader in network testing to
maintain and optimize wireless networks.
And then in 2017, Keysight acquired Ixia for $1.6 billion. Ixia provides testing and security solutions across physical and virtual networks. This ensures networks stay safe. It also creates a smooth flow of data – from a smartphone to the wireless network, back to the wired network, and to the data centers that make up the backbone of the internet.
Keysight has slowly and methodically made several other smaller acquisitions to enhance its software capabilities throughout the past six years…
And Keysight isn’t done making acquisitions. Even though it has made 11 since becoming an independent company, Keysight is looking for more.
Chief Financial Officer Neil Dougherty said during a recent conference, “We have a strong [mergers and acquisitions] funnel of development process, and it does seem to be skewing toward targets that have a high software content.”
Keysight is prepared to put its reserves of more than $1.7 billion in cash to work. It will target acquisitions that have complementary products, will generate acceptable returns on invested capital, and will add to profit margins. All this simply means Keysight is focused on acquisitions of companies that are already healthy enough to generate free cash flow for its own business.
The pain point that Keysight is solving is one that I understand well. Early in my career, I used to work with the old HP test and measurement equipment and then the Agilent equipment. Taking measurements from the equipment was a manual process. It was basically all hardware without any software to help automate the process.
During a customer survey, Keysight found 49% of engineers spend over three months a year correlating data between different testing equipment and software. This is a huge time suck. It also takes these engineers away from
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their real task – developing better technology.
93% of Keysight’s customers wanted an integrated approach – somewhere for all the testing software and results to reside and work together. This led to Keysight’s latest undertaking: PathWave.
A Powerhouse for 5G Diagnostics Software
PathWave is the software that I wish I had back when I was working with design, test, and measurement equipment. We can think of it like a modular software platform with all sorts of functionality. It is also “open” to the extent that it allows plug-ins and data libraries to be used on the platform. A simple comparison would be a software platform like Microsoft Excel for design, testing, and measurement.
In 2014, software sales were only $360 million, or roughly 12% of revenue. In 2019, software revenues were about $800 million, or 19% of revenue. And coincidentally, 19% of total revenue came from subscriptions or recurring revenue from software and services.
Remember, we love recurring revenue because it provides stable sales and allows analysts to predict the future growth of the company with more confidence. Both of these lead to higher valuations. And obviously, software tends to be a business with much higher gross margins.
Keysight has plans to incorporate software into most of its offerings. To help build out its software capabilities, Keysight has hired 83% more software engineers than it had in 2014.
Becoming a dominant player in software was imperative for Keysight’s aspirations of dominating the 5G testing market…
Release 16: A Catalyst for Keysight’s Technology
5G has been a major driver of revenue growth for Keysight over the past couple of years, rising over 100% in fiscal years 2018 and 2019. But even with that impressive growth, 5G revenues have much more room to grow.
We are still in the early innings of the 5G rollout. So far, most 5G deployments have been low-band 5G wireless networks. Both AT&T and T-Mobile are rolling out low-band 5G networks.
And I kind of think of the low-band deployments as “quick and easy” 5G. Low- band deployments will perform better than 4G networks, but they aren’t capable of the gigabit per second or better performance levels that 5G technology is known for.
There are pros and cons to this strategy…
The benefits of a low-band wireless signal are that it travels farther and is less costly to roll out. The cons are that it’s less than 1/10th the speed of the high-band, high-performance 5G wireless networks that Verizon is deploying.
Another way I think about low-band versus high- band networks is that the low-band deployments of AT&T and T-Mobile are marketing strategies. These deployments enable the wireless operators to say they have 5G in their marketing campaigns, but it isn’t the real 5G.
Consumers will quickly figure out the difference. The performance over a Verizon 5G high-band network is incredible. I’ve tested it myself across the country. There is no comparison.
Verizon is taking the hard route to invest in and build the real thing right out of the gate, but it will pay off. Verizon will have the best 5G network in the U.S. And it will take two to three years for AT&T and T-Mobile to catch up.
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The thing is, the higher the performance of the network, the more critical the fine-tuning of these networks becomes.
And the only way for these providers to fine-tune their networks is with Keysight’s technology. That’s why the top eight 5G testing houses use Keysight’s solutions. And 75% of all 5G equipment in the field today has been developed using Keysight’s testing and measurement tools and software.
Demand for Keysight’s testing equipment won’t slow down. As the networks get more complex at higher performance and frequencies – and offer a wider range of 5G-enabled services – the demand for Keysight’s products will only increase.
3GPP, the group that sets wireless technical standards, issued the final release of standards for 5G in 2020 – Release 16. These standards provide for more complex 5G functionality like ultra-low latency and industrial applications for IoT (Internet of Things) devices. These standards will begin going live in 2021.
The key point is that Keysight’s 5G revenues are still early in their cycle. The company has a multiyear run ahead of it to support this global build-out of 5G wireless networks. And while Keysight will be busy providing testing equipment for 5G technology in the years to come, the company is already looking ahead…
Keysight’s Plan for 6G
I know that it might be hard to believe, but the work has already begun to develop the standards for 6G wireless technology. With Release 16 out since last summer, that frees up bandwidth for working on the next generation of wireless technology standards.
And yes, it takes about 10 years for everything to come together. I can even tell my subscribers with certainty that in 2029, I’ll be writing about incredible investment opportunities in high-tech companies best positioned to benefit from 6G
wireless technology.
Believe it or not, the wireless industry took its first step toward 6G in 2019, before 5G wireless networks launched. How’s that for forward thinking?
Industry experts met at the first major 6G gathering in Finland in March of that year. That led to the launch of the 6Genesis Flagship Program (6GFP) in late 2019. It’s an eight-year, $230 million project to develop, implement, and test the key technologies needed for 6G.
