Many tech investors are bullish on the growth potential of fifth-generation (5G) networks, which could transfer data up to 100 times faster than 4G networks. Those faster speeds could spur fresh sales of network hardware, faster phones, and innovative new devices and services across the Internet of Things.
Earlier this month, I highlighted a few 5G stocks that will reward patient investors with decent dividends. Today, I want to take a closer look at three 5G stocks that are also cheap relative to their growth potential: China Mobile ( CHL ), Ericsson ( ERIC 1.06% ), and Broadcom ( AVGO 4.50% ). Let's take a closer look at these tech stocks.
1. China Mobile
China Mobile, the Middle Kingdom's top telecom company, provided services for 946.2 million wireless subscribers in September, up 0.4% from a year ago. Its number of 4G customers rose 3% to 769.5 million, as its 5G customer base -- which didn't exist a year ago -- hit 113.6 million.
In the first nine months of 2020, China Mobile's operating revenue rose 1.4% year over year, but its profit dipped 0.3% due to higher 5G infrastructure costs. For the full year, analysts expect its revenue and earnings to rise 7% and 6%, respectively, as it locks in higher-value 5G subscribers in the fourth quarter.
China Mobile is often considered a safe stock for three simple reasons: It's the market leader, it's a state-owned enterprise, and it pays a decent semi-annual dividend, which usually stays between 3%-5% based on its annual profit.
However, China Mobile's stock tumbled 30% this year as U.S. regulators repeatedly threatened to delist U.S.-listed Chinese stocks over their alleged ties to the Chinese government. The Trump administration's latest executive order, which goes into effect on Jan. 11, could bar American investors from buying shares of China Mobile and 30 other companies.
As a result, China Mobile trades at just eight times forward earnings. That discount might be justified, but investors should recall President Donald Trump's previous executive orders against TikTok and WeChat flopped, and the Biden administration could quickly overturn the order. Therefore, China Mobile's stock could rebound quickly if those regulatory headwinds dissipate.
Swedish telecommunications giant Ericsson controlled 14% of the world's telecom equipment market last year, according to Dell'Oro Group. It ranked third behind Huawei's 27% share and Nokia's ( NOK 3.69% ) 16% share.
But Ericsson is growing faster than Nokia, and it doesn't face trade blacklists and sanctions like Huawei. Ericsson also shrewdly navigated the U.S.-China trade war by retaining its 5G contracts in China, even after Nokia lost several large customers (including China Mobile) while gaining new 5G contracts from other customers that had cut ties with Huawei.
As of this writing, Ericsson has secured 117 commercial 5G agreements globally. Analysts expect Ericsson's growing presence in the 5G market, along with stable sales of its other networking devices and services, to lift its revenue and earnings 7% and 26%, respectively, next year.
Ericsson's stock has already rallied nearly 40% this year on rosy expectations for its 5G business, but its stock still looks cheap at 17 times forward earnings. Ericsson also pays a decent forward yield of 1.4%. Like China Mobile, it pays a semi-annual dividend, which is tied to its profit growth.
Broadcom sells a wide range of wireless chips for the data center, networking hardware, storage solutions, broadband, wireless, and industrial markets. It also provides infrastructure software and security services.
Broadcom generated a fifth of its revenue from Apple ( AAPL 3.55% ) last year. It also signed a new $15 billion contract with Apple at the beginning of 2020 to provide wireless chips to the iPhone maker for the next three and a half years. That tight relationship indicates robust sales of the iPhone 12 will likely boost Broadcom's sales over the next few quarters.
The pandemic disrupted Broadcom's sales of networking and broadband chips earlier this year. But it offset that slowdown with the growth of its software business, and its chip sales stabilized over the past two quarters as cloud and telecom customers resumed their infrastructure upgrades.
During last quarter's conference call in September, CEO Hock Tan predicted Broadcom would start "benefiting from the transition to 5G and new product ramps later this year." In other words, infrastructure customers should start buying more chips for their 5G networks, and 5G device makers will install more wireless chips in their products.
Wall Street expects Broadcom's revenue and earnings to rise 9% and 16%, respectively, as it rides those accelerating tailwinds next year. That's an impressive growth rate for a stock that trades at just 15 times forward earnings, and its quarterly dividend sports an impressive forward yield of 3.4%.