For many investors, the mention of 5G might bring Huawei, and it’s being banned from the US, to mind. There is actually far more to 5G than Huawei – and a large number of other publicly listed stocks stand to benefit from the rollout of this new technology that is currently taking place.
In this article we explain 5G technology and why it is so important for the tech landscape and for investors. We also list the most important 5G stocks and the industries they belong to.
- What is 5G?
- Why 5G is important for investors
- Important 5G industries and companies
- 5G exchange traded funds (ETFs)
- Risks of investing in 5G
What is 5G?
The term “5G” is used to refer to 5th generation mobile networks. This is the 5th generation of wireless standards being implemented around the world, and also represent the biggest change in performance from the previous standard – in this from case 4G. The primary difference between 5G and previous standards is that signals are transmitted using shorter frequency waves. This enables more data to be transmitted and more devices to be simultaneously connected. It also allows data to be transmitted at much higher speeds than previous wireless standards allow.
5G networks do also introduce some new challenges – in particular, the fact that signals cannot travel far, and cannot travel through barriers like mountains or buildings. In fact, even rain and clouds can affect the signal. The solution is to build lots of small base stations rather than fewer large towers.
Why 5G is important for investors
Wireless networks that operate on 5G standards promise to improve network speeds while reducing latency by a factor of 10. In addition, network density, the number of simultaneous connections, will also increase by a factor of 10. The result of the increased efficiency of networks will allow other new technologies to advance in a considerable way. The following are just a few examples of what 5G may enable:
- Artificial intelligence applications will be able to process data from connected devices in real time. This will have implications across many industries.
- Autonomous vehicles will be able to communicate with one another instantly to avoid collisions and optimize traffic flow.
- Medical professionals may be able to perform procedures remotely from other parts of the world using video and robot technology.
- Online gaming applications will be able to transmit even larger amounts of data instantly, leading to more immersive experiences.
- 5G wireless networks will have greater capacity which will lead to lower connection costs. This will in turn result in more devices being connected to the internet. The IoT (internet of things) will then be able to achieve critical mass.
- Virtual reality and augmented reality applications will be able to handle exceptionally large amounts of data in real time.
Growth in the above industries and applications will in turn result in growing demand for 5G network capacity. For this reason, growth stocks in the 5G arena may be able to maintain earnings momentum for some time.
Important 5G industries and companies
5G stocks can be categorized across five industries: equipment and infrastructure companies, semiconductor manufacturers, mobile network operators, real estate, and mobile handset manufacturers. We are describing the first four categories but leaving out the handset manufacturers for two reasons.
Firstly, while companies like Apple and Samsung will no doubt benefit from 5G adoption, both companies have a wide range of other revenue sources besides the devices that will be 5G enabled. Furthermore, the Chinese handset manufacturers are unlisted as mentioned in our coverage of Chinese tech stocks. What follows is a description of the four remaining industries connected to 5G, along with the top stocks in each.
- Equipment and infrastructure
- Semiconductor manufacturers
- Mobile network providers
- Real estate investment trusts (5G REITs)
Equipment and infrastructure
Before mobile network operators can offer 5G they will need to upgrade their infrastructure. More base stations will be required, and those base stations will need to be connected to the internet. Routers, switches, and new antennae will also be required. The following are the major suppliers of 5G infrastructure and equipment:
- Corning Incorporated (GLW) / Market Cap: $23.8 Bln – Corning is a key 5G infrastructure company. Besides a range of other products, Corning is a leading supplier of fiber optic cable which is used to connect 5G base stations to the internet. The company is also a supplier of small antenna used for 5G base stations. Corning has also announced a collaboration with Qualcomm to supply easy to install “5G ready” indoor networks. These will allow private wireless networks to be set up in office buildings, campuses, hospitals, and hotels.
- Ciena Corporation (CIEN) / Market Cap: $9.2 Bln – Network operators must build infrastructure to support very high network speeds. Advanced software is required to support and optimize large numbers of connections. Ciena manufactures and distributes fiber optic equipment and the software used to manage networks. Ciena is one of the smaller 5G companies – and therefore stands to benefit in a more meaningful way than other 5G stocks.
