Radio is dead. As a medium, this may be true. Even the concept of listening to a broadcast is being replaced, steadily, by podcasts and streaming. But radio, as a technology, is more vital and dynamic than ever before.
It used to be that a PC had a TV for output, a typewriter for input, a tape recorder for storage and maybe a wire in the back for internet access. Today, nearly all the input, output and storage is based on data radios, with the screen showing only current output and doing the work formerly done by the keyboard.
Look inside your iPhone or Android device … you’ll find a cellular phone chip, a Wi-Fi radio chip, a Bluetooth radio chip, a GPS radio chip and Near Field Communications. Increasingly, PCs are similarly equipped: Radio frequencies, or RF, are what modern computing is all about.
Like Marconi’s radio telegraph, RF chips send encoded data. Like early broadcast stations, they’re sending it on specific frequencies, with specific power levels, approved by the government. The difference between now and, say, 1940 is that all these radios deal with data, only translating some of it into sound or video afterward.
As we move toward an Internet of Things, in which traffic lights, cars, heart monitors and refrigerators have intelligence built inside them, RF chips will become even more important in moving that data back-and-forth between the cloud and software’s human controllers. Thank Hedy Lamarr: The Hollywood star of the 1940s is now a technology legend for her World War II “secret communication system,” a system for avoiding radio jamming by having devices switch frequencies in unison. This became spread spectrum radio; it’s what makes cellular systems efficient, is the heart of WiFi and lets millions of low-power radios share spectrum efficiently.
Your portfolio can’t succeed without a few good radio investments.
Golden Age Radio Stocks: Skyworks Solutions (SWKS)
You may not have ever heard of Skyworks Solutions Inc (NASDAQ:SWKS) But look inside your iPhone. The folks at iFixit have already done a teardown of the iPhone 7, finding a Skyworks power amplifier along with two chips controlling its radio reception. The estimated price of the Skyworks chips is $6 per device.
Skyworks has been powering iPhones for years. This has scored investors a 250% gain over the past five years, along with dividends that are now up to 28 cents per share. That is a yield of just 1.5% at the stock’s current price of about $73, but the price-earnings multiple on the stock is still a very-affordable 15.
Skyworks mainly designs chips that refine and amplify radio signals for use by software, vital in an environment like an iPhone where there are a lot of radios working at the same time. In addition to selling to Apple Inc. (NASDAQ:AAPL) and rivals like Samsung Electronics (OTCMKTS:SSNLF) its customers include General Electric Company (NYSE:GE), which uses its chips in medical devices, Cisco Systems, Inc. (NASDAQ:CSCO), which uses them in wireless routers, and Northrop Grumman Corporation (NYSE:NOC), which uses them in defense applications. The market for radio chips is just getting started.
Each Apple rumor, release and teardown, however, does result in a host of rumors, raises and pullbacks for Skyworks stock. What matters most, however, is that every year the company has higher sales and higher profit margins, a common theme for companies in the group. After all, Apple is spending 19% more on chips for the iPhone 7 than it did for the iPhone 6S, according to Citigroup.
Golden Age Radio Stocks: Cirrus Logic (CRUS)
On the new iPhone 7, Cirrus Logic, Inc. (NASDAQ:CRUS) is supplying the audio codec and amplifiers. The shares rose $10 each in July, after reports of its product sales on the iPhone first surfaced.
Over the past five years, as iPhone sales have risen, the company’s stock is up 230%. Rumors of where it fits into the iPhone design, and how the iPhone is selling, tend to move the stock up and down rapidly.
While quarterly results for Cirrus Logic are choppy, the fact is revenue is up about 63% since 2014 and margins have expanded, with roughly a $1 in every $10 now hitting the net income line. Many traders find suppliers to be a great place to play the iPhone market, because they’re relatively small (CRUS revenues were under $1.2 billion last year) and they’re volatile, meaning there is action. Rapid price movements are what traders live for.
Cirrus Logic was founded in 1981, in Salt Lake City, UT, but is now based in Austin, Texas. It was known for graphics chips in the 1990s but switched to audio in the past decade under current CEO Jason Rhode. Since that decision, the shares are up nearly 600%-plus.
At its recent price of $51, Cirrus Logic’s valuation is stretched, with a P/E of nearly 32 and no dividend. The question now is what Rhode will do with that new money and credibility and whether shareholders should hold or sell.
My own view is they should hold.
