This week we look at one of the more compelling stocks in the TAMIM Alpha Fund portfolio. Allot is a stock well positioned to capitalise on not only the current state of the Telco industry but also the future of the segment and the Internet of Things. Most of us are familiar with the ever-changing landscape of communications technology. Starting from the basic cellular phone in the late 20th century, the advent of the Information Age as we call it has seen us evolve into where we are today, this is the age of the hyper-connected consumer, demanding evermore convenience and consuming exponential levels of data.
Take the history of mobile: voicemail, call forwarding, 2G and SMS, the rise and fall in popularity of these services illustrates the point about how consumers are being driven to expect the latest and the most convenient technologies at cheaper prices. And it doesn’t stop here, from the way we eat to the way we expect to be served online, companies are being forced to adapt to this empowered consumer and find efficiencies in the delivery of their services.
So what does all this mean? Put simply, the adoption of new technologies such as the Internet of Things (IoT) or Artificial intelligence is not a want but an imperative just to survive. These are no longer ideas but the new reality and one which requires the building out of and maintenance of massive networks (both physical and virtual).
Take, for example, China Unicom which happens to be the third largest mobile carrier in China with a total of 170 million users, 28 million of which are in Guangdong province. One of their key projects was to harness the power of IoT to cut costs at the China Southern Power Grid Company (their customer) which up till then had sent employees to collect electricity consumption data across 33 million homes. By integrating low-cost SIM cards into the electricity meters they ended up having the ability to transmit consumption data in a matter of seconds at low bandwidth.
In a similar vein, communication service providers globally ranging from Telafonica to Vodafone are increasingly being forced to be innovative in providing value-add services for the hyper-networked consumer. Ranging from products such as unlimited data to helping their own Small to Medium Business customer base better understand their target market from a marketing perspective.
So What Gives - An Investment Perspective
At TAMIM we believe that it is imperative to understand the changes taking place in the global economy and think about 1) how they impact our portfolio’s and 2) constantly be on the lookout for any opportunities that these changes present. One such thematic investment we made was in Allot Ltd. a holding in the TAMIM Alpha Fund portfolio.
Allot is a leading provider of innovative network intelligence and security solutions for service providers and enterprises globally. This innovative company has solutions specifically tailored to the proliferation of big-data networks and is a unique player when it comes to converting that data into analytics as well as ensuring the security of the network.
In fact, they played a crucial role in the China Unicom - Southern Power Grid project by providing its IoT Secure Solution. Enabling machine-to-machine traffic behaviour control and ensuring compliance with the original mandate. In addition, they have a 50% penetration of service providers globally working with some big names including Milicom and Vodafone in providing a niche but vital solution as the telcos continue to enhance their offerings in a fiercely competitive environment.
We made our purchase in February of 2018 when the company was trading close to its net cash value. Besides the long-term attractiveness of the market they operate in we found it particularly interesting for two major reasons:
We see significant catalysts for the company in the form of their existing revenue models and new revenue-sharing agreements reached with their customer base, specifically a new agreement signed with Telefonica Spain at the beginning of 2019. In this instance, the contract allows the telco to provide a comprehensive Cyber-security package on a monthly subscription basis to their end-customer and importantly allows Allot to receive a percentage of the revenue. Providing a sticky and lucrative revenue stream for years to come.
As the industry continues to evolve and make new strides we feel that the company is well placed to grow with the onset of 5G technology globally and as CSP’s (Communication Service Providers) who make up the majority of their customer base are forced to make additional investments in order to monetise their network. In essence, the argument is carriers are going to have to be ever more innovative in providing their services to customers in the most efficient and user friendly manner, in order to do this they need to 1) understand their customers (including their consumption patterns); and 2) protect their customer data and network’s from attack’s (both of which Allot is well positioned to help with).
At TAMIM we are committed to educating investors on how best to manage their retirement futures.
Sign up to receive our weekly newsletter:
TAMIM Asset Management provides general information to help you understand our investment approach. Any financial information we provide is not advice, has not considered your personal circumstances and may not be suitable for you.