In the last decade, one of the most obvious areas of improved technology has been the growth and mass adoption of smart mobile devices. Near the end of 2010, 4G (fourth-generation) wireless networks began coming out for commercial and consumer use, allowing for greater download speeds and with lower latency (the delay before data begins following instructions) than previous generations of wireless networks. Likewise, 5G wireless networks represent another step up the ladder toward higher speeds, driving further improvements in mobile network coverage and capabilities.
What is 5G?
5G stands for the fifth generation of wireless networks, a new standard for mobile telecommunications that will be significantly faster than previous generations. As Skyworks Solutions CEO Liam Griffin aptly summarized in a 2018 conference call, the benefits of 5G technology will be immense:
- It's significantly faster, up to 100 times 4G networks' speed.
- It has extremely low latency, meaning there's little delay between when signals are sent and received -- a must for driverless cars, robotics, and machine-to-machine communication.
- It lets networks carry more data and more reliably.
Roughly speaking, a new generation of wireless networks has emerged every 10 years since the early 1980s.
- In 1981, 1G, or analog transmission of voice, first became available.
- In the early 1990s, this was followed by 2G, or digital transmission.
- In 2001, 3G wireless networks supporting multimedia applications first became available.
- Ten years later, in 2011, 4G appeared on the scene and the growth of the Internet of Things began in earnest.
The major domestic wireless carriers are now rolling out 5G wireless speeds in cities across the country. China's 5G rollout has begun, with other countries following suit. Device makers are preparing for this massive shift as a number of smartphone models are being released that are capable of taking advantage of 5G speeds where they will be available. While it will probably take years before 5G wireless speeds blanket our country the same way 4G speeds do now, there can be no doubt that the 5G wireless revolution is upon us, and investors would do well to begin thinking about its implications now.
Why is 5G important?
Of course, 5G represents much more than just faster movie download times and improved video streaming service when away from Wi-Fi coverage. There are actually two huge benefits 5G brings to consumers and businesses.
First, 5G wireless speeds will bring competition to internet service providers (ISPs) that provide high-speed broadband internet service to residential and commercial locations. Once an area has access to 5G speeds, these locations will be able to access the same level of service wirelessly. This is significant because, as of 2018, 85% of U.S. households had access to one or zero ISPs that could offer internet service with speeds of 100Mbps (megabits per second), according to a study released by the Federal Communications Commission (FCC). More than 10 million domestic households lacked access to a broadband provider that could offer speeds of 25 Mbps.
The second reason 5G is so important is that it will enable so many of the cutting-edge innovations on the threshold of great advancements. Everything from autonomous vehicles and smart cities to virtual reality and mobile payments will require high-speed connections to perform to their highest capabilities. This network of connected devices are often referred to as the IoT.
The risks of investing in 5G
As with any sector or trend, there are different risks to investing in general trends as well as with specific stocks in the sector. The good news is that universally accepted standards have not only been agreed upon by government agencies, but many are actively pushing for 5G infrastructure to be pushed out and implemented sooner rather than later. Close to home, the FCC has adopted its 5G FAST Plan, which calls for modernizing regulations, updating infrastructure code, and freeing up more spectrum to be used for 5G speeds. This means that it's highly unlikely that the rollout of 5G wireless networks will be disrupted by other technologies or materially hindered before it is launched. Too many entities, including large corporations and government regulatory agencies, are invested in a 5G future.
Specific companies, of course, face many risks, depending on their place in the 5G ecosystem and competitive pressures. For instance, there are a number of semiconductor companies that place prominently in the 5G ecosystem. While some of these companies' products seem more secure than others, there is absolutely no guarantee, for example, that a new Intel chip will not displace a competing chip from Skyworks Solutions.
Investors best suited for investing in 5G
Fortunately for investors, there are a variety of ways to approach investing in the general 5G trend, as the sector is so broad the companies benefiting from it that can fit nicely within the many different styles of investment portfolios, across the spectrum of value investors to income investors to growth investors:
- Risk-averse value investors seeking a high margin of safety will find several stocks that might appeal to their sensibilities, including beaten-up semiconductor companies and device makers that will both benefit from the IoT and currently sport a low P/E ratio.
