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2 5G Stocks to Buy Before They Break Higher

By Harsh Chauhan – Sep 9, 2020 at 7:45AM

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These chipmakers stand to gain substantially from different aspects of the 5G rollout.

The potential economic fallout of the coronavirus pandemic hung heavy over Wall Street going into the second quarter 2020 earnings season, but with earnings season winding down indications are that the performance was not as bad as feared. According to RBC Capital Markets, Q2 earnings results were largely better than analysts' expectations, with 83% of S&P 500 firms estimated to have trounced forecasts.

Profit declines were also lower than expected, indicating that businesses may have weathered the impact of COVID-19 to some extent. The technology sector was one of the biggest winners during the earnings season, accounting for the highest number of names beating earnings estimates and upward estimate revisions per RBC. That's not surprising as tech companies are benefiting from lucrative trends such as 5G wireless networks, remote working, artificial intelligence, and data centers, among others.

In fact, tech names such as Qorvo (QRVO -4.62%) and Micron Technology (MU -2.93%) also managed to complete their turnarounds during the quarter thanks to favorable business conditions, the 5G rollout, and higher demand for data center equipment. More importantly, it is likely that these two chipmakers will be able to sustain their impressive runs in the forthcoming quarters. Let's see why.

Person holding a smartphone.

Image source: Getty Images.

1. Qorvo has multiple catalysts thanks to 5G

Qorvo's quarterly revenue increased in the double digits year over year for the three months ending on June 27. Nearly 60% of that revenue came from the mobile segment, which performed better than expectations thanks to resilient smartphone demand. Qorvo now anticipates its mobile revenue to pick up the pace thanks to new product launches and higher content opportunities in 5G devices.

More importantly, this could be the beginning of a multi-year growth trend for Qorvo's mobile business for three reasons. First, 5G smartphone shipments could jump to 1.5 billion units by 2025 as per third-party estimates, up significantly from an estimated 250 million units that are expected to be shipped this year.

Second, Qorvo says that "demand for 5G is adding more complex parts and driving higher content" in smartphones. The chipmaker estimates that 5G could create an additional content opportunity worth $5 to $7 in each smartphone. The third and most important reason is that Qorvo's clients are in a great position to take advantage of the 5G transition.

Apple is one of Qorvo's biggest customers, accounting for a huge chunk of revenue, and it seems all set to bring out 5G iPhones that will create additional revenue opportunities for the chipmaker. Qorvo's 5G chips are reportedly used by the likes of Samsung, Vivo, and Xiaomi as well -- three companies that dominated the 5G smartphone landscape in the first quarter of the year.

So, Qorvo's mobile business has a bright future as it is standing on the cusp of a smartphone technology transition, but that's not the only way 5G is going to boost the company's business. The deployment of 5G base stations is opening another avenue for Qorvo, leading to a jump in demand for gallium nitride (GaN, a component used in 5G base stations to increase the speed and efficiency of the network).

The company scored "record design wins in support of ongoing 5G base station deployments" last quarter, and this may just be the beginning as the market is still in its early phases of growth. As such, don't be surprised to see Qorvo switch into a higher gear in the forthcoming quarters, making it an ideal bet for investors looking to buy a 5G stock at an attractive 19 times forward earnings.

2. The big picture looks bright for Micron Technology

Micron Technology gave investors great news last quarter with double-digit revenue growth and even better guidance. But the joy was short-lived as it emerged that the memory specialist might lose its momentum in the forthcoming quarters. Not surprisingly, Micron shares have pulled back over the past month, but there is evidence that the company's recent turnaround may not be derailed.

Memory prices, for instance, have started strengthening once again. DRAMeXchange reports that the spot price of dynamic random access memory (DRAM) started rising once again in the last week of August after falling over 30% in the preceding four months. Now over 90% of DRAM is sold based on contract prices, which lags behind the spot price by a few months. So it may take some time before an improvement in spot prices has a positive bearing on Micron's results.

But at the same time, investors should note that the recent concerns expressed by Micron management over the company's outlook may not last for a long time. The demand for DRAM should start picking up toward the end of the year thanks to the launch of new gaming consoles that are expected to carry more memory than the previous generation.

Additionally, Micron's mobile business has picked up the pace of late thanks to the advent of 5G smartphones that are using more memory than 4G devices. Revenue from the company's mobile business unit was up almost 30% year over year last quarter due to higher DRAM shipments. We have already seen how the demand for 5G smartphones is expected to explode in the coming years, so it won't be surprising to see Micron sustain a high pace of growth in this segment.

Investors need to look beyond the short-term hiccups that Micron might face on account of weakness in contract prices of memory chips. But at the same time, they should not forget that spot DRAM prices are getting better and that trend may continue as demand rises on account of 5G smartphones and other factors. This makes Micron an attractive investment as it trades at just nine times forward earnings.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Qorvo. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
MU
$52.91 (-2.93%) $-1.59
Qorvo Stock Quote
Qorvo
QRVO
$81.51 (-4.62%) $-3.95

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