Digital Infrastructure Monthly Report | March

• Demands for increased storage capacity, higher bandwidth and faster transmission speeds do not represent a cyclical or even secular trend, these are perpetually increasing demands as we move forward.       
• The 2020 Coronavirus pandemic has greatly accelerated the global economy’s embrace of technology, especially in education, remote work, communication, shopping, transacting and data processing.        
• The shift to 5G represents a significant point in the virtuous circle of increased network capacity leading to app, connected device, and data innovation leading to the need for increased capacity

Tematica BITA Digital Infrastructure and Connectivity Index (TBDIGI) Performance

Past performance is no guarantee of future performance. Source: Tematica, BITA *TNR Index, in USD. 12 Month figures based on 29.02.20 - 28.02.21.

Performance Review

Breakdown of Performance 

February saw the digital ETF advance 0.96%, but behind this modest return lies a tale of two ends of a fairly hefty barbell. The top ten contributors to performance for the period represented 22.85% of the index but contributed to approximately 320% of the return while the bottom ten detractors to performance represented 13.83% of the index and contributed to approximately -220% of January’s results.

The top ten contributing names, which represent 4 of all 6 segments, all share the same trait of being mostly consumer facing companies with Shopify (SHOP) [16.60%], Wix.com (WIX) [41.09%], PayPal (PYPL) [10.90%] and Square (SQ) [6.52%] contributing, as well as Intel (INTC) [9.49%] and Nvidia (NVDA) [5.58%]. Another indicator that while there does seem to be light at the end of the Covid-19 tunnel, the shift to “everything online” has begun to entrench itself with consumers.

Dragging on February’s performance tended to be more commercial focused names with GTT Communications (GTT) [-59.57%] holding the unenviable position of worst performer as its credit score was downgraded by Standard & Poors from “CCC” to “CCC-“, with a negative 6 month outlook warning of a further reduction to “CC”.

Satellite Communications provider Iridium (IRDM) [-12.86%] was downgraded earlier in the month by Barclays analysts from “Overweight” to “Underweight”[1] despite a strong Q4 earnings release and news that it will be joining the S&P Midcap 400 Index.[2] Assumedly, managements comments regarding continued COVID related impacts and perceived pressure from SpaceX’s Starlink satellite internet service, coupled with insider selling of approximately 380,000 shares, led investors to take some profits given the name’s 38% YTD return through February 8th.

Past performance is no guarantee of future performance. Source of all data: Tematica Research

Digital Infrastructure and Connectivity UCITS ETF Performance Table

As of 28.02.21

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. Source: Tematica / BITA / HANetf. Data as of 28/02/2021

Industry News

The US Federal Communications Commission (FCC) announced the results of the 3.7 GHz Service Auction[3] with a total of just over $81 billion spent on 5,684 licenses. Verizon (VZ) (bidding as Cellco Partnership) won the most bids ending up with 3,511 licenses and spending approximately $45.5 billion followed by AT&T (T) spending $23.4 billion for 1,621 licenses.[4] To us, this speaks directly to the virtuous circle that underpins the strategy of investing in Digital Infrastructure and Connectivity.

Last month’s stories of Apple (AAPL) and Hyundai subsidiary KIA Motors joining forces to develop an Apple-branded autonomous electric vehicle turned out to be just that, stories. While a collaboration with KIA has been debunked, Apple has been positioning itself over the years to be able to develop such a vehicle and expectations are that “Project Titan” is expected to be delivered sometime in 2024. As we have said before, advancements and wide scale adoption of fully autonomous vehicles represent a huge opportunity for both digital infrastructure and especially connectivity names.

Global semiconductor chip availability has quickly become a real issue. So much so that U.S. President Joe Biden recently signed an Executive Order requesting a review of the supply chain for the Medical, Defense, Communication and other sectors.[5] Seeing as the U.S. accounts for just about 12% of global chip manufacturing expect either some new entrants or M&A activity in the mid- to long-term. Will “dependence on foreign silicon” be the new political rallying cry? Only time will tell.

Constituent News

Wix.com (WIX) posted a strong quarter, beating revenue expectations by 4.6%, and while they posted a $0.03 EPS loss, consensus was for the company to post a loss of $0.11 per share. Conversations around earnings was largely positive as many analysts are upbeat on Wix.com’s prospects for additional product launches and overall growth.

Maxlinear Inc (MXL) reported stronger than expected Q4 revenues of $197.4 million (up 24% quarter over quarter and 178% year-over-year) despite both gross and operating margins being lower as compared to the same year-ago period.[6] The company announced that one of its new devices was selected by the Wi-Fi Alliance as an official Wi-Fi 6E testing device.

Euronet Worldwide (EEFT) did better than expectations posting revenues of $706 million for the fourth quarter[7] and while year over year numbers were lower the company did see advances in their Electronic Funds Transfer (EFT) and electronic payments businesses.

Broadcom (AVGO) reported January quarter revenue that rose 13.6% YoY with Semiconductor Solutions revenue up 17% YoY and Infrastructure Software revenue up 5% YoY. During the quarter wireless related semiconductor revenue jumped 52% YoY, accounting for 40% of the Semiconductor Solutions revenue, and Broadcom sees its wireless revenue in the current quarter up 30%-40% YoY. Networking chip revenue rose 15% YoY “driven largely by data center and global telcos, which continue to upgrade their infrastructure and network.[8]

Outlook

According to the World Economic Forum’s The Future of Jobs Report 2020, 84% of employers are set to rapidly digitalise working processes, including a significant expansion of remote work—with the potential to move 44% of their workforce to operate remotely, which means continuing demands on the world’s digital infrastructure to support a more geographically distributed workforce.[9] But that isn’t the only change we see. By 2025, according to the report, the time spent on current tasks at work by humans and machines will be equal, which means significant changes to the global workforce to address the growing skills gap. In fact, on average companies estimate that around 40% of their workforce will require reskilling of six months or less and 94% of business leaders report the expect employees to pick up new skills on the job, up from just 65% in 2018.[10] How are they going to get those skills? Increasingly through online learning solutions, which again, means further demands on the digital infrastructure.

The US Senate is considering including in a new bill to boost competitiveness against China with $30 billion in funding for previously approved measures to supercharge the country’s chipmaking industry. Spearheading the package that is expected to be voted on in April is US Senate Majority leader Chuck Schumer.[11]

China has pledged to boost spending and drive research into cutting-edge chips and artificial intelligence in its latest five-year targets. China also targets getting 56% of the country on faster fifth-generation or 5G networks.[12] The 5G IoT market size is estimated to grow at a CAGR of 56.2% from $0.7 Billion in 2020 to $15.9 Billion by 2027 as the number of connected devices ranging from consumer wearable devices and industrial devices to connected cars reaches 22-25 billion by 2025.

The increasing global dependence on the internet coupled with the virtuous circle of increased storage and processing capability leading to more use and innovative application development is an ongoing process. With upgrade cycles like 5G (and 6G in the next decade) present both a short- and long-term opportunity for those companies that provide good s and services to the various segments in the digital infrastructure and connectivity space.

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