How to invest in the best 5G stocks
The fifth generation of mobile communication technology will revolutionise industries around the world. We have a look at the top 5G stocks to watch.
5G will unleash a new industrial revolution
The rollout of 5G has started and, at its peak, it is expected to be up to 100 times faster than current networks by offering speeds of 10 gigabytes per second compared to the 1GB speeds offered by today’s 4G.
But 5G is about much more than downloading films quicker or delivering faster connectivity on your smartphone. It marks a huge technological jump and is expected to unleash what is being dubbed ‘the fourth industrial revolution’ by unlocking the potential of a wave of new technologies spanning everything from artificial intelligence and machine learning to automation and autonomous vehicles.
Apart from better speeds, the other major benefit of 5G is lower latency, which is how long it takes between sending an instruction, like opening a smartphone app, and for that instruction to be completed.
Existing 4G networks have cut down latency to as low as 50 milliseconds but 5G has the potential to reduce this to below just one millisecond. Fractions of a second may seem insignificant, but quicker download speeds are nothing without better latency and the anticipated improvement is so drastic that 5G will be capable of handling critical tasks that current networks simply cannot handle. Driverless cars are a prime example: 49 milliseconds is a huge amount of time for a self-driving vehicle responding to incidents and other road users.
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Top 5G stocks
- Taiwan Semiconductor
- Qorvo and Skyworks Solutions
- BT Group
- Deutsche Telekom
5G mobile phone and device makers
The faster connectivity that 5G brings will ultimately be experienced through the devices that we use, especially smartphones, tablets, wearable tech and other smart technology.
People will have to buy 5G-enabled devices in order to reap the benefits of this new technology and it will allow everyday devices to become smarter, faster and capable of offering a wider array of services.
This should cause a revival in hardware sales in the coming years as the price of 5G falls and more consumers upgrade their devices.
The mass uptake of 5G can’t come soon enough for smartphone makers. People have been waiting longer to upgrade their smartphones and tablets because there has been little incentive to spend significant sums on new hardware that offers limited improvements from their existing devices.
For example, the main feature for Apple and Samsung’s new smartphones have been upgrades made to the cameras. The big smartphone manufacturers tend to release new models in the fall and this year is all about 5G and whether or not they will make the big push this year or next, and how this will impact sales over the short-term.
Apple did not rush to market with a new phone when 4G was initially launched and expectations are the same this time around. Reports suggest a new 5G-enabled iPhone will be released in September 2020, but that faster versions of its 5G phones won’t come out until early 2021. Apple believes it is still too early for consumers to buy in to the benefits of 5G and wants to be fashionably late to the party with a superior 5G phone rather than the first, partly because it is under pressure to justify ever more expensive iPhones as they are released.
Apple’s main rival, Samsung, has already bitten the bullet and unveiled its latest models – the S20, S20 Plus, S20 Ultra and its newest version of its Note – are all 5G enabled. This suggests Samsung, which sells more smartphones worldwide than anyone else, could capture the early adopters of 5G technology and take an early lead.
Another stock to consider is Xiaomi. It is the largest smartphone seller in China and has taken a serious slice of the pie in other markets, having been the market leader in India for the past two years. The company aims to sell its smartphones and slew of other smart devices (it has built the ‘world’s largest consumer Internet-of-Things (IoT) platform’, based on the number of connected devices it offers) as close to the cost making it, meaning they undercut rivals in terms of price. This is why it has performed particularly well in emerging markets. Xiaomi has already released 5g-enabled devices in China and is expected to release a slew of new phones over the coming year.
A safer bet for investors could lie in those providing the crucial components, such as chips, that power all the devices that will bring 5G to life for both individuals and businesses. Adoption of 5G will create a new market for a swathe of smart tech to be released, which will all need chips too.
Qualcomm has taken an early lead in 5G as it is already supplying numerous 5G-enabled modems, modules and processors that are actively being used in the market.
For example, Qualcomm’s Snapdragon platform underpins Xiaomi’s 5G phones and is also set to be used by a string of big brands including Fujitsu, Nokia, LG, Sharp and Sony. Its equipment is used in much more than smartphones and forms an important part of everything from gaming PCs to autonomous vehicles, making it a key supplier as the world embraces 5G.
On 5G, it said it expects its equipment to be used ‘by industry segments outside traditional cellular industries, such as automotive, computing, IoT and networking’.