- Ericsson (ERIC) / Market Cap: $39 Bln – Swedish telecoms giant Ericsson has been a preferred supplier of wireless network infrastructure around the world for a long time. This appears to be continuing with the 5G standard and Ericsson is already managing 50 5G networks with a long pipeline of new projects in the works.
- Nokia Corporation (NOK) / Market Cap: $25 Bln – Nokia, based in Finland, provides similar services to Ericsson, namely building and managing networks for mobile operators. Nokia was initially involved in more 5G networks, but lost its lead when China Mobile chose Ericsson to build its 5G network. Nevertheless, Nokia is still a big player in the 5G industry, and there are is still a lot of infrastructure to be built. The company also stands to earn royalties from its 5G patents for many years to come.
- Cisco Systems (CSCO) / Market Cap: $198 Bln – Cisco, as one of the world’s largest suppliers of network equipment, tends to benefit whenever networks and data centers are upgraded. The company does supply equipment directly related to 5G, but also stands to benefit as network traffic increases. Cisco is also well placed to benefit from the growth of cloud computing and the IoT that will accompany 5G adoption. It’s also worth pointing out that Cisco has some of the widest profit margins in the industry.
- Macom Technology Solutions (MTSI) / Market Cap: $2.9 Bln – A key component of 5G networks is “massive multiple-input, multiple-output” antennas (also known as massive MIMO) which improves spectrum efficiency. Macom is a leading manufacturer of these antennas and other RF devices. This is another relatively small company with the potential to increase substantially in value.
Any type of network includes numerous types of chips and semiconductors, and of course this applies to 5G networks too. Special chips are needed for base stations as well as for 5G smartphones and other devices. There is some speculation as to exactly which semiconductor companies will benefit the most – so this industry may see some price volatility in the coming years.
- Qualcomm Inc (QCOM) / Market Cap: $127 Bln – Qualcomm is widely regarded as the most important semiconductor company in the 5G space. It is the leading manufacturer of the chips that power smartphones, and that will probably be the case for 5G chips for mobile handsets too. 5G adoption is expected to result in more connected devices, which implies growing sales of the chips that power these devices. Qualcomm has been involved in a legal battle with Apple over intellectual property, but this has now been resolved. In fact, the two companies have signed an agreement that will see Qualcomm supplying chips to Apple for at least the next five years.
- Skyworks Solutions (SWKS) / Market Cap: $24 Bln – Skyworks is an important supplier of chips to Apple and will benefit from 5G enabled iPhone sales. But the chipmaker also supplies a wide range of chips for other devices, most notably those used in autonomous vehicles. Analysts believe the 5G revolution will allow Skyworks to break into new markets. This is definitely one of the 5G stocks to keep an eye on.
- Xilinx Inc (XLNX) / Market Cap: $27 Bln – Xilinx is the leading designer of field programmable gate arrays (FPGAs). These are chips that can be reprogrammed after they are manufactured. They are also an essential component of efficient 5G networks. Xilinx outsources all manufacturing and is therefore an asset light company. Xilinx was caught up in the fallout when Huawei was banned from operating in the US, resulting in a large slump in the share price. However, the company appears to be recovering and recently won a large design contract from Samsung.
- Nvidia Corporation (NVDA) / Market Cap: $276 Bln – Nvidia’s chips are well known for applications that require lightning fast processing speeds. One of these applications is the intelligent routing of traffic over 5G networks. Nvidia may also see increased demand if 5G adoption leads to an increase in gaming and the use of real time artificial intelligence applications.
Mobile network providers
Theoretically, all mobile networks stand to benefit from the introduction of 5G networks. Ultimately more devices will be connected, and more data will be transmitted on each network. However, network operators will first need to invest heavily before they will see earnings growth. The following networks are 5G stocks that analysts believe may benefit earlier than others.