Golden Age Radio Stocks: Texas Instruments (TXN)
Texas Instruments Incorporated (NASDAQ:TXN) practically invented the modern era with its Digital Signal Processors, or DSPs. (The first DSP was used in the speak and spell toys of the 1970s.) Once DSPs became capable of handling real-time inputs, three decades ago, the worlds of radio and computing could become one.
Texas Instruments likes to brag it has the broadest wireless connectivity portfolio in the industry. Its contributions to the iPhone 7 consist of two power management chips, but the company today gets 15% of its revenue from Apple.
The company also makes major contributions to other phones, in wireless charging, video and its current focus, the Internet of Things, which means its RF chips are finding new markets in cars, watches, and manufacturing plants.
But there are two sides to every digital radio conversation. Texas Instruments is big on the system side, through partnerships with Cisco and other vendors. The cell towers and routers that take your phone’s signals back-and-forth between the larger Internet often have Texas Instruments devices inside them.
All this makes for solid, if boring performance. Texas Instruments’ revenue has barely budged over the past five years, and stood at $13 billion in 2015. But profit margins have risen over the past four years to nearly 25% — that’s Apple territory. It delivers $3.5 billion in operating cash flow each year, and its 38 cent per-share dividend, yielding 2.2% (better than a U.S. 10-year bond), is backed twice over by earnings.
For investors, TXN is a conservative play. Its 45% gain over the past year is unusual, but the current consensus estimate for quarterly earnings is 86 cents a share on revenue of $3.5 billion. Those are numbers that would make the company a growth stock again. That’s one reason why TXN stock is up more than 150% over the past five years, while more than doubling its dividend from 17 cents to 38 cents per share. It delivers the goods for investors.
Golden Age Radio Stocks: Intel (INTC)
Intel Corporation (NASDAQ:INTC), also known as “Chipzilla,” missed the initial move to mobile in the past decade. This year, however, it finally claimed some big wins.
The new iPhone 7 includes the entire Intel mobile cellular platform, including two RF transceivers, the baseband modem and the radio power management chip. The rumors of this win, and its confirmation, helped send the stock up nearly 20% since late June.
Intel is best-known for its microprocessors, and Apple’s decision to use Intel chips in its Macintosh line in 2005 was the company’s biggest win of the past decade. And the iPhone 7 may be its biggest win of the current decade. Winning on the iPhone gives Intel a shot at winning RF market share on other devices … devices that still represent 80% of the total cellphone market.
Before the iPhone win, Intel stock was trading at about 15 times earnings. Now it is trading at near 18. That’s partly because the effort needed to get the win sapped the company’s margins, which fell nearly two-thirds between the fourth quarter of 2015 to the second quarter of 2016. Those margins now need to accelerate in order to justify its current price.
Of course, Intel is much more than radio chips, or even microprocessors. Under CEO Brian Krzanich, who has been in charge since 2013, the company has shifted away from PCs and toward the “Internet of Things.” The failure of that sector to really take off has caused some analysts to call for Krzanich’s scalp, but he’s not for turning. And thanks to the iPhone 7 he won’t have to turn.
Of all the stocks discussed here, Intel may be have the safest stock, although its current price is still barely half of its record of nearly $73 a share, achieved during the height of the dot-com boom in 2000. Its recent run-up has cut its yield, but the dividend still pays out 2.8%. That dividend should be safe, given its cash flow and $17 billion in cash and securities, but earnings trailed the dividend rate in the past quarter. Analysts are expecting much better news when it next reports earnings on October 18: 71 cents per share in earnings on $14.9 billion in revenue being close to the numbers it achieved last Christmas.
If Intel delivers, INTC stock could go higher.
Golden Age Radio Stocks: Qualcomm (QCOM)
No company represents the rise of radio as a computer parts category so much as Qualcomm, Inc. (NASDAQ:QCOM).
As far back as the 1980s, Qualcomm was showing what was possible with Code Division Multiple Access, or CDMA technology, which implemented Hedy Lamarr’s frequency hopping scheme and let 10 calls share a single precious analog channel.
Since then, it has gone from strength-to-strength so that it now has fully half the revenue of industry leader Intel, without the expense of owning its own fabrication plant. Its Snapdragon line of RF transceivers are used by dozens of phone makers, and it supplied the LTE modem in the Apple iPhone 7.
Qualcomm’s strength is in its ownership of CDMA and follow-on technologies. Carriers that encode data and voice using CDMA make that a requirement for client devices. In the U.S., this means phones on the networks of Sprint Corp (NYSE:S), Verizon Corporation (NYSE:VZ) and U.S. Cellular, the last a unit of Telephone & Data Systems Inc. (NYSE:TDS), Madison, WI, all must use Qualcomm technology.
