Mobile service providers are busy launching their next-gen 5G networks, and a handful of 5G-enabled phones are now available. Meanwhile, on the business front, some organizations are beginning to test out the service in new edge network applications like connected factory equipment and real-time monitoring of digital operations.
But the truth is, network upgrades are a constant and never-ending endeavor, and a ubiquitous 5G future is still at least a few years away. But three companies that could benefit from the deployment of 5G in the next decade that three Fool.com contributors think are buys in August are Xilinx (NASDAQ:XLNX), American Tower (NYSE:AMT), and T-Mobile (NASDAQ:TMUS).
A versatile chip on the mend
Nicholas Rossolillo (Xilinx): Once high-flying chip designer Xilinx -- the leading designer of the versatile field programmable gate array used in a variety of industrial equipment and communications infrastructure -- has been struggling the last couple years. A normal cyclical downturn in the semiconductor industry was compounded by the U.S.-China trade war, and while network computing demand has been soaring in recent months, effects from the pandemic have nonetheless contributed to a delayed rebound.
But while shares are still down some 20% from all-time highs, Xilinx has begun to show signs of life once again. In early July, the company increased its outlook for sales after the U.S. Commerce Department made some rule changes that allowed for the resumption of sales to Chinese tech titan Huawei. As a result, Xilinx's revenue in the three months ended June 27, 2020, came in at a better-than-expected $727 million. It still represents a 14% decline from a year ago, but the company is making progress pulling itself out its slump.
The chip designer's outlook for the current quarter shows further improvement, forecasting only a 9% year-over-year revenue decline at the midpoint of guidance. Demand from customers in the communications industry and data center operators -- including 5G network deployment -- are helping the company make its comeback. But even amid this slump, Xilinx remains highly profitable. Free cash flow (revenue less cash operating and capital expenses) was $230 million, good for an enviable 32% profit margin.
Xilinx currently trades for 26.5 times trailing 12-month free cash flow. I think this chip stock is a value as 5G network expansion continues and other chip demand rebounds over the next few years.
An all-American tower of 5G power
Anders Bylund (American Tower): Cell tower manager American Tower isn't exactly on fire sale right now, trading a market-beating 12% higher year to date. But you know what master investor Warren Buffett says about these things: "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."
That's exactly what you get from American Tower. It's a fantastic company whose stock is trading at a fair price.
American Tower reported second-quarter results last week. Property revenue rose 2.4% year over year to $1.9 billion and currency-neutral adjusted funds from operations (AFFO) jumped 7.4% higher to $2.07 per share. These modest gains were no surprise because the company is insulated from short-term volatility by the long-term nature of its contracts. Neither the COVID-19 pandemic nor the merger of two major customers put much of a dent in American Tower's financial results.
Management expects to boost the company's dividend payouts by approximately 20% later this year in order to comply with the requirements for real estate investment trusts (REITs) and qualify for the related tax breaks.
Looking further ahead, American Tower expects 5G base stations to power a strong growth period in the next several years.
"We've seen accelerating deployments for 5G kind of heading our way," CFO Rod Smith said in the second-quarter earnings call. "There's a number of new spectrums heading into the market that will have to be built out."
More networking equipment in American Tower's cell towers and small-cell installation sites means more long-term contracts, and it really doesn't matter which network providers or handset makers come out on top in their respective pools of red-hot competition. American Tower is an established leader in a vital niche, making it a fantastic long-term buy for investors who don't want to lose any sleep over their investment choices in the 5G sector.
T-Mobile: the best 5G at the lowest price?
Billy Duberstein (T-Mobile): If someone were to offer you a superior product for a lower price, it would be hard to say no, right? That's what T-Mobile is attempting to do in its transition to 5G. T-Mobile has long established itself as the "Un-carrier," giving customers affordable wireless plans and eliminating a lot of the extra taxes, fees, and other annoyances common in the wireless industry. However, that strategy was also probably necessary, as T-Mobile had a lagging network compared with leaders Verizon and AT&T.
Yet in the wake of its merger with fourth-place rival Sprint, which closed on April 1, the "new" T-Mobile now has the largest 5G spectrum portfolio in the industry. That means as the industry goes ahead with its 5G deployment, T-Mobile has the chance to leapfrog ahead of the competition in terms of network quality while also keeping its low-priced ethos. That's a recipe for disruption.
New CEO Mike Sievert isn't wasting any time, either. T-Mobile began deploying its 5G network back in December, and it already covers 250 million Americans nationwide in 7,500 cities and towns across 1.3 million square miles. That's much wider coverage than its two main rivals, largely because T-Mobile has been building out the lower and mid-band portions of 5G faster than AT&T or Verizon. In contrast, Verizon has been concentrating on millimeter wave (mm-wave) spectrum, which offers the highest speeds in 5G but also has extremely limited coverage, available just 0.4% of the time, according to a recent Opensignal report.
I happen to think going with wider 5G coverage first is the better strategic move, especially since many of the next-gen 5G applications that require huge speeds won't be widely available for years. Meanwhile, T-Mobile looks to continue its Un-carrier ethos despite its spectrum advantage, recently releasing Scam Shield, a free solution to better help protect consumers from scams and robocalls -- something for which rivals charge extra. And just this month, T-Mobile is offering a ridiculous 5G-inspired deal, offering four lines of unlimited data for $25 per line, while throwing in new 5G phones for just $5 per month more.
With T-Mobile and Sprint combining for just about 30% of the U.S. wireless market, I expect the combined company to achieve material share gains in its transition to 5G, making T-Mobile a great stock to buy today and hold through the 5G era.