At the start of 2020, 5G stocks — representing the new generation of wireless technology — were on the runway and ready for takeoff.
Thanks in part to the pandemic, it’s still on the runway. Carriers are slow-walking their support, even while advertising it. Phone makers are doing the same, adding chips they say support 5G to new phones.
The heart of the 5G story isn’t in the phone. It’s not in the speed of a data transfer. It’s in the fact that 5G unites many frequency bands, from thousands of cycles to billions, under a common set of protocols that can interoperate. A signal that attenuates within a few feet can thus share the network with signals that travel hundreds of miles, bringing all devices into the same cloud-based computing system.
Most of the devices that will use 5G haven’t been built. Many have yet to be invented. The 5G revolution will bring more factories, streets, homes and wearables into the internet. Anything with a sensor will be able to collect data, analyze it and adapt to it with little or no human intervention.
The productivity results will be profound. I began writing about this as “the World of Always-On” in 2003. I spoke on it at a Stanford conference in 2004. It is usually called the Internet of Things, one of many technologies that failed to achieve lift-off in the last decade. Lately I have begun calling it The Machine Internet. It’s one of the great opportunities of the next decade. And some 5G stocks are particularly set up to succeed.
- AT&T (NYSE:T)
- Verizon Communications (NYSE:VZ)
- Comcast (NASDAQ:CMCSA)
- Nokia (NYSE:NOK)
- Ericsson (NASDAQ:ERIC)
- Qualcomm (NASDAQ:QCOM)
- Skyworks Solutions (NASDAQ:SWKS)
There are vast amounts of money to be made here — by chip companies, device makers, by carriers and by software developers. The 5G revolution has only just begun. What follows are some ground floor opportunities.
5G Stocks: AT&T (T)
Right now, AT&T stock is a classic yield trap. But it should more than cover its dividend with earnings when it reports Oct. 22. Its 51-cent-per-share dividend yields a startling 7.3%. That’s higher than Chevron (NYSE:CVX).
How can this be? AT&T is the leading provider of mobile services, a business certain to take off with 5G. It is a major provider of wired broadband as well.
What’s wrong?
I blame former CEO Randall Stephenson, who made two of the dumbest deals of the last decade, saddling his company with $175 billion in debt, a debt to equity ratio of .96. Forget the company’s market cap of $204 billion. Its “enterprise value,” the debt and equity combined, is almost $400 billion.
First, Stephenson spent $67 billion for DirecTV, a direct-satellite broadcaster. It’s now worth much less. Then there’s WarnerMedia, for which Stephenson paid $85 billion in 2018. Since that deal, AT&T has been squeezing out costs, while rivals like Netflix (NASDAQ:NFLX), Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) have increased budgets. Many Warner assets, like CNN, are built for cable TV, and AT&T lost 954,000 of these customers in the second quarter alone. AT&T’s press release on second quarter earnings claimed good things are coming from Warner Media. Don’t believe it.
If AT&T were to rid itself of these boat anchors, it could better pursue the opportunities of 5G. Goldman Sachs (NYSE:GS) was recently hired to examine DirecTv’s possible sale to private equity, and a sale to DISH Network (NASDAQ:DISH) is often teased. But nothing has happened yet. Some WarnerMedia properties are also said to be on the block.
Instead of investing in 5G, AT&T has been squeezing profits from AT&T Wireless, its bedrock since the 1994 acquisition of McCaw Cellular for $12.6 billion.
AT&T’s capital budget is about $20 billion, including new AT&T Fiber deployments. That’s lower than the budget for Amazon, which spent $24 billion over the last four quarters. As a result, Amazon is worth $1.58 trillion, or 7.6 AT&T’s. Even with AT&T’s debt added, Amazon is worth nearly four times more.
AT&T shares would jump on any deal for DirecTv or WarnerMedia, almost regardless of the price. Many Warner assets would look attractive inside Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) or even Facebook (NASDAQ:FB).
What AT&T should be doing is adding bandwidth to serve the Cloud Czars, and the application providers they host.