Taiwan Semiconductor says it is the largest company that solely produces semiconductors for device-makers all around the world and says ‘about 85% of worldwide semiconductor start-up product prototypes’ spawns from its factories.
The company has said recent growth has been driven by demand for high-end smartphones and the initial roll-out of 5G, and said it expects the business to continue to be underpinned ‘by the continued ramp of 5G smartphones’.
Apple is the company’s largest customer that is thought to account for around one-fifth of sales, but it has hundreds of clients on its books.
Qorvo and Skyworks Solutions
Qorvo and Skyworks Solutions are each other’s biggest competitors. They both supply Radio Frequency (RF) chips and other equipment, although they don’t provide modems and processors like Qualcomm, meaning they represent a different way of gaining exposure to the market. Both companies generate over 70% of their revenue from the mobile market, but this should diversify as 5G is rolled-out.
Qorvo is already supplying chips for phones and devices to bridge the gap between 4G and 5G, but it has already started to roll -out higher-band products for faster, ‘second-generation 5G smartphones’. It said 5G contract wins have been accelerating since December. Qorvo is a major supplier to Apple and is therefore expected to benefit when the company begins to roll out its 5G phones.
Skyworks says its Sky5 platform – the name of its 5G suite of products – is being used by an expanding customer base, ‘from smartphones to wireless infrastructure, industrial robotics, autonomous vehicles, smart homes and virtual assistants − our solutions provide the critical connection, ensuring peak performance for 5G and IoT usage cases’.
Oppo, Vivo and Xiaomi are all using Skyworks to power their 5G smartphones and the company is already a major supplier to Apple, which is expected to continue when new iPhones are released.
Intel sold-off its smartphone modem business to Apple last year. Although 5G remains a ‘strategic priority’ for Intel, chief executive Bob Swan said ‘in the smartphone modem business it has become apparent that there is no clear path to profitability and positive returns’.
Instead, it is focusing on providing them for computers, IoT devices and other ‘data-centric’ devices. It is also expecting 5G to be beneficial for its cloud-computing division that specialises in melding together different service providers.
The telecoms industry is at the heart of 5G by providing the wireless networks that supply 5G to people and businesses. It is having to invest serious sums to build -out extra infrastructure, and on Spectrum auctions in order to secure the radio frequency capacity that forms the backbone of the services it provides to customers.
Telecoms companies are keen to deploy 5G networks so they can boast superior speeds and lower latency to differentiate themselves from rivals. It also feeds into the industry-wide strategy of convergence, whereby you increase the stickiness of a customer by selling them multiple services (which in this case is built around phone, broadband and TV packages).
If customers flock to one telecoms provider because of its 5G network, they are more likely to purchase other services from that company too.
Demonstrating the ability to provide a reliable and superior 5G network will be crucial in securing customers over the initial years, especially when it comes to mission-critical and high-end applications.
T-Mobile/Sprint (followed by Verizon and AT&T)
It has propelled new the company, which is sticking with the T-Mobile brand, into a better position to rival the two leaders in the US, Verizon and AT&T. The company is investing a staggering $40 billion in the next three years alone to rapidly build out a nationwide 5G network by 2024, which it plans to twin with a bigger entry into broadband too.
T-Mobile says the combined group will have ‘double the total capacity and triple the total 5G capacity’ than it would have as a standalone business. The company admits the merger ‘does not change the massive market position of AT&T and Verizon’ but says it ‘gives them a fairly-sized competitor to force change that will benefit consumers’.
That suggests that T-Mobile has a lot of work to do, but that it has the most upside to gain at the detriment of its two biggest rivals.
In the UK, BT Group has a distinct edge over any other telecoms company because it is responsible for operating Openreach, the nationwide broadband network that other carriers must piggy-back off.
Expanding its full-fibre broadband and 5G network at the heart of its strategy, so BT aims to offer the ‘best converged network’ possible, boosted by its ownership of EE. It says the performance of its 5G network is ‘ahead of the competition’. BT is the natural leader in the UK and in a strong position to capitalise, even if the huge investment will weigh on its results in the short term.
Deutsche Telekom (followed by Vodafone)
Deutsche Telekom is the largest telecoms company in Europe. Germany is its core market, but it makes two-thirds of its revenue elsewhere, led by the UK, wider Europe and the US (with a controlling stake in T-Mobile). In Germany, the company is turning to the model deployed by BT, whereby it operates a central network that other companies, like Telefonica, can use. It intends to provide 5G coverage to the 20 largest cities in Germany by the end of 2020 and cover 99% of the country by 2025. The country’s international leadership, with strong footholds in the US and Europe, gives the company diversity and the resources it needs to deliver its 5G plans.