- Income-seeking investors might be attracted to major telecom carriers offering high dividend yields.
- Growth investors will find plenty to like in high-growth semiconductor makers and in payments companies that will likely benefit from the proliferation of high-speed wireless networks and the IoT.
Let's take a closer look at some of these specific investment opportunities in the 5G space.
The easiest way to invest in 5G: ETFs
Exchange-traded funds (ETFs) are a basket of equities collected under one trading symbol and traded as a single entity. They have gained in popularity with investors in recent years because they offer instant diversification and give investors a simple way to gain immediate access to the broader market or specific investment themes.
Two ETFs that might be of interest to those aiming to profit from the coming 5G revolution are the Global X Internet of Things ETF (NASDAQ:SNSR) and the Pacer Benchmark Data and Infrastructure Real Estate ETF.
Global X Internet of Things ETF
The Global X Internet of Things ETF doesn't directly invest in companies bringing 5G to the world, but benefits from one of its direct beneficiaries, the IoT, which consists of billions of devices that connect to the internet and each other in order to automate, control, and monitor different applications and functions. As 5G becomes reality, the IoT is expected to explode in size, with estimates from Cisco Systems projecting that 500 billion devices will be connected to the internet by 2030.
Among other things, the IoT will encompass:
- Kitchen appliances
- Medical monitoring devices
- Security systems
- Smart home speakers
Among this fund's top 10 holdings are:
- Garmin, the maker of GPS navigation systems for a variety of wireless devices and applications.
- ADT, the security system and alarm company.
- Cypress Semiconductor, the maker of programmable systems-on-chips and microcontrollers that are used in many different wireless devices.
The Pacer Benchmark Data and Infrastructure ETF
The other fund that offers investors indirect exposure to 5G is the Pacer Benchmark Data and Infrastructure ETF. The purpose of this ETF is to "generate the majority of their revenue from real estate operations in the data and infrastructure sector." Accordingly, the majority of its holdings are real estate investment trusts, or REITs, which must generate at least 75% of gross income from real estate and pay out 90% of income as dividends. The vast majority of this ETF's holdings consist of two specific types of REITs: data center and cellphone tower.
Nearly all of the fund's top 10 positions, which make up 80% of the ETF's allocations, are made up of these types of investments. The uniqueness of this data and infrastructure ETF might make it especially appealing for investors looking for some extra diversification in their portfolios or for assets that might not be as correlated to the market's everyday moves.
Top stocks for investing in 5G
The 10 stocks listed alphabetically in the table below offer investors what I believe to be the best opportunities to both invest in this trend and beat the market over the next several years.
|Company||Bullish Elevator Pitch|
|Apple (NASDAQ:AAPL)||Leading maker of smartphones and wearables.|
|China Mobile (NYSE:CHL)||The largest telecommunications company in the world has about 900 million subscribers.|
|Cisco Systems (NASDAQ:CSCO)||Cisco offers solutions for connecting devices, analyzing data, and cybersecurity, all important services in a 5G world.|
|Corning (NYSE:GLW)||Corning is the world's leading manufacturer of optical fiber, the material that will act as 5G's backbone.|
|Intel (NASDAQ: INTC)||Intel will supply 5G modems to smartphone makers, including Apple.|
|Mastercard (NYSE:MA)||As wireless connectivity improves, mobile payments will increase, meaning more digital payments and less cash.|
|Skyworks Solutions (NASDAQ:SWKS)||Skyworks supplies analog chips that connect a wide range of mobile devices to wireless networks, including smartphones.|
|Verizon Communications (NYSE:VZ)||Major telecom carrier that seemingly has capability to roll out 5G coverage to its U.S. customers first.|
|Visa (NYSE:V)||5G will spur payments over wireless networks, decreasing the number of transactions facilitated with cash.|
|Xilinx (NASDAQ:XLNX)||Xilinx makes field-programmable gate arrays (FPGAs), ideal for early 5G deployments and tests because they are easily programmable.|
Let's take a closer look at some of these 5G wireless network investment ideas to see why they could offer shareholders market-beating returns in the years ahead.