The problem is Qualcomm revenues peaked in 2014, as did its stock price, at over $80 per share. This resulted in a horror show for shareholders, the shares losing one-third of their value. They’re up 25% this year, but are still nearly 25% off their all-time highs. The five-year gain on the shares is also 25%.
The problem for Qualcomm lay in China, where the company fought a long-running battle over the value of its patents, and then had to fight all over again to get its money from Chinese OEMs following an agreement with the government.
While margins still average 25%, with a 53 cents a share dividend handily covered by net income, Qualcomm’s yield of 3.4% brings it a different type of shareholder than those who like Skyworks or Cirrus Logic. Still, its intellectual property should give revenues and income stability comparable to Intel, and the yield is nearly double that of the U.S. 10-year bond.
With the China troubles now in its rear view mirror, and with its chips still a standard in cellular radio, normal service has now resumed at Qualcomm.
Golden Age Radio Stocks: Broadcom (AVGO)
Today’s Broadcom represents the merger of two companies, the old Broadcom and Avago, which is why the ticker symbol for Broadcom Ltd (NASDAQ:AVGO) is AVGO.
A series of scandals at Broadcom that began with co-founder Henry T. Nicholas, and bonuses paid to his successors, eventually led to the merger with Avago, and a wholesale clear-out of the C-suite, with CTO (and co-founder) Henry Samueli the only survivor from the old company. New CEO Hock Tan had been head of Avago.
The old Broadcom was known for its sales strategies with Chinese OEMs, to whom it brought complete device designs rather than just chips and software. The shares are up almost 22% since the merger was completed Feb. 1, and investor Steven Cohen of Point72, the former head of SAC Capital, began buying shares during the second quarter of the year.
The company has delivered two quarters of results since the merger, and both were a mess, as the company undergoes a complete restructuring. The new board’s main priority has been retiring debt, now about 25% of the combined company’s assets. It lost $809 million on revenues of $5.3 billion for the May quarter, then lost another $286 million on revenues of almost $3.8 billion for the August quarter. According to CEO Tan, 27% of the August quarter’s revenues came from phones, not just Apple phones but from Samsung and others. The company now has a market cap of $168 billion. That should rise as its reorganization proceeds and investors get more visibility into its potential.
In the design of the iPhone 7, Broadcom was a big winner, delivering three chips used in its RF front-end — a mid-band, high-band and duplexer module, as well as FBAR filter modules. As phones handle even more cellular radio channels and different kinds of services, Tan believes Broadcom products will become even more important.
Golden Age Radio Stocks: iHeartMedia (IHRT)
I had to offer a real radio stock in this gallery, not so much as an investment but as an explanation of why so many people call radio dead.
Radio did not begin with the launch of station KDKA in Pittsburgh, which broadcast election results in 1920. Radio was actually born for data, for telegraphy. That’s what Guglielmo Marconi sold, a radio telegraph, and that’s the technology that told of the 1912 sinking of the Titanic in the North Atlantic.
It’s the mass medium of radio broadcasting that is failing today, and no company represents that failure more than iHeartMedia Inc (OTCMKTS:IHRT), formerly Clear Channel Communications. Clear Channel led the consolidation of the radio business, starting in the 1970s, and it was still considered a political power broker in 2008, when it was worth $2 billion. What’s left of the company is now worth about $160 million under Robert Pittman, who was also the father of MTV and once President of AOL-Time Warner.
It wasn’t video or criticism, however, that killed the radio star. It was the internet, which delivered the diversity that Clear Channel’s tight, automated formats lacked. Radio was first broadcast on the internet over 20 years ago, but it finally found its business models in streaming and podcasting.
Clear Channel, meanwhile, remained wedded to standard music formats and talk radio, and was taken over in a 2008 leveraged buyout by private investors (it is presently controlled by Bain Capital and THL Partners). After stumbling for five years under the Clear Channel name it became iHeartMedia. (The Clear Channel name remains on its outdoor advertising division.) Since the new name was introduced, in September 2014, the company has continued to falter, and it has not made a profit this decade. The company is a walking bankrupt, with $1.50 in debt for each $1 in assets, but annual revenues in the $6 billion range.
What’s next for the company? It’s trying to get into paid streaming, it has announced a Spanish-language division and it continues to fight creditors who think they could get a better deal in bankruptcy than from its latest restructuring offer.
If you like radio, in other words, stick to chips.
Dana Blankenhorn is a financial journalist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares of AAPL and INTC.