The current pandemic brought upon from the novel coronavirus disrupted the economy at levels not seen since the Great Depression. Efforts to slow the virus spread by enforcing a stay-at-home order and closing borders should pay off. As the lockdown eases, the anticipated recovery will play out differently. Sectors that embraced automation and facilitated staff working from home will thrive, making them key stocks to buy.
Megatrends like Artificial Intelligence, 5G, and cybersecurity will continue to out-perform the markets in the coming months. That suggests that 5G is particularly promising because technology increases the performance of wireless networks. Its low latency is also a requirement in supporting Artificial Intelligence and the Internet of Things in many facets of life from automobiles to smart devices.
Scott L. Baier, professor and chair of the John E. Walker Department of Economics at Clemson University, said of 5G:
For 5G, the pandemic is likely to have accelerated the need for 5G and there been a push to have 5G available in more rural areas. It is hard to forecast what major interruptions are possible for the markets. However, looking forward I think you will see households, firms, and governments more prepared for these types of interruptions.
There are seven 5G stocks that look strong that will prove rewarding in the months ahead. The companies their stocks to buy are:
- Coherent (NASDAQ:COHR)
- AT&T (NYSE:T)
- NXP Semiconductors (NASDAQ:NXPI)
- Qualcomm (NASDAQ:QCOM)
- Nokia (NYSE:NOK)
- Ericsson (NASDAQ:ERIC)
- Cisco Systems (NASDAQ:CSCO)
The first of our stocks to buy is Coherent. The company forecast strong demand for 5G-related technology. It said that the Chinese government programs are driving 5G adoption, which is increasing its demand. Coherent is seeing printed 45- to 50-micron circuit board designs driving high-density interconnector (HDI) manufacturing. IT also expects higher demand for lasers used to manufacture 5G antennas.
In the last quarter, Coherent warned that although orders for automotive applications rose sequentially, market conditions are still a headwind. Weak automobile demand and the shift from gas-powered cars to electric vehicles will hurt results.
Competition for components and lasers is heating up as Chinese manufacturers take the 3 kilowatts to 6-kilowatt fiber laser markets.
In the first quarter, Coherent posted revenue of $320.8 million and a non-GAAP gross margin of 38%. Microelectronics accounted for 41% of its revenue, while materials processing was 27%. In an EBITDA Multiples model, the following assumptions below imply a fair value of ~$127 for Coherent stock:
|Selected LTM EBITDA Multiple||13.1x – 16.0x||14.5x|
|Selected Fwd EBITDA Multiple||13.3x – 16.3x||14.8x|
|Fair Value||$113.47 – $140.10||$126.78|
Data courtesy of finbox.io
AT&T continues with 5G deployment despite the pandemic. The company said it expects to have nationwide coverage this summer. Executive Randall Stephenson said, “while we have no intention of slowing down on 5G and fiber deployment and such, [the] reality is that a lot of it is not in our control. We are having to work through some of those issues. So, there is probably going to be relatively to what the targets we gave you on the CapEx of downward proclivity on that number, just because of logistical issues that we are running into.”
Currently, AT&T is delivering on speed gains across 51 markets. Its speed performance increased more than 30 Mbps at the start of the year. So, even as the telecom giant rolls out low-band 5G, its 4G LTE network is already a strong performer.
On Stock Rover, AT&T has high scores (out of 100) in three key metrics. AT&T stock has a fair value of ~43:
Data courtesy of Stock Rover
NXP Semiconductors (NXPI)
NXP Semiconductors briefly traded below $65 in March only to rebound since then. Markets expect it to thrive as the 5G wave, particularly multiple-input multiple-output (MIMO) in radio frequency (RF) power and millimeter-wave. Last year, NXP announced a portfolio “of LDMOS RF power amplifier (PA) multi-chip modules (MCM) for 5G massive MIMO (mMIMO) base stations.” By offering less complexity in RF and improving design predictability, customers get better yields and lower qualification time.
In the last conference call, NXP said that “it looks like it’ll still be a couple of quarters out before we’ll see strong growth in 5G deployment. We clearly see that it’s coming. Just don’t see it in the near term.” Investors should expect long-term demand for 5G resuming later this year at the earliest.
On Apr. 7, NXP pre-announced results. The company experienced demand weakening in the automotive market throughout March. Outside of China, many global auto OEMs shut production lines. This will delay NXP’s shipment of goods worth $150 million. But NXPI stock barely reacted because the order fulfillment is only delayed, rather than cancelled. When markets resume operations, NXP will report the sale in a future quarter.
According to simplywall.st, NXPI stock has a fair value of $130.95.