- Verizon Communications Inc (VZ) / Market Cap: $240 Bln – Verizon is the largest network in the US and has the most coverage. It is also the leader in the more profitable business market. Verizon is one of the few 5G stocks that pays a decent dividend. As a larger company it is generally regarded as more defensive too.
- T-Mobile (TMUS) / Market Cap: $130 Bln – T-Mobile recently merged with Sprint and is now viewed as the underdog US network operator. However, the company was the first to begin rolling out its 5G network. This may give it a competitive advantage and allow it to win customers away from competitors.
- China Mobile (CHL) / Market Cap: $147 Bln – China Mobile is one of the more important 5G Stocks based outside of the US – though it is listed on the NYSE. With over 900 million subscribers, the company is China’s largest operator. China Mobile has already invested heavily in 5G and built over 50,000 new base stations. This should give the company a competitive advantage when demand for 5G access begins to grow. The stock price has been under pressure for several reasons – the result of which is that the valuation is now far lower than most other 5G stocks.
Real estate investment trusts (5G REITs)
Not all 5G stocks are those belonging to tech companies. Mobile network base stations require real estate too. And, since 5G networks require more base stations, there are more opportunities for the companies that lease those base stations to network operators. REITs that own and lease base stations pay dividends and are useful for investors building an income stock portfolio.
- American Tower (AMT) / Market Cap: $115 Bln – American Tower is the largest US cell tower REIT, though many of its towers are actually in India and Brazil. Still, it owns over 40,000 – and growing – towers in the US. Despite the stock price more than doubling in the last 3 years, AMT still yields 1.62%.
- SBA Communications (SBAC) / Market Cap: $34 Bln – SBA Communications is a smaller REIT and only yields around 0.6%. However, the company has managed to increase revenue by 54% each year for the last 5 years, resulting in the stock price increasing 200%.
- Crown Castle (CCI) / Market Cap: $70 Bln – Crown Castle owns and leases small cell towers as well as over 70,000 miles of fiber optic cable. This company has grown at a more modest pace but has also managed to maintain a more generous dividend yield of 2.92%.
5G Stocks – ETFs
- Defiance Next Gen Connectivity ETF (FIVG) – The Defiance 5G ETF tracks the BlueStar 5G Communications Index which includes 78 5G stocks. The index uses a modified market cap screening system which results in the largest holdings accounting for around 5% of the fund. The expense ratio is 0.3%.
- First Trust IndXX NextG ETF (NXTG) – This ETF tracks the Indxx 5G & NextG Thematic Index. It holds around 100 stocks with investments spread more broadly across all stocks. The expense ratio at 0.7% is relatively expensive.
- VanEck Vectors Semiconductor ETF (SMH) – The VanEck ETF does not invest specifically in 5G stocks, but in the entire semiconductor industry. This well-known ETF gives investors exposure to mobile networks, cloud computing, AI, IoT, and automation. The expense ratio is reasonable at 0.35%.
Risks of investing in 5G
For investors, 5G holds a lot of promise. However, like any investment, 5G stocks do come with some risks. In fact, growth stocks are often riskier than most, and that applies to 5G companies too. The biggest risk is probably that there is too much good news priced into a stock. If this is the case, any disappointing news will result in a large fall in the stock price. A good investment typically needs to be purchased at a reasonable valuation.
There is also the risk that a bubble develops across the entire industry. Both risks can be reduced by spreading investments over time, rather than trying to time the market. There are also risks to individual companies due to the competitive nature of the entire industry. These risks can only be reduced by spreading investments across at least 5 or 6 stocks.
Risks can also be reduced by limiting the percentage of your entire portfolio that is exposed to 5G and other technology stocks. By diversifying with asset allocation across asset classes, the effect of a market crash will be reduced. This would also reduce the effect of a potential bubble in 5G stocks bursting.
Conclusion: Investing in 5G stocks
The rollout of 5G promises to remain one of the important investment themes over the next 5 years and possibly beyond that. This does not mean that all of these stocks will outperform. It’s also likely that they will perform well at different times. However, the stocks included here should serve as a useful watchlist to track in the coming years.