The bottom line is that you buy AT&T today for the dividend, and you wait for the reorganization. Take the yield and wait for the capital gains of a break-up that now looks inevitable.
Verizon (VZ)
Like AT&T, Verizon Communications has a dividend offering shelter from the pandemic storm.
Its first-quarter report offered earnings of $1 per share, and cash flow of $8.8 billion, on revenue of $21.8 billion. That’s more than enough to justify the 65-cent-per-share dividend, yielding 4.27%.
Verizon is a good investment today because it went less heavily into digital content than AT&T. That’s because its borrowing power was spent buying half of Verizon Wireless from Vodafone (NYSE:VOD), its long-time partner. It paid $130 billion for 45% of the wireless unit in 2014.
The content Verizon bought was the former America Online and Yahoo, now called the Verizon Media Group. This includes news sites like Huffington Post, Techcrunch, Yahoo Finance and Engadget. Together they cost under $10 billion. They give it a big thumb on its own news coverage. Verizon took a bath on these assets and, unlike AT&T, is trying to sell as much of its internet empire as it can. It sold Tumblr last year to Automattic, the owners of blogging platform WordPress.
Verizon lost 68,000 customers during the first quarter, while AT&T gained subscribers. But that’s out of 154 million subscribers. Verizon does have a chance to make more money with the rollout of 5G and the Machine Internet. If you’re expecting growth, that’s where it will come from.
Then there are what were its phone assets. Verizon combined the old NYNEX and Bell Atlantic phone operations with GTE operations. Some of these subscribers were upgraded to fiber, a service Verizon called Fios. These wired broadband customers are valuable, and it has 4.06 million of them. Verizon has 5.96 million internet customers in total and 13.55 million voice customers. Wireline revenue in the first quarter was $2.79 billion, little changed from last year’s $2.76 billion. The capital budget averages $5 billion/quarter. While the company has $99 billion in debt, thanks to the Vodafone deal, it can handle that load.
Morningstar now calls Verizon fairly valued. Verizon is managed with an eye toward stability rather than growth.
But a long-term investor will pay just 13 times earnings right now and get a yield of 4.2% backed by earnings and cash flow, while waiting for the 5G revolution to start. That’s a good place to be
Comcast (CMCSA)
Comcast wants to be AT&T when it grows up.
The country’s largest cable operator is trying to get into mobile phones, having spent $458 million at a recent FCC spectrum auction. It has begun advertising 5G as part of its Xfinity Wireless service. This was launched through a re-seller agreement with Verizon, bolstered by customer WiFi. It hopes an evolving standard called OpenRAN will help it build out new services.
Comcast is a cheap stock because it’s still trying to sell cable subscriptions, a service 1.55 million abandoned just in the second quarter of 2020. Comcast also owns NBC Universal, and the related amusement parks, which have been hammered by the pandemic.
The stock opened for trade Sept. 22 at about $44.94, a price-earnings ratio of just 18, with a 23-cent-per-share dividend yielding 2.06%.
Why buy it?
Comcast is a leader in the “last mile” of communications. Its wired cable provides more internet bandwidth than the old phone networks. Cable profits drove Comcast’s move into entertainment during the last decade. Wired broadband is now expected to fund its move into wireless. Of 15 analysts following Comcast on Tipranks, 11 are saying buy it, despite a one-year price target just 8% ahead of the current price.
Comcast’s challenge is to fend off 5G long enough to become a player there.
While wireless phone companies like T-Mobile (NASDAQ:TMUS) insist they can compete with cable broadband right now, that’s still years away. For now Comcast CEO Brian Roberts insists 5G isn’t cheaper, faster or better than wired internet, even while Comcast invests heavily in it. Wireless revenues are growing fast but from a small base.
Comcast’s capital budget shows it investing in a different future than it’s selling consumers. Comcast cut capital spending about 9% during the second quarter, with cable and the European direct broadcaster Sky both taking hits. In June it carried $105 billion in long-term debt against just $13 billion in cash.
Comcast is a dominant last-mile company, but investors don’t like last-mile companies right now. They prefer companies at the center of the internet. If you buy Comcast shares, you’re betting either that this fashion will change, or perhaps one of the Cloud Czars may find Comcast an irresistible prize.