QCOM is frequently on our stocks to buy lists, and for good reason. Qualcomm’s 5G strategy lifted first-quarter results. Thanks to 5G Snapdragon design wins, the smartphone chip supplier expects years of growth ahead. Qualcomm said that “virtually all of our 5G Snapdragon design wins are using our RF front-end solutions for 5G sub 6 and/or millimeter wave, including design wins based on our second-generation solutions.”
Globally, the accelerating pace of millimeter-wave deployment will result in more smartphones using the Snapdragon 5G platform. To increase accessibility to consumers for 5G, the company offers a broad range of products. For example, premium-tier devices will have its flagship Snapdragon 865 mobile platform. Mid-tier devices may have the Snapdragon 765 and 765 Gaming Mobile platform, the latter having an integrated 5G modem.
In the first quarter, the company’s QCT division reported revenue of $3.6 billion, beating the high end of its guidance range. Qualcomm forecast 1.75 billion to 1.85 billion device sales in 2020 that includes 175 million to 225 million 5G devices.
Per Tipranks, the average price target on Qualcomm stock is $92. QCOM has the quality score of 94/100, well-ahead of the industry’s score of 63:
Data courtesy of Stock Rover
Next on our stocks to buy list is Nokia. Nokia is trading at such discounted levels that it is reportedly hiring bankers to fight a takeover. Short-term fundamentals are mixed as management struggles to report consistently strong quarterly results. Still, the company announced a partnership with Intel (NASDAQ:INTC) to build 5G radio and cloud infrastructure.
Nokia is now shipping a 5G AirScale radio access solution that employs Intel’s silicon technology. It is expanding the ReefShark chipset product range to include lower power consumption. Intel said that “through our collaboration with Nokia, our broad portfolio of products and ASIC capabilities, we are showing the value that can be realized with a consistent, high-performance architecture across the intelligent 5G network.”
By powering 5G solutions with an Intel Atom P5900 processor, ReefShark products will consume less power. Similarly, as more countries adopt Nokia’s 5G networks, the products will have less energy footprint.
Plus, Nokia also said that its AirFrame data center solution for edge and core will use Intel’s Xeon Scalable processor. The built-in AI acceleration will ensure the handling of demanding 5G technologies.
Nokia stock has a fair value of $8.06, according to simplywall.st. Conversely, in a 5Y DCF EBITDA Exit model, NOK stock has a fair value of around $6. This assumes a discount rate of 7.5% and a terminal EBITDA multiple of 10.4 times.
|(EUR in millions)||Input Projections|
|Fiscal Years Ending||19-Dec||20-Dec||21-Dec||22-Dec||23-Dec||24-Dec|
|% of Revenue||10.70%||11.60%||11.00%||11.00%||11.00%||11.00%|
Data courtesy of finbox.io
Nokia’s competitor, Ericsson, is also on this list of stocks to buy. Ericsson announced a slew of commercial 5G launches in Europe. Together with Magyar Telecom, it will launch commercial 5G in Hungary. Magyar Telekom said that it worked with Ericsson to test the technology for six months. Once launched, customers will get higher data rates and low latency. More new devices will get connected to the network, enabling more applications for customers.
On Apr. 9, Ericsson announced that Erillisverkot Group selected it to provide “5G core network products and solutions for its main critical broadband network.” The Finland firm will manage the system on the network initiative called Virve 2.0. This is a 10-year deal that uses Ericsson’s dual-mode 5G into a cloud-native platform.
In the first quarter, the company signed 86 commercial 5G contracts and already delivered 29 live networks. Management said that the impact of Covid-19 on the business is hard to assess. In addition, it said that “if we look globally, we see a number of countries, actually accelerating investments into 5G as well as 4G capacity. In response to the pandemic, one of the clear cases is clearly China. But if you look in Europe, it’s doing the opposite, slowing down [the] adoption of 5G.”
On Wall Street, the average price target on ERIC stock is $10.50 (per Tipranks).
Cisco Systems (CSCO)
At a 64% gross margin and 28% operating margin, Cisco Systems scores a 98/100 on profitability. The company enjoys strong demand for its hybrid cloud. And because it does not matter if the network is on 4G, 5G, or over satellite, customers require a solution that is on a Software-defined Wide Area Network (SD-WAN) architecture.
Large-scale networks are the backbone for the explosive growth in 5G. In other words, customers will need software capabilities, better security and segmentation, and threat detection. The company mentioned cloud security products like Umbrella, Threat Grid, and Stealthwatch that are critical for its customers.
As 5G mobile technology develops, Cisco expects more industrial IoT use cases. For example, it is building its portfolio to embrace the high-frequency bandwidth. For example, last month Cisco acquired Fluidmesh, a wireless back-haul systems provider. This will give it the capability of transferring data with zero loss on rail and mass transit travelling at speeds of over 186 mph.
The average price target on CSCO stock is $46.40.
The author owns Nokia shares.