The next evolution of cellular connectivity, commonly referred to as 5G, could eventually provide users of the wireless network with speeds up to 100 times faster than 4G LTE networks and have lower latency (meaning a faster response between cell towers and devices).
That won't just mean more impressive smartphones. It will also boost capacity for Internet of Things connections to products such as driverless cars, and it will create a 5G services market estimated to be worth $415 billion a year by 2027.
Here's why NVIDIA (NVDA 5.16%) is becoming an important player in this market, and why I expect it to be the best 5G stock to own this year.
Accelerating 5G with processors
NVIDIA is best known for its graphics processor chips, which were originally designed to power video gaming but which have since become important tools in an array of data processing uses. And that's where the company's 5G opportunity lies. Telecoms are beginning to use its graphics processors to accelerate their 5G infrastructure.
For example, NVIDIA says that it's working with telecommunications companies to build infrastructure solutions that put increased memory and massive amounts of data processing capacity in closer proximity to 5G users.
According to an Opensignal analysis, 5G users consume up to 2.7 times more data than 4G customers, so the growth of that technology will not only require cellular providers to add wireless spectrum, but also additional smart data centers to process all that data quickly. NVIDIA's graphics processors will be integral components in those powerful edge computing networks, which will have to handle increasingly complex and graphics-heavy data. Verizon is already using NVIDIA processors in its 5G network to improve its data centers.
Additionally, NVIDIA has created an application framework called Aerial that allows telecoms to easily setup virtual radio access networks. According to the company, using these "simplifies the deployment of new features and algorithms and streamlines resource usage" for networks. Telecommunications companies benefit from lower infrastructure costs by relying on these virtual machines rather than more expensive hardware.
Growing beyond 5G
In addition, NVIDIA is diversified across gaming, data centers, and (if its purchase of Arm Holdings closes) mobile processor licensing.
For example, in its most recently reported quarter (which ended on Oct. 25), sales in the company's data center segment grew by 162% and gaming sales spiked 37%. Meanwhile, total revenue increased 57% year over year.
NVIDIA's diversity of revenue sources is important because it could take several years for 5G to become the dominant cellular connection for mobile devices, and even longer for 5G-supported services like virtual reality and autonomous vehicles to become mainstream. While 80% of Americans could be covered by 5G networks by mid-2021, just 12% of mobile devices will be capable of using them at that time, according to PwC research.
By laying the groundwork for 5G now, and growing its data center and gaming segments at the same time, NVIDIA puts itself in a much more stable position as the rollout of the new telecom standard continues.