By Jeff Brown
2The Near Future Report
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
Special Report 2021
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
4The Near Future Report
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
5The Near Future Report
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.
6The Near Future Report
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.
8The Near Future Report
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.
9The Near Future Report
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.
10The Near Future Report
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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