Nokia (NOK)
Nokia is one of three companies whose infrastructure equipment is now defining the 5G battle among the world’s mobile carriers. The stock is cheap because these carriers have been delaying deployments to hold down debt, while advertising 5G heavily to get some uptake.
In the past, technology placed on cell towers was proprietary. Nokia, once a handset maker pushed out of that market by Apple, became an infrastructure player in 2015 by buying Alcatel-Lucent, inheriting all their patents.
But the push of China’s Huawei into the market changed things. To beat China, carriers have coalesced around support for OpenRAN, a common set of interfaces for Radio Access Networks. The group is led by Facebook.
Nokia says it now supports OpenRAN.
While the OpenRAN community has its aims right, its technology suite is incomplete. The Common Public Radio Interface (CPRI), which sits at the front of the network, isn’t nearly as good as proprietary alternatives. This means that, for now, carriers must still buy radios and signal processing products from the same vendor. OpenRAN isn’t as open as it seems.
Nokia has been using OpenRAN support to compete with Huawei and its Scandinavian rival, Ericsson. Its press office says a complete set of OpenRAN interfaces will be available on Nokia AirScale products next year. Rakuten, a Japanese mobile provider which signed Nokia to an equipment deal this year, admits Nokia is making a hefty profit on it. That means its proprietary advantages still exist. A short price war initiated by Nokia and other large vendors could quickly finish off the OpenRAN folks in the carrier market, analysts believe.
Then there’s the cloud, and the Cloud Czars.
Microsoft (NASDAQ:MSFT) has bought Affirmed Networks and Metaswitch, making its bid for an OpenRAN company look likely. Facebook is helping fund the Telecom Infra Project which created OpenRAN.
Nokia opened for trade Sept. 22 at $3.96 per share. That’s a market cap of $22 billion, on about $22 billion of 2020 revenue.
It sounds cheap, but Nokia’s up only 7% on the year. If 5G were a gold mine, and Nokia’s OpenRAN put it in pole position to win, the stock should be flying. While open technologies won’t destroy Nokia, they should put a limit in its profits. The arrival of the Cloud Czars could also limit Nokia’s profit runway. Its gold mine may just be pyrite after all.
Ericsson (ERIC)
While Nokia shares are up just 7% in 2020, those of Swedish equipment rival Ericsson is up 23%.
Analysts like Ericsson’s strategy of trying to hold proprietary advantage on its wireless carrier equipment. Also, Ericsson makes more money than Nokia.
Ericsson measures earnings in Swedish krona, now trading at almost 9 to the U.S. dollar. For the most recent quarter, it had $6.1 billion of revenue. That’s only slightly more than Finland’s Nokia, which had $6 billion. But Nokia earned just $94 million on its revenue, while Ericsson earned $270 million. Thus, Ericsson is worth $36 billion, Nokia just $22 billion.
The threat of China’s Huawei has forced the market to do a re-think, under pressure from the President Donald Trump Administration. Nokia has gone with the open standard, which could let Huawei and others in. Ericsson maintains a proprietary approach.
So far, Ericsson is winning. The Swedes just announced their 100th 5G contract and 56 of those networks are now live. Ericsson has been working directly with Qualcomm on extending 5G into newly opened high frequencies. GlobalData calls Ericsson the 5G transport leader.
In the U.S., Ericsson has a close partnership with Verizon. AT&T has agreements with both it and Nokia, as well as Samsung (OTCMKTS:SSNLF). T-Mobile (NASDAQ:TMUS) is also using Ericsson in its 5G core network, along with Nokia and Cisco Systems (NASDAQ:CSCO).
What might settle the matter would be for Ericsson to buy Nokia.
Rumors of such a deal were floated in February. The Administration has been pushing for more control over the 5G equipment market, even suggesting Cisco buy one of the two Scandinavian companies.
While Cisco stock has been getting hammered lately, its market cap of $166 billion remains over 4 times bigger than Ericsson, and over 7 times bigger than Nokia. The best protection of European independence, then, might be for the two to merge. Their combined market cap of $60 billion, plus annual revenue of over $40 billion, would be too much for Cisco to swallow.
