It might surprise you to know that, on average, Americans spend 5.4 hours every day on their cell phones.
We use them as alarm clocks to wake up in the morning, take pictures and videos, send emails, text friends, play games, and even make phone calls (from time to time).
They have become an essential tool in our lives, and they are only going to become an even more significant part as the mobile industry is about to be upended by the “5G Revolution.” That’s why we’re recommending stocks like Qualcomm Inc. (QCOM), Skyworks Solutions, Inc. (SWKS), Telefon AB L.M. Ericsson (ERIC), Nokia Corp. (NOK), and Apple Inc. (AAPL). But first, let’s dive into the 5G industry.
What is 5G?
5G is an abbreviation for the fifth generation of cellular networks. Wireless technology has been evolving for quite some time. If you’re old enough to remember, the original cell phones in the 1980s were as big as your head. These originals ran on first-generation technology, or 1G. Using cell phones back then was a luxury that not everyone could afford, as many phones cost upwards of $3,000.
In the following decade, the technology advanced to 2G. Cell phones got more affordable, and this was when it became common for many businessmen and women to have cell phones that could fit in their pockets. The biggest update to the technology was the ability to send texts.
The third generation, or 3G, was adopted in the early 2000s. Cell phones got even cheaper, and as a result, a large percentage of the population was able to own one. These cell phones had more features than their predecessors, such as larger color screens, data transfer, and, most importantly, access to the internet. Before this, you weren’t able to use your phone to surf the web or watch videos.
This was also when smartphones really took off. You could access the internet, send emails quickly, and your phone’s screen started to look more like a computer.
The current generation, 4G, has been the standard for the past decade. 4G was superior to 3G in that it increased the speed to access the internet, videos streamed faster, and data transferred more quickly. However, there are more devices than ever before and large amounts of wireless data is being transferred nowadays, which is a challenge for the 4G network. It’s not just cell phones that people rely on anymore; it’s tablets, e-readers, smart devices (like Amazon’s Echo and Google’s Home products), and even kitchen appliances. This means that the amount of bandwidth required is continuously increasing. That’s why there is a need for 5G.
5G technology was initially released in 2018 but is not widely available yet. The reason for this is that signals in 5G are transmitted using shorter frequency waves. This enables more data to be transmitted and more devices to be connected, resulting in faster speeds than 4G.
But these signals cannot travel extremely far. They also can’t travel through mountains or buildings and are even affected by rain and clouds. Instead of using large towers sporadically placed as all previous wireless technology did, there need to be many small base stations created. This is why it’s called a rollout. I recently purchased a 5G enabled phone, and in the three months I’ve had it, I’ve only seen the 5G signal a couple of times. So, the rollout is going to take some time.
Why is 5G Important?
5G is expected to be at least ten times as fast as 4G. Think about it. The average download speed of 4G is 14MBPs. The average download speed of my cable internet is around 92. If 5G is ten times faster than 4G, it will be much faster than cable internet. That means the internet speed of a phone in your pocket will even be faster than your computer’s internet. You will be able to download two-hour movies in seconds. But the benefits 5G offers aren’t just for cell phones.
5G will enable artificial intelligence applications to process data from connected devices in real-time. It will allow autonomous vehicles to communicate with each other. Surgeons will be able to perform procedures remotely through a robot. This doesn’t just affect how fast our phones will be; they will power the Internet of Things (IoT) and change our way of life. That’s why it’s called the “5G Revolution.”
Investing in 5G
Even though 5G is not expected to be available worldwide until 2025, investors are positioning themselves to take advantage of this new technology and the profits it will create for select companies. This is evident by the impressive 42.9% gain for the Defiance 5G Next Gen Connectivity ETF (FIVG) in the past year.
There are five main industries within the 5G ecosystem:
- Equipment and Infrastructure. This is basically the hardware needed to keep the data going. As mentioned earlier, more base stations will be required, and they will need to be connected to the internet. There will also be a need for antennas, switches, routers, data centers, and high-end cables. These are all part of the infrastructure and equipment industry.