While 5G speeds are an average of 100 times faster than typical 4G speeds, we can expect 6G speeds to be another magnitude faster than 5G. I know it’s hard to imagine the kinds of services that 5G speeds will bring, let alone what will happen with 6G. But it won’t take long for consumers to feel that they can’t live without 5G. Going back to a 4G network will feel like stepping back into the Stone Age.
AI will be deeply ingrained into the design of 6G wireless networks. We can think of this as an intelligent, self-healing, self-optimizing wireless network. AI will help manage the incredibly complex wireless networks and services that run on these networks.
And here’s the important point for us…
Keysight is a major contributor to the 3GPP on 5G wireless technology, as well as 5G test and performance standards. And these two organizations have already been discussing the next generation of wireless standards – 6G.
So when companies start making 6G prototypes, Keysight will be ready with its design, development, test, and performance measurement equipment.
And Keysight isn’t just stopping at 6G. The company is also involved in a bleeding-edge technology that promises to reshape our world.
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The Key to Enabling Quantum Computing
Regular readers know that I’m excited about the emergence of quantum computing. It is the next generation of computer processing for large, com- plex tasks. Quantum computing is actually going to be responsible for accelerating Moore’s Law.
Moore’s Law says that the number of transistors in semiconductor integrated circuits doubles every 18–24 months. That, of course, increases computing power.
This “law” is the reason we’ve enjoyed an explosion of computing performance the last few decades. It’s the reason the smartphone in your pocket is more powerful than all the computers used to send a man to the Moon.
And if Moore’s Law applies to quantum computing, then that means quantum computers are coming much faster than most realize.
That’s right – things are not slowing down; they are actually speeding up.
I tend to study technologies at very early stages, sometimes when they are just in the laboratory and far from commercial availability. This gives me a large head start and advantage in making smart investments.
In 2020, I completed two courses at the Massachusetts Institute of Technology (MIT) on quantum computing to make sure I am up to speed on the most recent developments in this space. It is going to unfold quickly, which means that I need to stay on the bleeding edge of developments for my subscribers.
We’ve actually already reached the age of quantum supremacy – the point when a quantum computer can outperform the most powerful classical supercomputer. In September 2019, the Financial Times reported on a leaked post from Google on NASA’s website.
The report detailed tests that Google ran on its 53-qubit quantum computer. In those tests, it gave the quantum computer a task that would take the world’s most powerful supercomputer – at the time, Summit – 10,000 years to complete.
The quantum computer finished in three minutes and 20 seconds. That’s beyond amazing. A 10,000-year task was made trivial by one computer the size of a refrigerator.
And that means it is only a matter of time before we have quantum computers to solve a wide range of problems that we struggle with today.
I’m talking about things like accurate weather predictions weeks in advance, molecular analysis, protein folding, genetic analysis, nuclear fusion, and cosmology – quantum computing will tackle all of it. And quantum computing will supercharge artificial intelligence as well.
Think about how much our world changed with the adoption of classical computers in the mid- 20th century. Or consider the significance of the personal computer (PC) revolution in the 1980s and ’90s. These technologies transformed our society in ways that few could have predicted at the time.
Quantum computing will do the same thing. But the impact will be far more powerful. And it won’t take decades… We’ll see profound changes in a matter of years thanks to quantum computing. Changes that will make the exponential growth in computing power that we’ve witnessed over the last 40 years look slow.
And here’s where Keysight comes back into the story…
Back in 2016, Keysight acquired a small company called Signadyne, which specialized in electronic control systems. More specifically, the founder of Signadyne specialized in long-distance quantum communication.
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And then in March of 2020, Keysight acquired another quantum-focused company, Labber, which spun out of MIT’s Quantum Engineering Group. This was a very smart acquisition that has already led to a partnership between MIT’s Quan- tum Engineering Group and its Lincoln Labora- tory, which is also focused on quantum research.
Keysight is also engaged with the Quantum Economic Development Consortium led by the National Institute of Standards and Technology to help guide future quantum standards.
Keysight has already emerged as the leader in quantum control systems and test and measurement for quantum computing. It is a real pick-and-shovel play on this explosive trend in bleeding-edge computing that is right around the corner.
The race for a universal, fault-tolerant quantum computer is on. Companies and nation-states are spending over $10 billion combined in pursuit of this goal.
This is a strategic market for Keysight that will start to generate meaningful revenue within the next two years. Just like with 5G and 6G, Keysight has been investing early so that it will be perfectly positioned when these technologies leave the laboratories and are widely adopted.
Keysight’s Valuation
Keysight is already a cash cow. Keysight has $2.1 billion of cash on the books, and generated over $1 billion in free cash flow in 2020. This healthy cash flow has allowed the company to spend about 16% of its annual revenues on research and development. That number is much higher than most tech companies, which is what I like to see
when companies are developing bleeding-edge technology in order to have a strategic position in rapidly emerging markets.
Its healthy cash flow also puts Keysight in the position to continue to make additional strategic acquisitions, which I fully expect it will do. Furthermore, we should expect that Keysight will continue to make acquisitions in the software space to further grow its high-margin software revenues as a percentage of its overall business.
At the start of this report, I promised readers we would be on the right side of market history. That’s what we’ll do by establishing a position in Keysight Technologies.
Action to Take: Please refer to our model portfolio for the most current recommended buy-up-to price for Keysight Technologies (KEYS). Be sure to use a limit order when placing trades. For the time being, we will hold KEYS with no stop loss. Always remember to use rational position sizing.
Risk Management: Because we will be holding Keysight without a stop loss, I encourage all readers to establish rational position sizing. We should remember to never go “all-in” on any one investment. Our mission is to build a portfolio of our companies. That’s how we’ll optimize our success.
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