The real threat to future 5G growth comes from the Cloud Czars in the form of Cloud RAN. This could dominate the new market for managed services in the Machine Internet. The idea is to run radio networks according to what are called “cloud principles.” Ericsson is pushing its own proprietary (naturally) framework for this “journey.”
While mobile companies like AT&T are worth 6-7 times what Ericsson or Nokia are, even the smallest cloud companies have the scale to create their own markets.
Cloud RAN tells me Ericsson’s leadership has a sell-by date. I expect merger talks with Nokia to grow more serious.
Qualcomm (QCOM)
By winning its case against the Federal Trade Commission (FTC), Qualcomm made itself the dominant supplier in 5G for phones.
A three-judge panel of the Appeals Court in the 9th Circuit ruled that Qualcomm’s control of patents essential to mobility is not an anti-trust violation. This means it can enforce its policy of “no patent, no chips,” through which it has dominated the mobile chip business, into the next decade.
The decision upended tech industry practice, which holds that commonly agreed-upon standards shouldn’t be under one company’s control. It’s aimed at China, which has been trying to get into the equipment business through Huawei. Assuming the losers don’t win an appeal before the full U.S. Appeals Court, something Intel and automakers are lobbying for, Qualcomm is free to fly.
With the Machine Internet, 5G and the auto market all in its future, the real mystery of Qualcomm is why it’s only up 29% for 2020, with most of the gain coming right after its successful appeal.
The answer is that Qualcomm is a chip designer, not a manufacturer. It’s an ingredient in chips, which are ingredients in phones. It’s not a phone maker. Qualcomm should have 5G chips available for budget smartphones next year.
But 5G isn’t just about phones. It’s also about cars and traffic lights. It’s about factories and warehouses. It’s about lightbulbs and ovens controlled by voice interfaces like Amazon Alexa. It’s also about watches and other medical devices. While Qualcomm’s price to earnings ratio of 49 seems high on the surface, it can afford its dividend of 87 cents per share. This yields almost 2.3% at a time when the 30-year government bond yields just 1.4%.
Assuming Qualcomm doesn’t suffer yet-another court reversal, its current price is attractive. Qualcomm has become the U.S. champion in 5G.
Skyworks Solutions (SWKS)
Everyone who follows the stock market knows that when Apple sneezes, Skyworks Solutions catches cold.
But it’s no longer the case that when Apple runs a marathon, Skyworks gets a t-shirt.
Skyworks is an RF (radio frequency) chip company. Its chips handle radio waves at cell towers, in user devices and in WiFi systems. They come in a variety of price points. It’s most often compared with Qorvo (NASDAQ:QRVO) although Broadcom (NASDAQ:AVGO) and Qualcomm are big, too. Without Apple, Skyworks might be in a world of hurt. With it, it’s a comfortable place to be.
Skyworks would like to diversify its customer list. There’s always talk about automobiles and the Machine Internet. These markets are like the Dallas Cowboys — a lot of potential but not a lot of recent championships. Still, it’s one more reason to buy the stock.
Analysts like Skyworks right now because of 5G. Apple’s ramp-up to supply the new communications technology in all its products should benefit Skyworks, the thinking goes.
But there’s another speculation no one is making. As Apple continues its moves into controlling its own silicon, it might buy Skyworks. A price of $30 billion would be nothing next to Apple’s market cap, and if you’re making your microprocessors, modems, and graphics chips why not? Skyworks might also help Apple explore those Machine Internet markets. There is currently no indication Apple is interested in buying Skyworks. But the interdependency, and Apple’s own move into chip design, could make it inevitable down the road.
With the tech market fever having broken, Skyworks becomes attractive. All recent analyst reports on Skyworks scream buy. This despite an average price target that’s lower than the current price.
Let Skyworks come to you. When the yield looks good, buy and hold.
At the time of publication, Dana Blankenhorn held long positions in QCOM, AAPL, MSFT, BABA and AMZN.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn.
