Telecommunications' long-awaited switch to 5G technology is well underway, prompting many investors to search for the best 5G stocks to leverage this trend.
While it will be a growth category, set your expectations accordingly – just like actual users of the technology should early on.
Washington Post technology columnist Geoffrey Fowler recently speed-tested 5G phones against old, clunky 4G phones. What it found was that the new phones weren't much faster than the new ones. Worse still, in some locations, 5G was slower.
"RootMetrics, a network-analysis firm owned by IHS Markit, said that in the first half of the year, median AT&T 5G speeds were 46 Mbps, only slightly faster than the 4G LTE speed of 43 Mbps," he writes. "At T-Mobile, speeds increased more as a percentage, but its median 5G speed of 25 Mbps still can't even compete with its rivals' 4G LTE speeds.
That's not what you want to hear when you're talking up a 5G revolution. Not in the slightest. But that reality is expected to change over the next few years as the technology progresses.
For investors looking to bet on some of the winning 5G stocks, that means you might not enjoy rip-roaring gains right out of the gate. But that's OK – it's a marathon, not a sprint, after all. Patient investors in the right picks, however, should be rewarded handsomely over time.
Here are seven of the best 5G stocks to buy. All of them should eventually benefit from the shift to 5G, not just in the U.S., but worldwide.
Data as of Sept. 14. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Market value: $36.1 billion
Dividend yield: 0.7%
Telefonaktiebolaget L M Ericsson, better known to most as just Ericsson (ERIC), generates revenue from two sources.
First, it provides hardware, software and services to telecom companies around the world. These products are the connectivity solutions that telecoms require to deliver 5G service to their customers. As the world continues to digitalize, Ericsson will benefit from this transformation.
Secondly, Ericsson also generates a royalty of up to $5 per smartphone from its 5G patent portfolio.
In the second quarter ended June 30, the company reported a small 1% year-over-year increase in revenue. Given the global pandemic, these results were better than expected. On the bottom line, Ericsson boosted gross margins (38.2%) and operating margins (8.2%) during the quarter, resulting in a doubling of free cash flow.
Ericsson currently is providing 5G equipment to 56 live 5G networks in 29 countries, including China. The company's commercial deals for 5G equipment hit 100 in August, with almost 60 of them already announced to the public.
Then on Sept. 10, Ericsson announced that its 5G roll-out with Spain's Telefonica (TEF) had begun. It expects to have thousands of Ericsson sites activated by the end of 2020. Those sites will provide Telefonica with 75% coverage across Spain, including both Barcelona and Madrid.
While COVID-19 will slow the rate at which Ericsson can install the equipment for some of the 5G launches, its sales development team can continue to broaden its customer base.
That makes ERIC an attractive buy among 5G stocks.
Market value: $23.0 billion
Dividend yield: N/A
Whenever you mention Ericsson, its Swedish rival Nokia (NOK) isn't too far behind. Nokia, Ericsson and Samsung collectively control more than 50% of the network equipment market, with that market share expected to grow to beyond 65% by the end of calendar 2025.
But while Nokia looks like one of the best 5G stocks based on positioning, investors will have to monitor recent changes in leadership.
On Aug. 1, Nokia installed a new chief executive officer, Pekka Lundmark. Chief Financial Officer Marco Wiren joined the company one month later. UBS analysts David Mulholland and Francois-Xavier Bouvignies believe Lundmark and Wiren will continue to carry out the company's three-pronged strategy for growth. This includes developing an end-to-end 5G solution (RAN, IP, and Optics) for its 5G customers, designing a strong software offering, and creating a strong enterprise channel.
In the past two years, Nokia has done an excellent job developing software and enterprise businesses. The analysts' most significant concern is whether Nokia will be able to execute its plan.
"Our base case on the stock at this point remains that a lot of underlying challenges the business was facing in 2019 have already started to improve with better execution through (the first half of 2020), and we would certainly look for this to continue through H2," UBS's analysts wrote in a Sept. 9 note to clients.
"While the new management team will have the option of pursuing significant changes – we do note that the transition in the case of Nokia has at least appeared more as a succession than a determined restructuring (vs. Ericsson)."