Corning's glass is half full
As the maker of Gorilla Glass, the tough, scratch-resistant glass, Corning's products will be covering many of the devices that will make up the IoT. Indeed, Gorilla Glass has already been used on more than 5 billion devices made by 40 different manufacturers , including smartphones, wearables, automobiles, 3D sensing technology, and hologram reality devices.
Several catalysts seem to be positioning Gorilla Glass as the covering of choice for several IoT devices for years to come, starting with that most popular of mobile devices, the smartphone. Despite flat smartphone sales since 2016, Corning has managed to grow smartphone-related sales by 30% from then through 2018. This sales increase has come about as more smartphones are appearing on the market with glass backs. Market penetration of smartphones with glass backs doubled from 2017 to 2018, a trend that is only expected to continue.
Corning has also partnered with Otterbox, the top-selling smartphone case brand in the United States, to make screen protective covers for smartphones. Finally, Corning launched Gorilla Plastics, so that its innovative solutions could be used on even more devices. Since the introduction of Gorilla Plastics, several smartphone models have decided to use this feature.
Yet it's more than just smartphones where Gorilla Glass products are being found. In 2018, Corning released Gorilla Glass DX and DX+ specifically for wearables. The two new versions of Gorilla Glass "provide enhanced antireflective optics and scratch resistance" solutions for wearables. Corning also entered an agreement with WaveOptics, a leading designer of diffractive wave guides used in wearable augmented reality devices, to provide ultra-flat, high-index glass wafers.
Its leading glass expertise and technology will lead to high demand for Corning's products as 5G wireless speeds inevitably lead to more mobile devices. With this demand, the company projects that it will double its mobile consumer electronics sales over the next several years.
Corning also makes for an excellent 5G investment thanks to its leading position as the maker of optical fiber, the material that will be needed to carry the increased data expected to come with the advent of 5G. The company had produced more than 1 billion kilometers of optical fiber as of mid-2017, more than one-third of the total global production ever at the time.
CEO Wendell Weeks explains why 5G networks need optical fiber:
Wireless today is a relatively fiber-lean architecture. As you move to the wireless of the future, you end up adding a lot of glass. So, as they talk about wireless network densifying, right, what that really means is they're glassifying. And so, if you compare us to others who are already in the wireless market, we were pretty small, but now we're getting pretty big because of our innovations and the requirements for what it is our unique fiber expertise offers.
As networks "glassify," Corning is also benefiting from its many innovative solutions, all of which reduce costs and increase installation speed. Between supplying the material that will carry data to cell phone towers and covering many of the devices that consumers will use to access this data on, Corning seems to be well positioned to capitalize on 5G technology.
Aim for the Skyworks
Skyworks Solutions designs and makes analog semiconductor chips, a necessary component for devices that wish to connect to a wireless signal. As of early 2019, about three-fourths of Skyworks' revenue came from the components it places in smartphones; the remainder of sales came from the chips it places in the IoT, including smart home speakers, wearables, and security systems. This breakdown can produce two major headwinds for Skyworks's stock price.
First, many analysts believe society has essentially reached "peak smartphone," essentially meaning that the market growth for smartphones has matured. As noted above, Corning CEO Wendell Weeks, when discussing Gorilla Glass, also acknowledged that smartphone sales have been relatively flat since 2016. If this is the case, it means almost 75% of Skyworks' sales are in a market showing no growth.
In addition to the weak smartphone market, Skyworks' largest customer, by a wide margin, is Apple. While it is definitely not a bad thing to have the world's largest publicly traded company as your customer, it does mean that during weak iPhone cycles, Skyworks stock has been known to suffer in a case of guilt by association. The more long-term risk this presents to its investors is if Apple ever decides to drop Skyworks as a supplier. This seems unlikely, because Apple must plan out future models of its phone with major suppliers years in advance. Remember, though, there are no guarantees in investing.
