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MIDAS SHARE TIPS: For steady 5G profit try Spirent Communications

In 2013, around 2.5 billion people used the internet worldwide. Today, more than five billion citizens are online daily, sending texts and emails, watching YouTube and TikTok videos, streaming films, using satellite navigation or logging on to Google for all things great and small. 

Our reliance on internet connectivity is predicted only to increase, with forecasters suggesting that, by the end of this decade, nine out of ten people over the age of six will be doing something digital most days of the week. Not only will the number of internet users increase, but the amount they do online is also expected to soar, as networks move from 4G to 5G technology. 

The shift has already started, with the number of 5G connections expected to climb from 500 million last year to 1.3 billion by the end of 2022. But it will pick up pace, more than tripling to 4.8 billion in five years’ time, so we can all do much more online in much less time. Geeks cannot wait. More old-fashioned folk may find it unsettling, but 5G is coming our way and nothing will stop it. 

Well-connected: Spirent Communications is growing fast and specialises in testing technology for 5G networks

For Spirent Communications, the trend is fabulous news. The company specialises in testing new technology and is one of the biggest players in the field, working with well-known names from Apple and AT&T to BT and Vodafone to Nokia and Siemens. 

These companies are big fans of 5G, but the tech is much more complex than anything that has gone before, so comprehensive testing is essential. In the past, Spirent would simply sell testing products to its customers and let them get on with it. 

Under chief executive Eric Updyke, the group has begun to do considerably more – devising tests for businesses, identifying bugs and automating much of the process so that new technology can be introduced faster, at a cheaper price and with less effort. 

The approach is delivering results. In the first six months of this year alone, Spirent won 350 new 5G contracts from more than 130 customers worldwide. But Spirent does not just work with mobile phone specialists. The group also tests cloud technology for internet giants such as Amazon and Google, it provides cybersecurity testing for large businesses and has recently begun to test virtual and augmented reality kit for Facebook’s parent company, Meta. ‘Location awareness’ is another specialist area for Spirent. A crucial component of satellite navigation and driverless cars, the technology highlights where people and objects are as they move about. 

Taken up enthusiastically by consumers and carmakers, the technology has a military use as well and Spirent provides testing services for the US government among others, ensuring that missiles and drones go where they are supposed to. Mistakes in this area could, clearly be disastrous, so Spirent’s involvement in this field is testament to the quality of its work.

Spirent tests kit before it is rolled out and once technology is up and running, too. This area of the business now accounts for a substantial proportion of group turnover and should continue to grow as software becomes increasingly complicated and reliance on digital connections increases. 

Testing is a competitive market, but Updyke is determined to keep Spirent ahead of the pack, spending around 20 per cent of annual sales on research and development, and constantly eyeing up opportunities in new countries and sectors of the market. 

Interim results earlier this month were encouraging and analysts are optimistic about the business, predicting an 8 per cent increase in this year’s sales to $625million (£511million), rising to $675million in 2023. A 12 per cent profits increase to $132million has been pencilled in for 2022, rising to $147million next year. 

The group reports in dollars because, even though it is headquartered in Crawley, West Sussex, more than half of its sales are generated in the US, most customers are American and the majority of its employees are based in the US, including Updyke, though he travels to the UK on a regular basis. 

Spirent has a strong balance sheet and a policy of rewarding shareholders with decent dividends. These are declared in dollars but paid to UK shareholders in sterling, with 7.6 cents (6.22p) expected for this year and 8.48 cents for next. 

Midas verdict: Technology needs to be tested before, during and after it comes to market. Spirent is a leader in the testing industry, the business is growing faster than ever and Updyke is confident that he can increase sales to $1billion in the next few years, even if economic conditions deteriorate. At £2.76, the shares are a buy.

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