On Sept. 7, Nokia learned that it lost out to Samsung for a contract to supply some 5G equipment to Verizon (VZ). Although the Verizon contract was a big one at $6.64 billion, UBS believes Nokia has enough on its plate to be successful over at least the next few quarters if not longer.
Market value: $128.0 billion
Dividend yield: 2.3%
Qualcomm (QCOM) makes money from selling its Snapdragon family of chips for use in smartphones and other mobile technology. It also has a patent business that collects licensing fees from other companies to use its patents.
Qualcomm's licensing business has improved dramatically in less than two years, first settling with Apple in April 2019. The iPhone maker paid Qualcomm $4.5 billion and signed a six-year global patent licensing agreement with an option for an additional two years. Qualcomm will supply 5G chips for Apple's new 5G iPhones.
On July 29, Huawei settled with Qualcomm on a dispute over past unpaid royalties. In addition to making a $1.8 billion lump-sum payment. Huawei also signed a multi-year licensing partnership with Qualcomm.
When it comes to the processors needed to run 5G phones, Qualcomm is the leading game in town, and that's going to be good for future sales.
"With smartphone volumes steadily recovering, Qualcomm is well-positioned to benefit from the long-term 5G investment cycle and we anticipate strong earnings in fiscal 2021 and beyond as 5G smartphones ramp, the mix of 5G grows, Apple re-enters the model for (Qualcomm CDMA Technologies) shipments, Huawei returns to the model for licensing payments, and global demand for smartphones improves," Canaccord Genuity analyst T. Michael Walkley writes in an Aug. 31 note to clients.
In fiscal 2021, Canaccord expects Qualcomm to earn $7.22 per share, a sizable rebound from fiscal 2020's $3.92. In 2022, it's expected to keep growing, to $7.81 per share.
Market value: $141.2 billion
Dividend yield: N/A
The long-awaited $31 billion merger between T-Mobile US (TMUS) and Sprint was completed on April 1, bringing together the country's third- and fourth-largest wireless companies. And their collective subscribers put T-Mobile on much more even footing with Verizon and AT&T (T).
As part of receiving Justice Department approval for the merger, T-Mobile has promised to deliver a 5G network to 99% of American homes within six years. It will also ensure 90% of the population receives 100 megabits per second (Mbps).
Former T-Mobile COO Mike Sievert now runs the merged company. Former CEO John Legere, who led the company's turnaround, stepped down from the top job but remained on the board.
Analysts generally have TMUS among their best 5G stocks to buy. Of the 26 pros covering T-Mobile, 19 believe it's a Strong Buy or Buy, six call it a Hold and just one says to Sell. All told, they have an average price target of $136.90, suggesting they believe the stock will improve by 22% over the next 12 months.
William Blair, which has an Outperform rating on this 5G stock, says that T-Mobile has 98 million wireless customers and 32% market share, which puts it ahead of AT&T (93 million) but still behind Verizon (120 million).
"With the merger closed, the company can now focus on integration, which is expected to generate greater than $6 billion in annual run-rate synergies," William Blair analysts Jim Breen and Erik Rayner wrote in an Aug. 10 note to clients.
"We view the combination as positive for consumers as it creates a stronger third competitor that will have greater nationwide coverage, network capacity, and financial strength, which is more likely to shift the balance of power away from Verizon and AT&T."
Market value: $42.4 billion
Dividend yield: 2.2%
Analog Devices (ADI) manufactures analog-to-digital converter chips, which, as the name implies, convert analog electrical signals to digital signals. Because ADI sells most of its products to other businesses, many investors likely aren't familiar with the Massachusetts-based company, but it's still an important contributor to the 5G revolution.
The typical 5G base station requires eight times as many channels as a 4G base station to process the signal needed for wireless phone transmission. This provides Analog Devices with a significant 5G opportunity.
"Analog Devices participates right in the signal chain that gets multiplied by eight," Greg Henderson, a senior vice president at Analog Devices, recently told BofA Securities. "So we do that radio signal chain from the digital to the antenna. We're in the part of the content that's multiplied."