- Semiconductor Manufacturers. All networks require chips and semiconductors. These chips are needed for base stations, 5G smartphones, and other types of devices. The chips calculate data and execute commands.
- Mobile Network Providers. These are the companies that provide service for our phones, such as Verizon (VZ) and T-Mobile (TMUS).
- Real Estate. This is the backbone of 5G. These are companies that build and own cell phone towers and base stations. They then lease the base stations to the network operators. They also run fiber-optic networks to connect 5G sites to the internet.
- Mobile Handset Manufacturers. These are companies that make phones, such as Apple (AAPL) and Nokia (NOK).
While the FIVG ETF provides broad exposure to the industry, investors should consider buying individual stocks that could significantly increase upside. The best way to evaluate these stocks is through our POWR Ratings service. Below is a list of the top 5G stocks that are currently rated Strong Buy or Buy in our POWR Ratings service.
5G stocks to Own in 2021
Qualcomm Inc. (QCOM)
QCOM develops and licenses wireless technology and also designs chips for smartphones. The company is a big player in producing chips for 5G phones, which is not surprising as the company provided chips for the 3G and 4G networks. Its chips enable 5G communication in smartphones, modems, and IoT devices that link to cars.
The company also has a patent business in which it collects licensing fees from other companies to use its wireless technology patents. QCOM has a chipset supply agreement with AAPL, where AAPL will likely license the chips directly from QCOM instead of relying on Original Equipment Manufacturers. QCOM also has a new patent license agreement with Huawei.
QCOM is poised to benefit from strong momentum in the handset space, driven by the ongoing shift to 5G. The company has an overall grade of B, indicating a Buy rating in our POWR Ratings system. The company also has a Growth Grade of B, which isn’t surprising due to its past and forecasted earnings growth. Over the past year, QCOM’s earnings were up 106.2% and are expected to rise a whopping 89.8% year over year in the current quarter. It is also expected to rise another 94.2% in the following quarter.
The stock also has a Value Grade of B, which means it’s undervalued at its current price. This makes sense as it currently sports a forward P/E of 17.04. QCOM also has a Quality Grade of B, indicating a strong balance sheet. The company currently has a current ratio of 2.0, which means it has more than enough liquidity to handle short-term debts.
Growth, Value, and Quality are not the only grades we rate stocks on. For our complete ratings for QCOM, including Momentum, Stability, and Sentiment, and Industry Rank, click here.
Skyworks Solutions, Inc. (SWKS)
SWKS is another chipmaker as it produces semiconductors for wireless handsets, and other devices are used to enable wireless connectivity. Its focus is on high-performance analog semiconductors, which are crucial to many 5G technologies. The company has already benefited from increased demand for mobile internet applications as more people than ever have smartphones, notebooks, and tablets.
But the deployment of 5G is where the company will shine. In its fourth-quarter conference call, management noted that 5G-enabled smartphones comprise 12% of all the world’s smartphones. It counts AAPL and Samsung as its customers, so the growing sales of 5G devices bode well. The company’s Sky5 product portfolio is also facilitating several 5G smartphone launches.
SWKS should be able to expand its addressable market as mobile customers transition to 5G. The company has an overall grade of B or a Buy rating in our POWR Ratings system. The company also has a Quality Grade of B, indicating it has a strong balance sheet. SWKS had $1.4 billion in cash at the end of the last quarter, compared with only $148 million in long-term debt.
The company is also quite profitable, with a net profit margin of 27.7%. If you want to find out its Growth, Value, Momentum, Stability, and Sentiment grades, make sure you click here. SWKS is also ranked #22 in the Semiconductor & Wireless Chip industry, and that industry has a grade of B. For more top stocks in the Semiconductor & Wireless Chip industry, click here.
Telefon AB L.M. Ericsson (ERIC)
I just covered two solid semiconductor stocks that should profit handsomely from 5G. Now it’s time for a network equipment and software supplier, and ERIC is my first pick. The company sells hardware, software, and services primarily to communication service providers while licensing patents to handset manufacturers. This provides it with two revenue sources, product sales and royalties.
