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Despite strong 2018 results, market is disappointed in Quantenna’s outlook

Quantenna has ridden the WiFi boom as the world’s principal dedicated chip vendor in the field, and yet remains undervalued even after reporting strong results for the 2018 fiscal year.

Its annual revenues were up 25% at $220.5m, and it ended the year even more strongly with Q4 revenue up 52% year-on-year to $62.6m (up 5% sequentially). Non-GAAP full-year operating profit doubled to $20m, or 9% of revenue, compared to $10m in 2017 or 6% of revenue.

These growth rates are better than those of Quantenna’s immediate competitors, though of course firms like Broadcom, Qualcomm and Marvell have far broader businesses than just WiFi. Broadcom’s total 2018 revenues were up 12% at $5.45bn, while Marvell was up 4.7% at $2.41bn and Qualcomm up 2.4% at $22.7bn.

However, Quantenna’s share price fell by 4.2% after the announcement, because the company’s guidance for the current quarter, Q119, was lower than expected, with Quantenna citing the impact on its supply chains of global trading conditions and especially the ongoing stand-off between the USA and China.

This is despite the fact that Quantenna stock looks cheap by almost all standard assessment methods. On the price to earnings growth (PEG) ratio widely used to assess tech stocks, Quantenna measures 0.47, which indicates its value should be higher than it is. A PEG ratio of 1 is supposed to equate to parity, with a lower figure indicating under-valuation and a higher one over-valuation. For this reason, financial analysts rate Quantenna stock at 1.8 on the desirability scale (1.0 suggests a Strong Buy, 2.0 a Buy, 3.0 a Hold, 4.0 a Sell and 5.0 a Strong Sell).

When the technology and recent customer wins are considered, these ratings look mildly pessimistic. Like other WiFi technology firms, whether in silicon or software, Quantenna is competing on performance, resilience and coverage with the aim of delivering consistent QoS across the whole premise, whether a home, enterprise office or public space. Its success has been founded largely on being ahead of the game so that deploying impending standards in its products ahead of ratification has been crucial. This of course is combined with a guarantee that products, primarily access points, home gateways, routers and repeaters, will be fully compatible with those standards when ratified.

This shows up with the latest standard now called WiFi 6, based on 802.11ax. The WiFi Alliance plans to certify WiFi 6 from Q3 this year, which would set the stage for broad adoption of the standard. Meanwhile, Quantenna is busy marketing its pre-standard version in keeping with its established strategy, nailing Telefonica as its biggest scalp so far. It could not have won such a major client at the start of the last standards cycle, 802.11ac (now retrospectively called WiFi 5), which shows how far the chip start-up has come.

WiFi 6 builds on WiFi 5, which enabled headline bit rates of 1.3Gbps and up to around 400Mbps in the real world, over four different spatial streams in the 5 GHz band using MIMO. WiFi 6 also runs over four MIMO streams and again in 5 GHz, but with a major advance in spectral efficiency through incorporation of OFDM. Some companies such as Huawei have claimed this boosts theoretical maximum bandwidth 10 times, but in practice it is more like five at this stage, with 11Gbps being about the maximum demonstrated so far. This translates into real world data rates of around 2Gbps.

Quantenna is in the vanguard bringing OFDM to market with two versions of WiFi 6, one called 5G ax and the other 10G ax, sticking to the old IEEE abbreviations to add confusion. The 10 G ax uses dual band to aggregate two 5G channels and this is the first time Quantenna has offered two product families ahead of the standard being certified.

We can single out two other products that could be called unique selling points for Quantenna. One is the Spartan family, launched in September 2017, which has proved successful by extending the life of legacy home gateways with a significant performance lift, either by boosting existing access points or adding wireless extenders and mesh nodes to increase coverage. Initially this allowed device customers such as AirTies, Zyxel, Mitrastar, Askey, Icotera and HiWiFi, to build single-band and dual-band products based on Quantenna’s QV840 and QV860 chipsets.

Mesh is the other key plank in the firm’s strategy, but that is hardly unique as it has been recognized as fundamental to WiFi performance and coverage, and is increasingly embedded in standards. Mesh makes wireless networks operate more like wired ones with peered radio nodes working like traditional APs connected to a wired port. It extends the range by aggregating nodes that boost the signal as well as cooperatively transmitting data between points, with forwarding decisions based on knowledge of the network topology and also transient conditions.

Quantenna has been collaborating with various vendors of mesh technology, with Plume Design the most recently announced partner. This deal adds Plume’s Adaptive WiFi technology, run from the cloud, adapting to Internet usage in the home and allocating bandwidth dynamically within the mesh.

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