Re-routing our 5G Portfolio

Published on 10/10/20 | Saurav Sen | 8,225 Words

The BuyGist:

  • Our Watch List revealed a couple of 5G companies that looked attractively priced. 
  • We were on the lookout to find replacements for our 3% position in Cisco.
  • We take a step back and analyze the current state of 5G deployments. 
  • We analyze our new investment ideas within that context.
  • We make a decision on whether we want to replace Cisco and on which company we pick.

5G again?

We’ve given 5G plenty of airtime (pardon the awful pun). Here’s the progression of our research over the years. You’ll find the articles to your right if viewing on desktop or at the bottom of this article if viewing on mobile.

So, why now? 2 reasons:

  1. Our Cisco thesis isn’t quite playing out as planned. Nothing is fundamentally wrong. But we’re just not convinced that, going forward, their Economic Moat is wide enough for 3% of our portfolio.
  2. We revamped our Watch List methodology over the last few weeks, which revealed 2 companies within our 5G theme. In fact, they are companies we’ve held (and profited from) before.

Our Watch List methodology has been revamped to answer the question: “what do we need to believe for us to buy into the stock of any XYZ company?” Over the years, we’ve found that this approach – of working backwards – is much more effective in both spotting investment opportunities and in prioritizing our time. We focus on companies that don’t require us to make outlandish revenue growth assumptions. Yes, there are a fair amount of qualitative and quantitative assumptions that go towards a fairly simple-looking output: “revenue growth we need to believe”. The hard part, of course, is to determine whether this estimate of implied growth is believable or not. Nevertheless, the discipline of putting all prospective investments on a level playing field – at least numerically – saves us a ton of time and effort.

We’ve assembled all our 5G universe (this list goes beyond our portfolio but includes our holdings as well) in this table below. Check out our estimates of “revenue growth we need to believe if we decide to buy the stock” numbers (this table is available in the portfolio page):

Two companies jumped out at us – Ciena and Lumentum. We don’t need to believe outlandish growth assumptions to buy into them. But the other reason they jumped out was that we’ve held these stocks before and have exited profitably from both. We know the companies well, which makes our job easier.

Our intention is to replace Cisco with either Ciena or Lumentum. That’s what this worldview article is about. We’ll conclude our analysis with a definitive answer.

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