"Communications infrastructure (25% of revenue) was hugely positive in the quarter, posting 15% year-over-year growth in 3Q20 after being down 23% annually in 2Q20," writes Argus Research's Jim Kelleher, who recently affirmed his Buy rating and $145 price target after ADI's fiscal third-quarter earnings. "Infrastructure was also up a sharp 32% sequentially; the volatility in revenue reflects the lumpy nature of 5G investments.
"ADI continues to see 5G as a multiyear tailwind; in 3Q20, wireless strength was aided by demand strength in wireline, as carrier and data center operators worked to keep up with surging traffic across core and edge networks."
In mid-July, Analog Devices announced a $21 billion, all-stock acquisition of Maxim Integrated Products (MXIM). The combined business will have annual revenues of $8.2 billion, more than $2.7 billion in free cash flow and an enterprise value of $68 billion.
Analog Devices has a history of successfully integrating acquisitions and adding tangible value for its shareholders, so view this as a plus.
Market value: $112.6 billion
Dividend yield: 1.7%
American Tower (AMT) is a real estate investment trust (REIT) that owns approximately 181,000 cell towers worldwide, including 41,000 in the U.S. Wireless companies lease space on the company's cell towers to attach their communications equipment. With the ongoing move to 5G, the REIT has experienced significant growth.
Credit Suisse provided a lay of the 5G land a few months ago, and its optimism for American Tower, which it rates at Outperform (equivalent of Buy), has everything to do with 5G. It expects wireless carriers to invest $32 billion in capital for the 5G rollout between 2019 and 2023. With the addition of a possible new fourth major wireless carrier in Dish Network (DISH), the number of tenants looking for tower space will keep moving higher.
While AT&T and Verizon have said they plan to slow tower spending in the next few years, T-Mobile is expected to ramp it up. Ultimately, U.S. tower spending could be at the peak and due for a slowdown. However, emerging markets such as India, Africa and Latin America will make up for any slowdown experienced in American Tower's U.S. business.
By investing in American Tower, you're betting that 5G will be one of the top technology transformations of the next decade. And it's a differentiated bet at that. Unlike the other 5G stocks on this list, AMT is a real estate play – one that has grown its dividends every quarter since 2011.
Market value: $2.0 trillion
Dividend yield: 0.7%
Investors should soon witness Apple's (AAPL) biggest smartphone launch since the iPhone X dropped in September 2017. The X eliminated the home button, bumping the retail price from $650 to $999, an unheard-of price at the time.
In October, Apple is expected to introduce the iPhone 12, its first 5G phone.
A lot has changed about the company since Apple launched X three years ago. One of the major shifts: The Services division of its business has become far more critical to its sales and earnings growth.
In fiscal 2017, a year ended right around the X launch, Apple's services revenues were $30 billion, accounting for 13.1% of the company's overall revenue. In the June quarter, with almost three fiscal years in the books, its services revenue accounted for 22% of sales. Its services revenue through the first nine months of fiscal 2020 was 30% higher than the segment's sales through all of 2017.
The iPhone is no longer the thing that keeps Apple moving higher. It can have a hiccup, and the stock doesn't panic.
So, the fact that its 5G phones are expected to generate tremendous sell-through is really just the icing on top of a cake for AAPL shareholders.
"One reason for Apple's confidence is the upcoming mobile phone season, widely expected to feature Apple's first roster of 5G phones," Argus Research's Jim Kelleher (Buy) wrote on Aug. 31 in a note to clients. "Given the exceptional boost to uplink and download speeds 5G delivers, technology investors expect the 5G cycle to be a bigger source of phone upgrades than the prior 4G LTE cycle."
Canaccord Genuity's T. Michael Walkley (Buy) believes that Apple could convert 300 million to 400 million current iPhone users to 5G iPhones over the next two years. If accurate, Apple's earnings should rocket higher.
Wedbush's Daniel Ives (Outperform) believes 20% of the upgrades to 5G iPhones will come from China. If Apple hits its stretch goal to upgrade 80 million iPhones in and around October's launch, China should account for 16 million of those sales.
Apple looks like one of the best 5G stocks on the market right now. An official 5G announcement, once it comes, should be an early Christmas present for shareholders.
Correction: An earlier version of this story incorrectly stated that Apple’s market value was $2.0 billion. The market value should be $2.0 trillion.
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