Analysts widely expect interest in 5G technology to skyrocket when Apple releases its first 5G-capable iPhone later this fall. Thanks to 5G, data connection speeds that currently stand between 12 and 36 megabits per second (Mbps) could reach 300 Mbps. This could ultimately facilitate technologies on smartphones that are currently not available, or in some cases, not yet invented.
With so much that remains unknown, predicting the technologies, let alone the companies that will spawn 5G innovation, is difficult. However, the move to 5G has created a need for new equipment and a coming upgrade cycle. Given what we know today, Broadcom (AVGO -1.87%), Ciena (CIEN -1.07%), and Qualcomm (QCOM -2.01%) are 5G stocks well-positioned to benefit as the world transitions to this new technology. Let's take a closer look at these three 5G companies and whether their stocks are a buy right now.
1. Broadcom: Profit growth and a rising dividend
Broadcom is a global semiconductor company built through acquisitions. This chip giant, once known as Avago (hence the stock ticker symbol), adopted the Broadcom name after buying the company with that name in 2016.
Some of its acquisitions also took Broadcom into the software business. Software now accounts for almost 28% of its revenue and most of its growth as of the third quarter of 2020. Its more established chip business also helps enable 5G capabilities in smartphones.
Both have helped to bring robust financials. Admittedly, in the latest quarter, net income fell mostly on rising amortization costs. Still, free cash flow of just over $3 billion significantly surpassed the free cash flow of about $2.3 billion from the same quarter last year.
Broadcom stock increased in a falling market following this news. Nonetheless, despite the elevated stock price, Broadcom sells for only about 15 times forward earnings. Moreover, even after stagnant earnings growth this year, analysts forecast profits will rise by just under 13% in the next fiscal year.
Investors should also take note of Broadcom's dividend. At the current level of $13 per share, it yields almost 3.6%, more than double the S&P 500 average of about 1.75%. This helps make Broadcom one of the more attractive 5G picks.
2. Ciena: Gearing up to offer "differentiated 5G services"
Networking giant Ciena was a one-time darling of the dot-com boom. Though it trades nowhere near its 2000 highs, Ciena has reinvented itself, utilizing its wireline experience to facilitate 5G service.
Now, investors may have a new buying opportunity. Shares fell by more than 24% in one day following Ciena's third-quarter earnings report. The company cited an overall drop in demand due to the coronavirus pandemic as the reason for the slow revenue growth. Overall revenue climbed by only about 1.7% year over year.
However, management also pointed out that demand for bandwidth grows at about 25% to 30%. Additionally, the company recently unveiled new 5G offerings geared to provide intelligent automation, advanced routing platforms, and professional services to facilitate what it calls "differentiated 5G services." This indicates that any impact related to COVID-19 may prove temporary as companies will have to buy equipment to keep pace with that growth.
Also, thanks to the much lower stock price, Ciena now trades at just over 14 times forward earnings, just below its five-year average forward multiple. Yes, analysts expect earnings growth to fall to the low-single-digits next year while Ciena works through the impact of COVID-19. Nonetheless, once consumers adopt 5G in earnest, Ciena will probably resume its previous growth path.
3. Qualcomm: Positioned to profit from 5G CAGR forecasts
Despite Ciena's potential, some of the most significant gains in 5G may accrue to Qualcomm. Thanks to its proprietary chipset, those who want 5G will have to buy a product that uses Qualcomm chips.
Indeed, the FTC won a case against Qualcomm that got the company declared a monopoly. Nonetheless, Qualcomm got the "monopoly" decision overturned, and Apple decided to buy Intel's smartphone modem business rather than fight the battle in the courts.
Until other companies invent a comparable competing product, Qualcomm will probably remain in control of its segment of the chip market. Moreover, Research and Markets analysts estimate the compound annual growth rate (CAGR) for the global 5G chipset market will average almost 88% through 2025!
Admittedly, last quarter's numbers show no indication of that earnings surge. Non-GAAP revenue came in flat, and non-GAAP profits increased by only about 8%.
However, next year, when 5G devices become widely available, analysts predict that profit increase will grow to more than 63%. Also, given the forecasted CAGR, Qualcomm appears positioned to keep that up for the next few years. Additionally, investors can buy this income stream for about 19 times forward earnings.
Yes, it remains possible that Apple or a different company will invent a chipset comparable to Qualcomm's. At that point, growth may slow. Still, with Qualcomm as the dominant company, its stock should benefit for years to come.