The rollout of 5G communications may seem overhyped, but it's really a big deal. Not only will lightning-fast, low-latency wireless communications become a new standard and speed up economic activity, but 5G will also open the door to a host of new killer apps, from virtual reality, to highly automated factories and farms, to other ways we may not have even contemplated yet.
The buildout of 5G is just beginning in earnest today, with the first 5G iPhone introduced one year ago. Yet because of the difficulty of 5G deployments, the rollout will take a few years, with the benefits kicking in gradually. That's why the three companies leading this revolution -- T-Mobile (TMUS -0.06%), Taiwan Semiconductor Manufacturing (TSM 1.26%), and Micron Technology (MU 2.92%) --will see compounding benefits this decade.
Even better? Each stock looks reasonably priced today.
T-Mobile has a two-year head-start in 5G deployment. Image source: Getty Images.
T-Mobile has a two-year lead in 5G deployment
Thanks to its 2020 acquisition of Sprint and other smart spectrum investments over the years, "Un-Carrier" T-Mobile has a solid lead in 5G deployment. In fact, seven recent independent third-party reports clarified that T-Mobile has the superior 5G network -- a big contrast from the 4G era, when it was a laggard.
T-Mobile's stock didn't do much of anything after its latest earnings report. Strong net additions, a beat on revenues and profits, and raised guidance for the year were offset by news that Dish Network (DISH), will move off T-Mobile's wholesale network for AT&T's (T 1.02%). That move will put a near-term hole in T-Mobile's financials, to the tune of over $500 million in revenue per year. Yet despite this small setback, CEO Mike Sievert reiterated the company's impressive medium and long-term guidance outlined in its analyst day back in March, on the conference call with analysts.
The loss of Dish will also free up capacity on T-Mobile's network, which the company will turn around and aggressively market to its three main growth targets: enterprises, rural areas, and home 5G broadband. Each of those segments represents a tremendous growth opportunity for the company.
T-Mobile plans to cover 200 million points-of-presence (POPs) with its ultra-capacity midband 5G spectrum by the end of 2021, a target competitors won't be able to reach until the end of 2023, and T-Mobile will continue to cement its lead with more capacity and 300 million midband POPs by that time.
As more people get 5G phones and the capabilities of 5G become clearer, it appears T-Mobile will continue to benefit from its lead. The current consolidation in the stock therefore looks like a good opportunity to pick up shares in this 5G leader.
Image source: Getty Images.
Taiwan Semiconductor Manufacturing is also leading the pack in foundries
The world's largest and most capable semiconductor foundry will also benefit handsomely in the 5G era. 5G requires more advanced leading-edge chips, and Taiwan Semi now has a multiyear lead over rivals in pulling off the most exacting, complicated semiconductor manufacturing processes.
Since it pulled ahead of rival Intel (INTC -9.20%) on the leading edge several years ago, TSM's stock has rallied; however, TSM's stock is actually down about 18% off its all-time highs. The culprit could be the massive spending plans announced by rivals Samsung and Intel, which intend to catch up to TSM and build their own third-party foundry capabilities over the next several years. And while TSM posted strong 28% revenue growth last quarter, margins slipped, perhaps also dampening enthusiasm.
However, TSM has announced its own $100 billion spending plan over the next three years to satisfy booming demand and cement its industry-leading position. The U.S. government is also subsidizing TSM to build capacity in Arizona, because of its clear manufacturing lead.
In addition, margin compression was due to foreign exchange fluctuations, plus the faster ramp-up of the leading-edge 5-nanometer node. When a new node ramps, its margins are lower, but they expand as production matures. So neither of the reasons for the margin compression are really causes for concern.
Meanwhile, the long-term picture is exceptionally bullish. Management said it now expects to grow revenue at the high end of its 10%-15% five-year annualized growth rate -- and even that is probably conservative. Also encouraging, CEO C.C. Wei claimed that any sort of future semiconductor industry slowdown is likely to be less severe than in the past, because of the dual 5G and artificial-intelligence megatrends likely to grow every year this decade.
With the stock trading around 30 times earnings, and with its 1.5% dividend sure to grow over the next five years and beyond, now looks like a good time to add to this 5G leader.
Image source: Getty Images.
Micron introduces a dividend, in a show of confidence
Finally, all 5G phones, networks, and applications will require much more data and firepower than those of the 4G era. That means an era of heightened demand both DRAM memory and NAND flash storage. As one of only three major DRAM producers and about six NAND flash producers, Micron should be able to generate hefty profits in the 2020s.
The solid outlook for memory and storage recently encouraged Micron to initiate a small dividend of $0.10 per quarter, or about a 0.5% dividend yield at today's stock price. That relatively small dividend may not seem like much, but this pleasant surprise for investors could be pretty significant in terms of what it signals. The memory industry has historically been prone to booms and busts, but the initiation of a dividend shows confidence that Micron will be able to generate solid profits through future cycles -- a stark contrast from the 2000s and 2010s.
Management's confidence is due to the combination of improved demand for memory, thanks to 5G, AI, and the Internet of Things. Meanwhile, on the supply side, industry consolidation has helped the remaining players focus on generating returns on investment, rather than endless price and market share wars. In addition, under CEO Sanjay Mehrotra, Micron itself has greatly improved relative to its competitors, introducing the industry's first 1-alpha DRAM node and first 176-layer NAND flash chip during the past year.
The small dividend also still leaves plenty of cash left over for stock buybacks, which the company will continue. CFO David Zinsner said the company will take a more opportunistic approach to buybacks, conserving cash when the stock price is high, but being more aggressive when it is low. Given the higher-than-normal volatility in Micron's stock price -- which is nearly 20% below its recent all-time highs -- that seems like a prudent strategy.
If management's sunny outlook is to be believed, and memory cycles become more muted and profitable over time, Micron's shares look extremely cheap, at just 7.6 times next year's earnings estimates. If the strong semi market continues into 2022, those earnings estimates may end up being conservative too.
