The 5G network "supercycle" has arrived, and consumers are only just beginning to reap the benefits of better mobile data and communications services. Given the size of global mobile networks and the new use cases 5G unlocks, it's no surprise investors want a cut of the 5G boom.
Rather than focusing on telecoms, though, some of the highest growth opportunities are in companies involved in network construction and chips that enable 5G connectivity. Three such stocks worth buying now are Skyworks Solutions (SWKS -0.69%), Micron Technologies (MU 1.50%), and Broadcom (AVGO -0.91%).
A leader in connectivity chips bets on a new market
Skyworks Solutions benefited from the smartphone boom in spades -- primarily as a supplier to Apple's iPhone -- and 5G has set off a new device upgrade cycle with consumers seeking phones with a chip that enables connection to a 5G network. Skyworks' portfolio of radio frequency semiconductor designs is meeting that demand.
Increased sales plus higher value for 5G chips versus the older 4G standard has the company's revenue flying high. Through the first six months of fiscal 2021 (the period ended April 2, 2021), sales were up 61% from the year-ago period.
But 5G isn't limited to smartphones. Telecoms are touting their next-gen mobile services as a replacement for traditional internet service, and people around the world are increasingly turning to mobile providers for basic internet connectivity. 5G should hasten this trend over the next decade as network coverage and reliability increase. Skyworks' products thus extend into other devices, including consumer electronics, modems, and routers.
Even the automotive industry could be affected, with in-car connectivity and eventually self-driving capabilities tapping 5G networks. That's why Skyworks recently announced it's purchasing the network infrastructure and automotive division of Silicon Labs.
Skyworks has a pristine balance sheet ($1.42 billion in cash and equivalents and no debt as of the end of the most recent quarter), so it's flexing its muscles to expand its reach as a new era of mobility dawns. The total purchase price will be $2.75 billion in cash, so Skyworks will need to get some financing to pay the bill, but I like this move.
Mobile services are extending their reach, and Skyworks will be setting itself up nicely by integrating Silicon Labs' capabilities with its own mobile networking tech. Trading for 26 times trailing 12-month free cash flow and forecasting strong double-digit percentage growth for revenue and earnings in the current quarter, Skyworks looks like a long-term value right now.
A basic building block of 5G
Memory is a basic commodity of all semiconductor designs, and historically this segment has been an incredibly volatile place to be invested. Boom cycles of soaring sales and profits have been followed by destructive contractions. But over the years, memory chips have become increasingly complex to meet the ever-rising demand for more digital data, and the number of players in the industry has shrunk, making this a far more profitable realm of the chip world than in times past, which will help dampen future downturns.
Memory and storage provider Micron is already a beneficiary of the current upcycle in memory chips. From new smartphones to antennas that create 5G signals to the local data centers that route network activity, digital memory features prominently in the design. As a result, Micron's sales are on the rise. Revenue was up 21% through the first half of its fiscal 2021, and profit margins are rebounding as well after a tough stretch that cropped up in 2018 during the U.S.-China trade war.
Pent-up demand from the trade war and the pandemic's impact in 2020 is creating a tailwind for Micron now, and the global chip shortage is making for a nice backlog of orders for the memory design and fab company. It's also selling its 3D XPoint development segment to refocus on tech it can monetize more quickly, which should provide an estimated $400 million-a-year boost for the bottom line going forward.
Micron looks like a deal at 26 times trailing 12-month adjusted earnings per share, especially as the company laps its depressed financial results from a year ago during the start of the pandemic. And with 5G rollout continuing around the globe, there will be plenty of demand for Micron's memory chips in the years ahead.
A networking giant selling on the cheap
Broadcom is a giant in the infrastructure technology space, from networking equipment to data centers to connected industrial equipment. 5G and its power to transform industry will thus be a big deal for Broadcom as it helps its customers put the higher-speed, lower-latency service to work.
In its most recent quarter, Broadcom reported a 14% year-over-year increase in sales and a 35% increase in free cash flow -- building on its long track record of rising profitability. In fact, the company's free cash flow profit margin was an enviable 45% during the quarter. There is a sizable amount of debt on the balance sheet ($41.1 billion) after a string of infrastructure management software acquisitions in recent years, but Broadcom generates more than enough cash to service these liabilities and to invest in development of new technology.
In fact, as 5G heats up, management said its foresight last year during the start of the pandemic has meant its supply chain is performing well despite the global chip shortage. It has a long pipeline of orders and is forecasting that its recent growth rate will hold through the rest of this year.
As a result, shares look like a real long-term steal at just 15 times trailing 12-month free cash flow. A dividend currently yielding 3.2% makes the deal that much better. I remain a happy shareholder and plan to add to my Broadcom stake this spring.