The newest generation of wireless network technology, 5G, is rapidly being built around the globe. In fact, dozens of countries have now deployed 5G, and some estimates point to these next-gen networks reaching 1 billion users worldwide by 2024.
But wireless service providers are highly regulated and quickly becoming a utility-like business model. The most profitable way to invest in 5G has been with the companies that develop the hardware and use cases for the technology, and they're poised to continue delivering strong returns in the next few years. That's why Qualcomm (QCOM 1.41%), Broadcom (AVGO 0.61%), and Marvell Technology Group (MRVL 1.55%) look like great buys right now.
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1. Qualcomm: 5G is about more than just smartphones
Mobile-chip-design leader Qualcomm was one of the biggest beneficiaries of the mobility movement of the 2000s and 2010s. Nearly every smartphone on the planet has a Qualcomm chip in it, and the company's bread-and-butter business is still doing great things. As 5G has set off an upgrade cycle among consumers, Qualcomm expects its sales from smartphones and RF Front End (the semiconductors that enable a device to receive a wireless network signal) to increase an average of 12% per year through 2024.
But 5G won't just be a growth driver for smartphones. Lots of other devices will benefit from 5G, too, as many consumers are turning to wireless mobile as their primary internet service provider. Smart-home devices and laptops are increasing the adoption of 5G. Industrial internet of things (IoT) is also proliferating as large enterprises use mobile tech to connect large numbers of smart devices to a network for greater efficiency and control of work.
Then there's Qualcomm's nascent auto segment, which is on pace to surpass $1 billion in annual sales for the first time this year. Qualcomm is using its know-how in smartphones to build an end-to-end platform for the modern vehicle, encompassing everything from the infotainment system within a car to advanced driver-assist systems (and perhaps someday fully autonomous driving cars) to vehicle connectivity with a mobile network. In another five years, Qualcomm thinks its auto business could be hauling in $3.5 billion a year.
After a pullback from recent highs, Qualcomm stock now trades for just 18 times trailing-12-month earnings (or 24 times trailing 12-month free cash flow). Highly profitable and growing sales at a healthy double-digit percentage clip, Qualcomm stock deserves some love right now.
2. Broadcom: These profit margins are no joke
Broadcom may not be the commonly recognized name that Qualcomm is, but it isn't any less dominant a business in the semiconductor industry. As its name implies, Broadcom is a specialist in all sorts of communications hardware, from data center equipment to wireless chips to optical network hardware. As far as 5G goes, Broadcom designs chips for 5G network infrastructure (like the small cells that generate wireless signal) to smartphone circuitry that enables 5G and WiFi connectivity.
As a big tech conglomerate, Broadcom isn't the fastest-growing enterprise. Even with a global chip shortage keeping demand (and therefore pricing on chips sold) at an elevated level, Broadcom's semiconductor revenue was up 20% year over year during Q1 fiscal 2022. Many peers reported sales far higher than that. Additionally, the enterprise-software segment (comprising network monitoring and security services Broadcom acquired in recent years) grew at just a 5% clip.
However, what Broadcom lacks in sizzling revenue growth it more than makes up for in profitability. The company generated free cash flow of $3.39 billion -- a free cash flow profit margin of 44%! Nearly all of this excess cash is returned to shareholders each quarter via a dividend and share repurchases. As for share repurchases, the board of directors authorized a $10 billion plan in December that's good through the end of 2022, and $2.7 billion of that authorization was repurchased during Q1.
Churning out massive amounts of cash, Broadcom is a must-see deal in the world of 5G and general communications technology. Shares trade for 34 times trailing-12-month earnings (19 times trailing-12-month free cash flow). A 2.7% dividend yield, one of the best in the industry, sweetens the deal.
3. Marvell Technology Group: An emerging leader in managing data
2021 was a busy year for Marvell Technology. It acquired cloud data center switch provider Innovium, and later, optical-networking company Inphi. Paired with Marvell's existing portfolio of hardware designs addressing high-speed movement of data, the new company is poised to be a key player in 5G and data center construction.
It's still early on for Marvell post-acquisition, but the merits for broadening its portfolio of offerings were on display in its Q4 2021 update. Revenue increased 11% sequentially to $1.34 billion, and the outlook for Q1 2022 implies another sequential rise in sales of over 6% at the midpoint of management's guidance. With a stronger lineup of silicon than ever before, the company is reporting a strong pipeline of design wins as its customers implement more of its hardware in their plans.
5G and adjacent areas of tech like the cloud and data centers should be a strong driver of Marvell's growth in the next few years. Cloud and mobile network services that utilize 5G are on the rise, and Marvell's high-performance compute, data movement, and data management hardware is well-suited to handle the faster network speeds of 5G technology. Some of these same designs are also being put into use in autos (much like Qualcomm's mobile chips), as the modern vehicle quickly transforms into a network-connected data center on wheels.
Granted, investors looking for a "cheap" 5G stock won't find that here. Marvell currently operates in the red (although it's free cash flow positive) due to its big purchases in 2021. In the coming years, the company will turn a corner and generate a profit again. In the meantime, though, the stock trades for nearly 90 times trailing-12-month free cash flow. Nevertheless, with data consumption quickly rising because of 5G-network deployment, Marvell is worth a serious look right now.
