I recently wrote an article about the devaluation of spectrum and how it is weighing on the stock price of DISH Network (NASDAQ:DISH). Naturally, when the outlook for one business suffers, another rises. In this case, it is small cells, the technology that telecom companies around the country are deploying in place of spectrum. Given the rapid rise of small cells, early adapters of such technology should thrive in the years ahead, mainly Alcatel-Lucent (ALU) and now Nokia (NYSE:NOK).
When Nokia acquired Alcatel-Lucent, investors saw a unified company with operations in all areas of telecom equipment sales and services. The fact is that Nokia is now the only telecom equipment vendor that has both the construction side of networks (base stations and towers) and the equipment to improve and maintain the networks (routers and switches).
With that said, the bullish investment thesis for Nokia investors post the Alcatel-Lucent merger is cost-cutting and cross-selling, finding areas of each company's business that are repetitive and piggybacking off each other's strength in certain key regions, like Alcatel-Lucent's thriving business in China. Nonetheless, these advantages are reason enough to own a Nokia stock that now trades at just 13.5 times FY2017 EPS.
Therefore, Alcatel-Lucent's leading research, presence and potential with small cells act almost as an under-the-radar catalyst to spark new growth that few investors seem to consider. Specifically, small cells is something that the company has been developing for many years.
Alcatel-Lucent's small cell project also is known as lightRadio, which increases hotspot capacity 10-fold by basically redirecting and amplifying broadband from cells towers with the use of a device (small cell) no bigger than a baseball. With mobile data consumption soaring, as explained in the previous DISH article, and more than two-thirds of consumers across the U.S. still having slow download speeds outdoors and internet connectivity issues in large gatherings and metropolitan areas, lightRadio addresses a major unmet and growing need that was previously addressed with the use of expensive spectrum acquisitions and investments.
While there are various companies that have invested in small cell technology, what makes Alcatel-Lucent unique is the partnerships and range of technology investments it has deployed to make lightRadio special. Furthermore, lightRadio is compatible with a wide range of products and technologies that operate within the mobile network universe. For example, Qualcomm (NASDAQ:QCOM) invested $130 million in ALU back in 2014 to jointly develop products for small cells, or lightRadio. The idea was to give lightRadio more capabilities, and it did just that by using small cells for range expansion, improved voice capabilities, and transferring data, among other things. In other words, ALU made lightRadio the equivalent to spectrum at a much cheaper cost by entering these partnerships - a decision that will likely pay dividends to Nokia in 2016 and beyond.
So, how big of an opportunity is lightRadio and small cells for a Nokia company that will create $29.5 billion next year? According to Alcatel-Lucent, the market opportunity for lightRadio could be worth $16 billion annually long term. If ALU can capture a big chunk of this market, say 30%, then it becomes a very significant business and a catalyst for NOK stock.
Albeit, revenue recognition in the telecom equipment space can be quite confusing for investors, and that's because there is little consistency. Some deals are sold in licensing or product sales, realizing all the revenue at the time of sale. Beyond that, some revenue is recognized at the end of a contract, throughout a contract, or over many years as a subscription business. Nevertheless, all the major telecom companies are adopting small cell technology, and that bodes well for ALU and NOK, regardless of how and when the revenue is recognized.
AT&T (NYSE:T) was the first to jump on board with small cells when it vowed to add 1,500-3,000 new small cell sites to its network on a yearly basis back in 2014. Then, in 2015, Verizon (NYSE:VZ) and Sprint (NYSE:S) upped the ante, with the former investing $1.5 billion in a handful of markets where it backed out of previous spectrum bids. Verizon executives went on to say that deploying small cells in place of spectrum would reduce costs by 80%. Meanwhile, Sprint already removed itself from this year's upcoming spectrum auction and vowed to deploy tends of thousands of small cells in place of spectrum.
With that said, we already know that Verizon chose ALU as a partner to deploy small cells, as did China Mobile (NYSE:CHL) in what will likely become the biggest small cell deployment in history. Therefore, one has to assume that ALU is working for AT&T, Sprint, China Unicom (NYSE:CHU) and all of the many service providers that are choosing small cells over spectrum. At the end of the day, it all bodes well for ALU, and is an unaccounted for, under-the-radar catalyst that neither analysts nor investors seem to notice. In other words, don't be surprised if Alcatel-Lucent's presence in small cells, coupled with its growing and thriving routing business end up being a major catalyst for NOK stock, adding yet another reason to own the stock.
Disclosure: I am/we are long T.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.