ERIC has 122 commercial 5G agreements and provides 5G equipment to networks in 40 countries. This includes China’s massive market and makes the company a leader in 5G base station equipment, including antennas, radios, and software. ERIC is also the world’s largest supplier of LTE technology. It has a significant market share and has established many LTE networks around the world.
The stock is rated a Buy, with a grade of B in our POWR Ratings system. It also has a Stability Grade of B, which means the stock has shown consistency in reporting sales and earnings. Its 5G business is driving considerable growth that its earnings are expected to rise 40% year over year this quarter.
ERIC also has a Value Grade of A. For a company in a high-growth industry, its stock can still be bought on the cheap. That’s because it has a trailing P/E of 19.86 and a forward P/E of 18.45. The stock also has a Price to Sales ratio of 1.6, well below its industry average. Our POWR Ratings provide grades in eight different components.
If you would like to get ERIC’s grades in the Growth, Momentum, Sentiment, and Quality components, click here. ERIC is also in a B-rated industry, Telecom – Foreign, and is ranked #5 in that industry. For more top stocks in the Telecom – Foreign industry, click here.
Nokia Corp. (NOK)
Once known for its mobile, NOK is a leading vendor in the telecommunications equipment industry. The company’s network business derives revenue from selling wireless and fixed-line hardware, software, and services. In particular, the company has focused on 5G network build outs. Its technology segment licenses its patent portfolio to handset manufacturers and makes royalties from Nokia-branded cellphones.
In terms of 5G, the company has 165 commercial 5G deals with communications service providers and more than 220 5G engagements with operators. NOK also has 65 live 5G networks, including both public and private. For instance, its 5G technology has been contracted by the top U.S. operators, including VZ, TMUS, and AT&T (T). It has also had success in the China 5G market.
NOK has an overall grade of B, translating into a Buy rating in our POWR Ratings system. The company has a Growth Grade of A, which is notable as EBITDA has grown an average of 22.7% over the past three years. NOK also has a Value Grade of B, which isn’t surprising as its forward ratio of 16.39 is quite low, plus its price-to-sales ratio of 1.1 is well below the industry average.
The company is also well-liked by the “Smart Crowd” with a Sentiment Grade of A. For the rest of NOK’s grades (Momentum, Stability, and Quality), click here. NOK is currently ranked #8 in the B-rated Technology – Communication/Networking industry. For other top stocks in this industry, click here.
Apple Inc. (AAPL)
My last pick is a mobile provider, and what better mobile stock to buy than AAPL. It is one of the largest companies in the world and the biggest name in consumer technology. Most importantly, though, its latest iPhone was a 5G model, and it’s been selling like hotcakes. The phone has been out for months, and customers are still lining up. The phone has also made inroads into China, as the iPhone 12 has sold better than expected in the country, bringing its market share up to 20%.
iPhone sales increased 65.5% from the year-ago quarter to $47.94 billion. Total product sales soared 61.6% year over year to $72.68 billion. AAPL’s services segment is also performing exceptionally well. Services revenue grew 26.6% year over year to $16.9 billion. This is great news for the company’s fastest-growing and highest-margin segment.
The company has also entered other markets such as Pay with Apple Pay and streaming with Apple TV. It recently announced that it is working on an Apple Car. The stock is an overall grade of B or a Buy in our POWR Ratings system. It has a Sentiment Grade of A, which means analysts love the stock. According to the StockNews.com Price Target feature, 33 out of 41 analysts hold a Strong Buy or Buy rating on the stock.
AAPL also has a Quality Grade of B, indicating a healthy balance sheet. It had a whopping $70 billion in cash as of the end of the last quarter. The company has exceptionally high profitability numbers with a net margin of 23.5% and a sky-high return on equity of 110.3%.
We also provide Growth, Value, Momentum, and Stability grades for AAPL. The company is in the Technology – Hardware industry, which is B rated. For more top stocks in that industry, click here.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...
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