With all of the hype around 5G technology, you might think any stock related to this next-gen technology would be super-expensive, especially in this market. Fortunately for investors today, that's not the case.
In fact, there are still some very high-quality 5G companies trading at reasonable or, dare I even say it, cheap valuations, even today. So with fears of higher interest rates causing a flight from profitless growth stocks to value stocks generating profits today, Facebook (META -0.52%), Micron Technology (MU -0.60%), and Kulicke & Soffa (KLIC 1.21%) all look like solid 5G buys this month.
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Facebook: More than just digital ads?
Facebook may not seem like a 5G stock at first glance, yet its recent first-quarter earnings call provided hints of what's to come in the 5G era. On that call, CEO Mark Zuckerberg spent his opening comments discussing not the core digital ads business, but newer products Facebook is developing.
5G technology should fuel app innovation in areas like augmented and virtual reality, and Facebook has been investing big in this area. Zuckerberg especially touted the Oculus Quest 2 AR/VR headset and its differentiated wireless streaming capabilities -- a difficult technological achievement in the VR headset world, which has generally required cumbersome wires to work. Quest 2 has been doing better than expected, and developers are producing much more than just gaming apps. Zuckerberg noted apps such as the FitXR for VR boxing and dancing routines as an example of how use cases for VR are expanding.
Facebook's "other" non-advertising revenue, likely mostly composed of Oculus sales and payments, was up 146% in the first quarter. Though "other" revenue was just 2.8% of total revenue last quarter, that growth rate is notable, and a $2.1 billion run-rate is nothing to sneeze at.
Besides AR/VR, Zuckerberg also highlighted new initiatives expanding tool-sets for content creators on Facebook's core platforms. Facebook and Instagram are home to all sorts of content, whether written, visual, video, or filters. All of these capabilities will be enhanced by 5G, which could further "professionalize" social media content to a higher degree. That could bring even more monetization possibilities Facebook's way.
Meanwhile, Facebook's core digital ad business is firing on all cylinders, and should also benefit from the enhanced connectivity in the 5G era. Ad revenues were up 46% last quarter, and operating income nearly doubled, up 93%. Going forward, Facebook will continue to deploy these hefty profits back into new growth opportunities as well as buying back stock.
Annualizing the $3.30 Facebook made last quarter to $13.20, Facebook only trades at 25 times run-rate earnings, despite its roaring growth and extra $64 billion in cash on the balance sheet. That's a lower multiple than its FAANG brethren and seems very cheap, making Facebook an excellent buy for the 5G era.
Micron: The firepower behind 5G
At a recent industry conference, Micron CEO Sanjay Mehrotra guided to revenues "at or above" the high end of its current quarter guidance, along with "strong" earnings. And yet, Micron's stock is still down about 12% from recent all-time highs. This is in spite of Micron's being one of the prime beneficiaries of the current semiconductor shortage.
5G, along with other digitization trends brought on by the pandemic, has greatly increased the demand for Micron's DRAM memory and NAND flash, and prices for these components are going up. Meanwhile, supply has been disciplined in recent years, at least in DRAM. Even NAND flash, which has been oversupplied for quite some time, is seeing price increases these days.
Micron is a notoriously cyclical stock, and it trades in ways that may seem counter-intuitive as traders anticipate the next down-cycle. However, I think skeptical investors may be underestimating the length of the current upturn. With a big step-up in demand from the pandemic digitization trends, it may be hard for the industry supply to catch up for some time. For instance, new Intel CEO Pat Gelsinger believes it will be at least two years until the semiconductor shortage is brought into balance.
With memory prices surging, Micron looks as if it will mint billions in cash flows over those next two years, and it trades for only about eight times next year's earnings estimates. But even if Micron's stock price doesn't react to all this good news, the company will be able to repurchase a significant amount of stock in the meantime, as it has pledged to do with at least 50% of its cash flows.
And if either the current up-cycle in memory lasts longer than the market anticipates, or if the next downturn is less severe than that sparked by the U.S.-China trade war, Micron's stock could march significantly higher over the coming years.
Kulicke & Soffa: Mutlichip packages and mini-LED to fuel growth
Not only will 5G technology put an onus on memory and logic chips, but as 5G phones pack more memory and logic into a phone, 5G requires novel, advanced ways of connecting these elements together. That should benefit Kulicke & Soffa, a leader in advanced packaging equipment.
On the recent conference call with analysts, CEO Fusen Chen said: "[W]hen we enter from 4G to 5G, we see a lot of additional demand for this multichip package. So right now, we are not only seeing the actual amount of demand needed, the multi-chip package also has additional capital intensity because you interconnect a lot of interconnect within the package."
Like Micron, Kulicke & Soffa has been very cyclical in the past. Yet as 5G, artificial intelligence, the Internet of Things, and other compute-intensive applications take hold, advanced packaging techniques will likely be required across more applications. That could add a secular growth element to K&S's results.
In addition, Kulicke & Soffa has entered the mini-LED market, a new display technology in the latest televisions and the new iPad Pro, and a step-up in quality from LCD screens. As 5G kicks in, expect more tablets, smartphones, and PCs to adopt mini-LED technology. Chen expects the mini-LED market to "accelerate throughout fiscal 2022 and a multiyear ramp to continue." The mini-LED segment only makes up a small proportion of K&S's revenue now, but as it ramps up this year and next, it could become meaningful and push up Kulicke's baseline revenue and earnings.
Trading at just 11.2 times this year's earnings estimates, this undervalued dividend-paying stock could march much higher during the 5G era.
