5G networks, which can operate up to 100 times faster than 4G networks, are quickly setting the new global standard for cellular speeds. These faster connections support the development of more advanced phones, autonomous robotics, more complex software applications, and devices that deliver more data in real time to data-crunching AI platforms.
The global 5G services market could still expand at compound annual growth rate (CAGR) of 46.2% between 2021 and 2028, according to Grand View Research. Investors should take that forecast with a grain of salt, but they should still consider investing in three companies that will benefit from that trend.
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1. T-Mobile
T-Mobile (TMUS -0.14%) supplanted AT&T (T -0.43%) as the second-largest wireless carrier in the U.S. following its takeover of Sprint a year ago. Its 5G network also provides roughly 33% more coverage across the U.S. than Verizon (VZ 0.98%) and AT&T's combined 5G networks.
T-Mobile pulled ahead in the 5G race because most of its network runs on low-band spectrums, which can reach farther than the high-band spectrums favored by Verizon and AT&T. However, high-band spectrums still deliver much higher speeds across shorter distances.
T-Mobile also challenged Verizon and AT&T with an "un-carrier" strategy that eliminated long-term contracts, data coverage fees, subsidized phones, and other byzantine nuisances. It then sweetened the pot with free international roaming, data-free streaming, and unlimited text, talk, and data plans.
T-Mobile doesn't pay dividends like Verizon or AT&T, but it's growing faster. Its revenue soared 60% to $36.3 billion last year as it gobbled up Sprint, and it expects the merger to generate up to $3.1 billion in synergies this year. Its revenue jumped 75% year over year to $10.3 billion in the first quarter of 2021 -- its last full quarter before lapping the Sprint merger -- and analysts expect its revenue to grow 17% for the full year.
T-Mobile's adjusted earnings will likely decline this year due to the high costs of integrating Sprint's customer base. But its stock still looks reasonably valued at 44 times forward earnings, and it could continue to outperform Verizon and AT&T as the 5G race intensifies.
2. American Tower
American Tower (AMT -0.60%) is a REIT (real estate investment trust) that owns and operates over 214,000 telecom infrastructure sites worldwide. As a REIT, American Tower needs to pay out over 90% of its profits or more to shareholders to maintain a favorable tax rate. It currently pays a forward yield of 1.8%, and it's raised its annual payouts for nine straight years.
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American Tower's diverse base of tenants, which include the top three telcos in America and other leading carriers worldwide, also make it a balanced way to profit from the secular expansion of the 5G market without fretting over the cutthroat competition between the top telcos.
American Tower's revenue rose 6% to $8.04 billion last year, even as the pandemic disrupted some 5G network upgrades, as its consolidated AFFO (adjusted funds from operations) -- a key profitability metric for REITs -- rose 8% to $3.79 billion. In the first quarter of 2021, its revenue rose 8% to $2.16 billion as its consolidated AFFO jumped 24% to $1.12 billion.
Analysts expect American Tower's revenue and adjusted earnings to grow 10% and 36%, respectively, this year as the pandemic passes and telcos continue to expand their 5G networks. The stock might seem a bit expensive at about 51 times forward earnings, but its wide moat, well-diversified business, and accelerating growth all justify that premium valuation.
3. Qualcomm
Qualcomm (QCOM -0.85%) is one of the world's largest producers of mobile application processors and baseband modems, and its massive portfolio of wireless patents entitles it to a cut of every smartphone sold worldwide. Those two businesses put Qualcomm in a prime position to profit from the growth of the 5G market.
Qualcomm still faces stiff competition from its Taiwanese rival MediaTek, as well as first-party chipsets from smartphone makers like Apple, but its Snapdragon SoCs (system on chips) should continue to power most premium Android devices for two simple reasons.
First, Qualcomm's top-tier Snapdragon 888 SoC still offers more processing power than any of its closest competitors, which makes it the obvious choice for flagship phones. Second, its Snapdragon SoC bundles together an application processor, GPU, and baseband modem, which makes it a cost-effective, all-in-one package for cost-conscious OEMs.
Last year, Qualcomm's revenue increased 12% to $21.7 billion as its adjusted earnings increased 18%. In the first half of fiscal 2021, its revenue rose 57% year over year to $16.2 billion, lifted by surging demand for new 5G phones, while its adjusted earnings surged 127%.
Analysts expect Qualcomm's revenue and earnings to rise 49% and 85%, respectively, this year. Those robust growth rates should cool off next year, but the stock still looks cheap at 16 times forward earnings. It also pays a forward dividend yield of 1.9%, and it spent just 37% of its free cash flow on that payout over the past 12 months -- giving it plenty of room for future hikes.
