5G as an investing theme has been a winning strategy this year. The Defiance Next Gen Connectivity ETF (FIVG 1.07%) -- which contains everything from semiconductor stocks to network equipment manufacturers to 5G service providers themselves -- is up 20% in 2020 compared to a 10% return for the S&P 500.
But within the large 5G universe, some specific names are leading the charge and could have many years of gains ahead of them. Three that our Fool.com contributors are buying now (or have recently bought) are NVIDIA (NVDA 6.18%), Nokia (NOK 0.28%), and Brookfield Infrastructure Partners (BIP -0.80%)/Brookfield Infrastructure Corporation (BIPC -1.04%).
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Graphics computing goes mobile
Nicholas Rossolillo (NVIDIA): As far as 5G goes, NVIDIA isn't exactly a pure play. Historically, NVIDIA has been a household name among those households that are PC video gamers. But more recently, NVIDIA's data center chip business has become something of a coequal breadwinner. The acquisition of networking hardware firm Mellanox has helped, but booming sales of graphics processing units (GPUs) and related chips for cloud computing and AI are the primary reasons.
And therein lies the reason why NVIDIA is a 5G stock. While super-fast wireless service is the product that's ultimately delivered to consumers, behind the scenes it's all about equipment and hardware, including data centers, networking gear, and cell tower antennas to power 5G and high-speed internet access in general. On this front, NVIDIA continues to shine. Total sales grew 57% during the third quarter, led by a 162% year-over-year gain in the data center and related end-markets segment. At $1.9 billion in sales, data center related revenue made up 40% of NVIDIA's grand total in Q3.
Granted, NVIDIA reported these stellar earnings to ho-hum investor reception. It isn't surprising given the fact the stock is up nearly 130% 2020 to date as of this writing. And at nearly 26 times trailing-12-month sales and 67 times trailing-12-month free cash flow (revenue less cash operating and capital expenses), this is no cheap stock. Further double-digit percentage advances on the top- and bottom-line in the next couple quarters are already priced in.
I'm still a buyer, though. I believe there is tremendous potential for NVIDIA over the next decade as it helps propel new developments like 5G, cloud computing, and AI. As a semiconductor stock, sales can fluctuate wildly based on new hardware releases and upgrade cycles. But just such an upgrade cycle involving 5G and data centers is only just beginning. As someone who makes regular deposits and new purchases in my investment accounts, I'm purchasing NVIDIA on a regular basis and will continue to do so through the ups and downs in the years ahead, with an eye on the long-term potential. A very long investment time horizon may not gel with your goals, but if it does this leader in the future of computing is worth serious consideration.
Here's a proven winner trading at a deep discount
Anders Bylund (Nokia): I picked up a few shares of Nokia (NOK 0.28%) last week. The stock was and is priced for absolute disaster after a mildly disappointing third-quarter earnings report, but the company still stands on the threshold of a massive market opportunity in 5G network installations.
It's true that the Finnish telecom equipment maker recently lost a part of its 5G contract with Verizon Communications to Korean electronics giant Samsung, which forced management to reduce guidance targets for fiscal year 2020. Even so, the company is staring down a huge 5G market on a global scale. In particular, Nokia is doubling down on software-based network solutions and virtualization of 5G networking functions.
"The broad trend toward open architectures with increasing virtualization will accelerate. This will be driven by cost pressures, as well as the need to increase speed and agility," Nokia CEO Pekka Lundmark said on October's third-quarter earnings call. "Adoption will vary widely and the full transition is more than a decade away, but the shift to more open interfaces, virtualization and cloudification, network function disaggregation, AI-driven automation and optimization is well under way."
I don't expect to get rich quick on my Nokia investment, but the long-term value in this stock is undeniable. The stock has gained just 5% year to date and is trading at just 16 times forward earnings. When you take a peek in Wall Street's bargain bin and find a market-leader with strong growth prospects in an exciting market like 5G networking, you almost have to buy it. So I did, and I recommend that you do too.
This infrastructure player is pivoting to towers and data centers for 5G
Billy Duberstein (Brookfield Infrastructure Partners, Brookfield Infrastructure Corporation): Many might be confused at my picking Brookfield Infrastructure Partners and/or Brookfield Infrastructure Corporation as my 5G stocks to buy; after all, Brookfield Infrastructure has historically bought and operated assets across utilities, transportation terminals, and midstream energy.
However, Brookfield has aggressively moved into data infrastructure in recent years, buying up cell towers, fiberoptic cable, and data centers critical for 5G communications. That data infrastructure segment, while small, is now the fastest-growing across Brookfield Infrastructure's diverse portfolio.
Brookfield had already amassed some data assets coming into the year, but really accelerated those plans with an acquisition of a U.K. telecom tower business last December, then a more recent and consequential purchase of 135,000 towers in Indian telecom operator Reliance Jio, the Indian private telecom giant that may undergo an initial public offering in the near future. Those two purchases built on Brookfield's existing data portfolio of telecom towers in France, fiberoptic cable footprints in France, Brazil, and New Zealand, and 53 data centers across five continents.
As a result, Brookfield Infrastructure increased its data assets by nearly 50% in the third quarter compared with the prior year, by far the highest growth rate of any of its segments. Meanwhile, the company paid for these new data assets by selling assets in other segments across utilities, transportation, and energy. As such, it appears Brookfield Infrastructure is evolving into more of a data infrastructure company going forward.
In the recent letter to shareholders, Brookfield Infrastructure CEO Sam Pollock noted, "Aging data infrastructure is struggling to keep pace with demand and traditional network owners do not have access to the capital required to fund the necessary upgrades. This provides a unique opportunity for well capitalized investors to take part in a 100-year data investment upgrade opportunity."
While Brookfield may be looking to evolve the composition of its asset base, what won't change is the company's philosophy -- to exercise strict capital allocation discipline by buying assets with long-term, toll-road-like recurring revenue contracts, targeting growth of 6% to 9%, and increasing its hefty 3.7% dividend (or 2.9% for Brookfield Infrastructure Corporation) along with those earnings.
Brookfield Infrastructure's other segments in utilities, energy, and transportation should all grow next year as the economy recovers from COVID-19, while the data-oriented segment is the long-term secular growth story as the 5G revolution begins kicking in. As such, its stock is looking like a solid 5G play heading into 2021.
