One of the biggest misconceptions for tech investors is that you must invest in unproven frontier concepts to make money. While investing in game-changing start-ups can be lucrative (though often risky), investors shouldn't overlook the value created by companies that are innovating on existing technology.
In fact, an enormous evolution in technology is happening right now. The shift to the fifth generation of wireless networking -- or 5G -- is underway. With speeds nearly 100 times greater than its 4G predecessor, 5G supports lightning-fast video delivery and lowers lag time for gaming.
More importantly, 5G is needed to power what's known as the Fourth Industrial Revolution -- the Internet of Things. Artificial Intelligence or AI-powered robots and autonomous vehicles will require lightning-fast networks to process data and execute commands. 5G is just grazing the surface of this opportunity, and smart investors can get positioned for decades of investing success. Here are three companies ready to benefit from increased 5G use.
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5G should spur growth for Verizon's network
As a wireless provider, Verizon (VZ 0.64%) will be one of the biggest winners from the rise of 5G, as increased traffic will help Verizon better monetize its wireless network.
Despite the opportunity, Verizon stock has stayed flat for the last five years, advancing only 4% versus the S&P 500's 107% gain during the same period, on account of sluggish growth including the company's 2.7% top-line decline last year.
Due to poor performance, Verizon shares trade at an extreme discount to the overall market. The company trades at 11.3 times trailing earnings, nearly one-third the S&P 500's 34.8 times multiple. Though Verizon's 4.6% dividend yield is more than three times larger than that of the S&P 500.
Although there was a year-over-year top-line drop in 2020, the dividend is in no danger -- Verizon's $20 billion in free cash flow (operating cash flow minus capital expenditures) is double the $10.2 billion in dividends paid that year.
Because of its massive undervaluation, Verizon could be considered a steal if 5G proves to be as big of a catalyst as many experts expect. Even if 5G provides modest tailwinds, Verizon's cheap valuation and monster dividend payout make the stock a value investor's dream. In the meantime, the company pays investors more than three times the yield of the 10-year U.S. Treasury bill to sit and wait.
American Tower is a 5G landlord
If you're in the U.S., it's likely your wireless company is AT&T, Verizon, or T-Mobile. Collectively, these Big Three have nearly 95% of the total market by subscribers. That's because it's expensive to build and maintain a nationwide network, including the towers and supporting physical structures that house the communication satellites. Costs act as a natural barrier, blocking new entrants from the industry.
Despite the concentration, it's a competitive market when it comes to providing the best network, and companies are looking to increase their coverage maps in a cost-effective manner. The Big Three are working with wireless communications real estate investment trust, American Tower (AMT -0.09%) to do so. American Tower owns and rents out communications sites, with 214,000 sites as of the second quarter. It's a win-win for all parties: The economics of renting is more favorable for the wireless provider and generally American Tower rents to multiple customers per site, providing ample returns on capital.
American Tower recently reported second-quarter results, beating analyst expectations for revenue and adjusted funds from operations with year-over-year increases of 20.2% and 18.7%, respectively. The company also hiked its quarterly dividend payout 15.5% over the prior-year period, maintaining its streak of quarterly dividend hikes that started in 2012.
The continued growth of 5G connectivity will be a significant boost to American Tower's operations. Wireless providers need to keep building out their networks, a process known as densification. American Tower has a long runway for growth as the pace of 5G adoption accelerates.
Microsoft's Azure will benefit from enhanced cloud computing speeds
5G connectivity is required to bring about the Fourth Industrial Revolution as autonomous cars and the Internet of Things require low latency. However, lightning-fast connectivity will require a significant increase in storage and computing functions.
A key beneficiary of this demand will be cloud providers like Microsoft's (MSFT -0.92%) Azure. In the recently reported fourth quarter, Microsoft disclosed Azure's revenue increased 51%. Azure is becoming Microsoft's growth stimulant to emerge as a serious competitor to Amazon Web Services (AWS). According to market research firm Canalys, AWS has nearly 31% market share versus Azure's 22% -- no other provider has more than 8%.
Look for growth in the cloud to continue. According to market research firm Global Industry Analysts, the global cloud infrastructure market valuation is expected to triple by 2026. Microsoft is likely to keep growing Azure at a rapid pace due to lock-in effects of users already on its cloud system, a land-and-expand strategy of increasing spend from customers and including robust software-as-a-service features.
