Telecom carriers are stepping up the pace of 5G deployments in the U.S. and paving the way for huge infrastructure spending. A similar story is unfolding across the globe, despite the impact of the novel coronavirus pandemic. Fitch Ratings estimates that 5G infrastructure investments will gain pace in the next couple of years, leaving behind the short-term impact of COVID-19. Additionally, investments in 5G infrastructure will create demand for compatible smartphones.
There are several ways for investors to make money from the shift to 5G. One can invest in a 5G infrastructure-oriented stock such as Applied Materials (AMAT 2.98%) -- whose offerings will make it possible for chipmakers to make the chips required for network deployment or for use in devices supporting the new standard. On the other hand, Synaptics (SYNA 1.93%) gives investors another way to take advantage of the 5G revolution as it supplies a key technology that's becoming ubiquitous with new smartphones.
More importantly, shares of both Applied Materials and Synaptics are trading at attractive levels, making them ideal for investors looking for value stocks to take advantage of the 5G revolution.
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Applied Materials looks like a bargain 5G stock right now
Applied Materials' trailing 12-month price-to-earnings (P/E) ratio of 16.4 is lower than its five-year average multiple of 17.3. The stock is trading at 12.5 times forward earnings.
The company delivered 23% year-over-year revenue growth in its fiscal third quarter, while adjusted earnings increased 43% over the prior-year period. Applied Materials is confident of sustaining this momentum as the company's guidance calls for substantial top- and bottom-line growth this quarter once again, though don't be surprised to see the company sustain its momentum in the long run.
Applied Materials' biggest business segment -- semiconductor systems -- delivered 28% annual revenue growth last quarter. The segment supplies 66% of the company's top line and its terrific growth isn't surprising. Applied Materials supplies semiconductor manufacturing equipment to chipmakers through this segment, which is then used to fabricate chips used in various applications.
More specifically, the segment is divided into three parts -- foundry and logic, DRAM (dynamic random access memory), and flash memory, all of which are expected to witness solid growth thanks to 5G. DRAM demand, for instance, is likely to improve in the coming years as 5G smartphones are expected to be equipped with more memory.
Chipmaker Micron Technology estimates that the baseline DRAM capacity of flagship 5G phones could jump from 6 gigabytes (GB) to 8GB. A similar trend is expected in high-end 5G devices, while entry-level and mid-range devices could see a jump in DRAM capacity from 2GB to 4GB to more than 6GB. Similarly, the NAND flash capacities of 5G smartphones are also expected to jump significantly.
As such, memory makers can be expected to invest more money in DRAM and flash memory infrastructure as the exponential growth of the global 5G smartphone market will create more demand for these chips. Samsung, for example, recently announced the expansion of its NAND flash production capacity in South Korea.
On the other hand, the SEMI World Fab Forecast report predicts that global fab spending could jump 8% in 2020 and 13% in 2021. All of this indicates that Applied Materials still has a lot of room for growth that could make it one of the top 5G stocks one could buy, especially considering the attractive valuation multiples.
Synaptics can take advantage of a shift in smartphone-display technology
Synaptics makes human-interface solutions that enable us to interact with devices such as smartphones, tablets, etc. The company gets just over 40% of its total revenue from selling chips for mobile devices, which is why the growth in sales of 5G smartphones could have a huge impact on the company.
IDC predicts that 5G smartphones could account for 50% of the overall market by 2023, as compared to less than 9% of total shipments in the first quarter of 2020. At the same time, leading smartphone original equipment manufacturers (OEMs) are transitioning from liquid crystal displays (LCDs) to organic light-emitting diode (OLED) displays in the 5G era to make the new devices more power-efficient.
Samsung had launched a 5G-specific OLED display earlier this year, while Apple (AAPL -0.35%) is expected to deploy this display technology across its entire 5G iPhone lineup that's expected to be released soon. Not surprisingly, third-party estimates predict that the demand for smartphone OLED panels could increase 36.5% annually in 2021 to 700 million units.
Apple is anticipated to be one of the biggest drivers of this growth as the iPhone maker's OLED panel demand could jump 67% in 2020. This could be a tailwind for Synaptics, as the chipmaker is touted to supply touch controllers to Apple for the OLED iPhones. More importantly, the company claims to have scored multiple design wins across different smartphone OEMs for the OLED chips that should help it step on the gas in the coming quarters.
Given that Synaptics is trading at a trailing P/E multiple of 24 and an attractive forward earnings multiple of 14.5, now looks like a good time to go long before its 5G catalyst kicks in.
SYNA Net Income (TTM) data by YCharts.
The company's shift toward higher-margin products, such as OLED display drivers, has led to impressive earnings growth of late as shown in the chart above. That growth trajectory is likely to get better as more 5G smartphones hit the market, paving the way for Synaptics to remain a top growth stock, even after its terrific run over the past few months.