The other major contender in Europe is Vodafone, which has launched 5G in seven European countries and has the ‘ambition to build Europe’s largest 5G network’.
Vodafone has said its 5G strategy is based around ‘co-leadership’, whereby it will aim to match the rollout speed to the leader in each country. It aims to have 50 European cities hooked -up by the end of 2020.
5G infrastructure providers
5G requires a lot more infrastructure than 4G because it needs to run on higher radio frequency bands to deliver faster speeds. The problem is that transmission and coverage both suffer as the frequency increases: the fastest 5G networks will run on frequencies that can’t even be transmitted through walls, or people and are highly vulnerable to interference.
This means more sites (often called small cells) are needed to transmit signals in buildings and on the streets, which require much more infrastructure to be built.
Whereas lower frequencies can cover a wider area, 5G will need more connections to make the network work properly, and most countries are trying to retrofit this new infrastructure on existing equipment like lampposts, antennae or electricity boxes.
According to Deloitte, this requires carriers to add 'three to ten times the number of existing sites to their networks'. Hence, 5G will only initially be deployed in densely populated areas with the highest speed and capacity reserved for dedicated networks.
Therefore, companies that produce equipment like base stations and antenna rays (which help to amplify coverage from base stations) will be needed to supply the extra infrastructure required to roll out 5G.
This arena is dominated by a handful of companies, including European outfits Ericsson and Nokia, and Chinese firms like Huawei and ZTE.
Notably, there is no US company on that list, and the country has been trying to block Chinese firms from securing significant roles in the international roll-out of 5G – warning the likes of the UK that its sovereignty could be at risk if it gives them access.
The UK and other European countries have decided to give the likes of Huawei a ‘limited role’ outside the core network, which should translate to more work for the European contenders.
The US is so concerned about a lack of US companies working in this area that the US attorney general William Barr recently called for the country to buy controlling stakes in firms like Ericsson or Nokia to provide the country with a firm that can rival those from China.
Huawei is currently the leading infrastructure supplier when it comes to 5G, having said in February that it has won 91 commercial deals so far. Yet there are questions about whether it can maintain its leadership now that some governments are restricting the work they can do. For example, BT Group and Vodafone have both said they will have to spend hundreds of millions of pounds to shift work away from Chinese firms and to viable alternatives.
Ericsson is regarded as Huawei’s second -closest rival and had 78 commercial 5G deals signed at the end of 2019 with 24 live networks in operation. It has boasted of significant strength on the global stage, and says it was the first to deploy functional 5G networks across four continents. It also says it has the ‘largest number of supported devices’ for 5G networks and that its equipment works with all chips. It even sees a huge opportunity in China as 5G networks begin to be rolled -out this year, even if it faces stiff competition from firms like Huawei and ZTE. It admits the cost of investment will rise in 2020, but says this will lead to improved productivity, and therefore better margins, from next year onwards.
Meanwhile, Nokia is not far behind with 66 5G deals and 19 live networks up and running at the end of 2019. It has a strong track record with its end-to-end 5G solutions, claiming it has won 100% of all contracts it had bid for outside of China, and around 90% including China. Nokia claims to hold a global market share of 22% and says that should rise to 27% by the end of 2020. The company has become a major supplier for firms around the world, but it has struggled to generate cash because of the hefty investments needed – having ‘paused’ the dividend last October so it can funnel more cash into 5G. However, it has made cashflow a priority, and also expects to reap the rewards of heavy investment over the coming years.
Investing in 5G: looking at the bigger picture
The companies that are responsible for bringing 5G to life are vying for an early lead, but this means many are having to invest huge sums and sacrifice returns over the short-to-medium term. We have already seen many suffer a decline in earnings and some payouts suspended, which is a reminder that it is about doing it sustainably and profitably rather than securing unprofitable market share.
The returns reaped from 4G have not been as good as the industry expected and businesses will be keen not to make the same mistakes. Still, this is why it is sensible for investors to gain exposure now as most companies won’t start to see a return on their investment for a few years, if not longer.
Still, investors are not short on options when it comes to investing in 5G and it is wise to look at the bigger picture beyond those building and supplying 5G networks. There are a huge number of industries that will benefit from 5G, everything from internet and data stocks, cloud-computing firms and gaming companies to carmakers, AI and automation technology firms, and smart and IoT device makers.
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