With most of its sales coming from a flat market, it would be easy to wonder what 5G will do to spur Skyworks' sales. After all, it's not like consumers are waiting for 5G to come out before buying new phones. More phones being sold won't stimulate more growth; instead, more Skyworks components in each phone will expand the company's sales.
In early 2019, CEO Liam Griffin explained why 5G will be a major catalyst for Skyworks:
... [T]he big inflection is going to be the step up into 5G, and that will absolutely happen. And when that happens, it's necessary that new technologies are brought into that same physical form factor, that same handset, new technologies, new spectrum, new frequencies, more filtering, the ability to coexist with different devices brings in a tremendous amount of complexity and challenge and creates a unique opportunity for Skyworks and the top-tier players in our space to win.
As of early 2019, management stated that the value of the switches, bands, and filters the company places in 4G-capable smartphones was about $18. The company projected that the dollar value of the components it will put in 5G smartphones was approximately $25, a 40% increase.
Skyworks Solutions will also benefit from the expansion of the IoT that 5G wireless coverage will inevitably usher in. In the same conference call, Griffin noted, "We have extended our technology leadership in cellular and are capitalizing more broadly across the Internet of Things, leveraging a diverse set of connectivity protocols, including WiFi, Bluetooth, ZigBee and GPS. Looking ahead, 5G technology will fuel a broad array of markets and applications ranging from industrial IoT, automotive, machine-to-machine, healthcare, smart cities as well as artificial intelligence."
Verizon's 5G vision
While all major telecom carriers are beginning to prepare for 5G wireless speeds, Verizon seems to be positioned to be the first to come to market with real 5G coverage in several major markets across the U.S. In Verizon's Q1 2019 conference call, CEO Hans Vestberg stated:
2018 was a year of 5G firsts. We were first to complete an overlay of data transmission on the 5G global standards. We were first to complete the 5G data session on a smartphone. And in October, we proudly were the first in the world to commercially deploy 5G with our 5G Home product. As we finish the year, our confidence is high as we are heading to the 5G era and the beginning of what many sees as the fourth industrial revolution.
Verizon is planning an ambitious rollout of 5G technology. In its 2018 annual Investor Meeting, management stated that it would be entering 30 commercial markets with 5G wireless coverage in 2019. They also believe it will be able to offer high-speed internet via 5G wireless to 30 million homes within five to eight years, starting in 2019.
But Verizon does not just make a great investment in 5G because it will be first to the marketplace. As its smart city initiative shows, the company also seems to have a much more holistic vision than other telecom carriers of how 5G can benefit society.
In an interview with Motley Fool contributor Nicholas Rossolillo, Lani Ingram, Verizon's vice president of smart communities, talked about how Verizon was carefully integrating its technology with its smart city partners' existing infrastructure to ensure it gets it right. She said, "It requires working with infrastructure: climbing up poles, digging up asphalt, working with right of ways, understanding load balancing issues, partnering with the community, and understanding how all of that fits together." Ingram continued:
Because [smart city buildout] is so physical in nature, you're not going to change out solutions every couple of years as technology changes. So it's really important that we build for the future. The beauty of 5G is that with the latency and bandwidth capabilities of this particular kind of connectivity solution, it just opens the world up to being able to leverage that in many different industries, but definitely in the smart cities area."
Verizon's smart city solutions include intelligent lighting, intelligent traffic management, intersection safety management, interactive digital kiosks, and parking optimization systems.
The 5G future
5G technology is a matter of when, not if. Telecom carriers are already laying the infrastructure necessary to bring this faster service to their customers. Device makers are already designing the next generation of mobile devices to be 5G-capable. With this in mind, it would do investors well to imagine what a future with this type of revolutionary wireless speeds will look like. I believe the companies listed above are some of the best bets for investors to profit from this coming technology.