Among other less savory things, 2020 will go down as the year 5G mobility became available to the masses. U.S. telecoms' next-gen networks made nationwide debuts, setting off a new smartphone upgrade cycle to take advantage of the higher performance mobile service. But 5G is just getting rolling. It will take years for 5G coverage to match where 4G is at, and network infrastructure improvements are a never-ending game. To that end, we think Ansys (ANSS 0.84%), Micron Technology (MU 2.20%), and Onto Innovation (ONTO 0.81%) are worth your attention in the final weeks of 2020.
A modern engineering bet on 5G and high-end computing
Nicholas Rossolillo (Ansys): I'm going with a new-to-me stock this month for my 5G bet -- 3D engineering design software provider Ansys. The company develops software design tools for engineers, helping them with systems and materials design and simulation. In a world where technology is getting increasingly complex, Ansys is finding plenty of demand for its services.
Image source: Getty Images.
Why is this a 5G stock? Among the many use cases for its engineering software is 5G hardware and network design, from the design of the chips themselves that create and receive a mobile radio signal, to the antenna systems and infrastructure needed to build a 5G network. Paired with its other capabilities for a range of industries, I like this steadily growing engineering play in a new digital-first era.
Granted, this isn't the highest growth name out there in the 5G world. Due to pandemic disruption, revenue was up just 3% through the first nine months of the year. Adjusted net income is down 12% from the first nine months of 2019. However, things are looking up for Ansys. At the midpoint of guidance, revenue and adjusted earnings per share are expected to be up 15% and 12%, respectively, year over year during the final quarter of 2020.
Granted, some of that growth is attributable to acquisitions. Ansys took over design peer Lumerical back in March and more recently announced it is purchasing aerospace, defense, and telecom simulation software firm Analytical Graphics for $700 million. It expects this latest deal to be complete before the end of the year. But therein is another reason I like Ansys. The company is a regular acquirer of smaller software technology peers, and it's able to fund its spending with its incredibly high profit margins. Even in a less-than-perfect year, Ansys has generated an operating income profit margin of 27% over the last 12-month stretch.
Cash and equivalents of $845 million and debt of only $424 million at the end of September add to my intrigue. The future looks bright for Ansys as it helps its customers design for 5G and other cutting-edge tech. I'll be mulling a small initial purchase (less than 1% of my portfolio value) as the year draws to a close.
Memory-hungry 5G phones are great for chip makers
Anders Bylund (Micron Technology): The advanced 5G networking technology requires more memory in the next generation of smartphones. Micron Technology, the only pure-play memory chip supplier on the American stock markets today, is poised to benefit hugely from this technical quirk.
You don't have to take my word for it. Micron raised its first-quarter earnings and revenue guidance earlier this week. In a related conference call, CEO Sanjay Mehrotra said that this quarter's surprising strength rested on solid memory sales in the data center market, but the picture changes when he looks forward to the next couple of years.
"It's not only about data center. Look at mobile, 5G," he said. "Next year, the calendar year 2021, about half a billion smartphones are expected to be sold that should have 5G. 5G drives more DRAM and more NAND content as well. So our end markets are well diversified, and we see longer-term growth trends in all of our end markets."
The guidance boost drove Micron's share prices to fresh multi-year highs. When I say multi-year, I mean that you have to go all the way back to the dot-com boom to find a higher price on Micron's stock. Even so, the stock looks downright cheap at just 11 times forward earnings. Unit prices in the volatile DRAM market are on the rise amid strong demand from the smartphone, data center, connected car, and artificial intelligence end markets. Many analysts expect the uptrend to persist at least through calendar year 2021.
Micron's stock chart tends to follow memory chip pricing trends, and the current surge should have legs for a while. Memory-hungry 5G phones are an important ingredient in Micron's recipe for long-term growth today.
A small-cap in semiconductor equipment manufacturing with heady growth prospects
Billy Duberstein (Onto Innovation): One under-the-radar name in the semiconductor equipment industry is Onto Innovation (ONTO 0.81%). Unfamiliar with the company? That may be because Onto was created just in 2019, when Nanometrics Incorporated merged with Rudolph Technologies. The merger created a company with equipment spanning advanced metrology equipment as well as specialty devices and advanced packaging.
As next-generation 5G processors and high-performance computing technologies take hold over the next decade, more pressure will be on semiconductor manufacturers to produce smaller, more powerful chips. However, the smaller and more densely packed the chips become, the more difficult they are to produce, and the more exacting a manufacturer's process controls need to be. That's where Onto's advanced metrology solutions come in, which supply the likes of TSMC (TSM 1.60%), Intel (INTC 0.61%), and all the major memory manufacturers. Year to date, Onto's metrology equipment made up 37% of revenue.
Advanced packaging made up another 39% of revenue, and is also set up for strong growth. According to the VLSI advanced packaging forecast, sensors and advanced packaging wafers are set to grow at a 19% average annual growth rate through 2023. The remaining 24% of Onto's revenue comes from recurring software and services, which should grow along with Onto's installed base.
Onto also has a sterling balance sheet, with about $340 million in cash and no debt, and it trades at a very reasonable 18 times 2021 earnings estimates, a bit below its larger rival KLA Corporation (KLAC 0.87%), which trades around 21 times next year's earning estimates.
While the stock has had a nice move over the past month, its reasonable valuation, strong cash flow generation, and exposure to high-growth trends in 5G and high-performance computing makes Onto a name worth buying in December.
