March 10, 2022 - 11:36am EST by
2022 2023
Price: 23.00 EPS 1.21 1.77
Shares Out. (in M): 28 P/E 18 12.4
Market Cap (in $M): 650 P/FCF 12.5 8.5
Net Debt (in $M): -30 EBIT 49 73
TEV ($): 620 TEV/EBIT 12.5 8.5

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Cambium Networks (CMBM) is a leader in fixed wireless, cellular backhaul, and WiFi infrastructure products. Originally spun out of Motorola in 2011, the company is expert both in the hardware design of radios, but also in the software algorithms that improve product performance. Led by Atul Bhatnagar, a seasoned and successful CEO, the company is well positioned in a rapidly growing market. Cambium grew revenue 20% in 2021, but this was front-end loaded as supply issues greatly impacted revenue in the back half of the year. The company recorded $181.2 million in revenue in 1H 2021, but only $154.6 million in 2H 2021. The current forecast is for supply issues to continue to impact the first half of 2022, but abate thereafter. CMBM retreated from a high of $66.40 in April 2021 to its current level of $23.30 with the impact of the supply challenges weighing on its shares. The path to a positive rerating is clear with a recovery in fundamentals later this year and into 2023.

Cambium has three distinct product lines, all within the wireless infrastructure category. Its point-to-multipoint products are used for fixed wireless access by wireless Internet service providers (WISPs), mostly in rural areas where fiber rollouts do not make economic sense. These products are sold internationally with approximately half of Cambium's total sales occurring outside the United States. The company has recently started selling 60GHz products and has 28GHz 5G products in beta testing, both of which support gigabit end-user connections. These speeds are equivalent to what fiber can offer and make these products even stronger competitors in the market. The 28Ghz product in particular has a lot of promise with international Tier 2 customers which are larger than the usual Tier 3s that Cambium sells to.


Cambium's second product line is point-to-point radios used for cellular backhaul and government communication.  These are line-of-sight connections that can transmit massive amounts of data.  As cellular operators roll out more 5G cell sites in rural areas they need wireless backhaul links to connect them to their main data centers as the cost of building out fiber to each cell site is prohibitive. The government uses these point-to-point products for secure communication from remote locations.


The company's final product line is WiFi products. This is a newer product line for the company but fits in well with its overall wireless portfolio. Cambium’s WiFi portfolio includes both indoor and rugged outdoor units and creates an overall wireless mesh for markets such as higher education, oil & gas drilling rigs, healthcare, and wireless video surveillance CCTV. While WiFi has many competitors, Cambium has been successful in taking share with its high performance, low total cost of ownership, and single management portal.  The company had a head start in the new WiFi 6 standard and its overall WiFi revenue grew 67% in 2021, including a blowout 4th quarter in which WiFi revenue grew 136% year-over-year.  Some of this was due to increased supply and pent-up demand in this product area but the broader annual growth confirms Cambium’s leadership in this space.  WiFi 6 is driving an upgrade cycle in the industry which is just beginning and will be a tailwind to Cambium's business for the next few years.


Cambium is uniquely positioned in its market as the low price / high value leader. It has unmatched price / performance and total cost of ownership is much lower than its competition. It uses merchant silicon in its products which allows it to take advantage of the scale of its large suppliers. For example, Tarana Wireless, a fixed wireless competitor, has a high-performance product based on an internally designed ASIC which is priced at twice what comparable Cambium products sell at and as such, has had very limited success in the market. Ubiquiti Inc (NYSE:UI), on the other hand, has a low-priced product, but its defocusing on the fixed wireless market has caused its products to lag Cambium’s in performance and it is losing share to Cambium in this area currently.


Another advantage of the Cambium product line is that it is all controlled by a single cloud software management system that works across the point-to-multipoint, point-to-point, and WiFi products. The basic version of this software comes free with the hardware products, but the company is introducing incremental functionality that it will charge a monthly fee for. This software will have very high gross margins and will help lift the overall gross margins of the company.  Also, the recurring monthly fee will drive increased revenue visibility for the business and will garner a higher multiple from the market.


One highlight of the Cambium investment thesis is the government funding coming into the rural telecom community to bridge the digital divide and provide high speed Internet access to rural users. Four separate government funding vehicles exist to provide funds to the efforts. The Rural Digital Opportunity Fund is already in place and has $11 billion left for funding. The Infrastructure Investment and Jobs Act provides $6 billion directly to telcos and another $14.5 billion in end-user subsidies. The Connect America Fund provides $4.5 billion each year for high-speed internet access in rural areas and the 5G Rural Fund for America provides $9 billion for 5G in neglected markets. The combination of all of these funds gives a significant tailwind to WISPs purchasing equipment such as Cambium's to connect rural areas in the US.


With additional revenue in the coming years, Cambium has a lot of operating margin expansion left in its business model. R&D, S&N, and G&A should all decline as a percentage of revenue in years ahead. Assuming a more normalized supply environment, Cambium is trading very inexpensively. It trades at 1.5x 2023E revenue and 12.4x 2023E earnings. For a 15 - 20% revenue grower with expanding margins this is dirt cheap. By 2025 I expect the company to do $600 million in revenue and $3.37 in EPS. Putting a 15x multiple on $143 million in EBIT plus net cash gets you to a $87 stock price or up 275% from current levels.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


Increasing component availability in the back half of 2022 and into 2023 will drive higher revenue and EPS at Cambium and its stock will rerate to a higher multiple on better fundamentals.

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