What was once one of the tech world’s Grand Slam events, this year’s Apple (NASDAQ:AAPL) reveal left investors looking if they miss any significant surprises. While the introduction of the 5G iPhone 12 was a widely anticipated online event, AAPL stock is down almost 6% since the Oct. 13 virtual event in the absence of anything even closely resembling “blockbuster.”
But don’t let the frosty investor reception fool you. Apple’s first 5G smartphone will change how we interact with the broader web.
It’s easy to forget that 3G download speeds in 2007 (when Apple launched the first iPhone) averaged just 0.1 Mbps, barely fast enough for music. Fast forward just over a decade. Today, 4G speeds have opened the door for not only audio but high-def video streaming, online gaming, and even online dating. It’s enabled companies like Spotify, Netflix and TikTok to grow into multi-billion-dollar businesses.
Launching a Cascade of Investment Winners
5G will take that a step further. Not only will the new technology enable faster downloads. It will also cut latency — the time it takes for a network to respond to your phone. Real-time translation, augmented reality, and other complex tasks will suddenly become possible, since 5G will allow phones to offload those tasks to more powerful offsite servers.
These changes, however, won’t happen all at once. 4G network speeds took almost a decade to reach current rates, and the first 5G generation won’t be much faster than existing technologies. (Remember that 4G and 5G are just classifications for types of wireless technologies, not a reference to a specific product).
And that means investors shouldn’t immediately bet on your phone doing robotic brain surgery or driving your car next year. Instead, Apple’s iPhone 12 will launch a cascade of investment winners, starting with manufacturers today and ending with software makers about 3-10 years later.
In other words, the next generation of TikTok might still be a decade away while 5G technologies improve.
Meanwhile, here are five companies that stand to benefit today.
- Qualcomm (NASDAQ:QCOM)
- Verizon Communications (NYSE:VZ)
- ASML Holding (NASDAQ:ASML)
- Apple suppliers
AAPL Stock Winners: Qualcomm (QCOM)
When Apple first announced the iPhone 12 specs, tech enthusiasts quickly noted a small groove along the phone’s right edge. Apple had reserved the space for a speedy millimeter-wave (mmWave) antenna, which would allow the new iPhone to run on a faster, higher-frequency band than most current 5G phones.
The maker of these mmWave antennas, Qualcomm, stands to gain. In partnership with European network maker Ericsson (NASDAQ:ERIC), Qualcomm has extended mmWave range from less than a mile to over three. That makes blanketing cities with antennas entirely feasible.
Qualcomm itself has a long history of turning innovation into financial profits. Its return on invested capital (ROIC) has averaged 11.8% for the past 10 years, according to Gurufocus, or more than twice the average large-cap company. It’s increased its dividend for the past 18 years and has doubled the return of the S&P 500 index since 2000.
As one of the highest-quality semiconductor companies in the industry, Qualcomm shares won’t come cheap — it trades at 30 times EV-to-EBITDA and has just a 2% dividend yield. But as 5G phones roll out, other phone makers will also turn to Qualcomm for its hyper-fast mmWave technology to keep up with Apple.
Verizon Communications (VZ)
Apple’s event this month even included a surprising cameo by Verizon CEO Hans Vestberg. In the event, Vestberg talked up Verizon’s capabilities in the mmWave spectrum. Investors should ordinarily take the hype with a grain of salt. But the legacy carrier does have a leg up on its competitors.
“Verizon’s approach to 5G is founded on shorter-range but greater-capacity wireless spectrum bands,” writes Nicholas Jasinski at Barron’s. “The economics of those are such that it most pays off to build the fiber-optic cable and small-cell antenna infrastructure needed in dense urban areas.”
In other words, Apple is promoting Verizon for the carrier’s focus on faster speeds in smaller markets. And that could be enough to get users to switch. A 2015 study by the U.S. Census Bureau found that almost two-thirds of Americans live on just 3.5% of U.S. land. (Users outside dense cities would get 4G or lower frequency 5G access).
And Apple’s sponsorship matters. When Apple first offered its iPhone exclusively on the AT&T network in 2007, wireless subscriber numbers at AT&T (NYSE:T) jumped from 50 million to 95 million in just five years. Even though Verizon doesn’t have an exclusive agreement with Apple, the endorsement will make it easier for the carrier to incentivize new users to join and upsell existing customers to faster plans.
ASML Holding (ASML)
The iPhone 12 had another surprise for Apple fans: the A14 Bionic chip. The new chip will use the advanced 5nm lithography process, making it faster and more power-efficient than the current 7nm and 10nm chips on the market.
While chipmaker Taiwan Semiconductor Manufacturing Company (NYSE:TSM) stands to gain as the producer of these A14 chips, there’s one other name that will benefit even more: ASML.
The relatively obscure Dutch company develops and produces these advanced lithography machines — giving TSMC the ability to etch silicon wafers at shrinking scales.
It’s like “making the leap from using a marker pen to a fine-liner,” as BBC technology editor Leo Kelion describes. “But rather than ink, it uses what it terms ‘feeble light’ generated via a mind-boggling process.”
Samsung, the only other company with 5nm chips, also buys its 5nm production gear from ASML. That means as Android phone producers rush to catch up to Apple’s A14 Bionic chips, demand for ASML gear will further increase.
Like Qualcomm, ASML stock won’t come cheap. (Consider it the cost of buying a firm with no viable competitors). The company trades at 31x EV-to-EBITDA, or twice the value of the average company. Long-term holders, however, stand to gain. The company’s high ROIC means its shares have risen 1,460% in the past 10 years, eclipsing the S&P 500’s 233% return in that period. The move toward ever-shrinking lithography will keep pushing shares higher.
Apple’s product cycles are broadly positive news for its suppliers. An order from Apple can turn into a multi-billion-dollar contract overnight.
Here are a handful of names to consider:
- Broadcom (NASDAQ:AVGO) — 20% of revenues. Semiconductors and software products
- Skyworks (NASDAQ:SWKS) — 51% of revenues. Semiconductors
- Cirrus Logic (NASDAQ:CRUS) — 79% of revenues. Signal processors
- Corning (NYSE:GLW) — Awarded $550 million from Apple. Glass products
- Qorvo (NASDAQ:QVRO) — 30% of revenues. Radio frequency chip supplier
- Lumentum Holdings (NASDAQ:LITE) — 26% of revenues. VSCEL Lasers for the iPhone’s 3D Camera
The smartphone giant, however, is also notorious for squeezing prices and dropping suppliers with little notice. That makes purchasing Apple suppliers a game of diversification. Signal processing company Cirrus Logic and semiconductor firm Skyworks, for example, earned 79% and 51%, respectively, of their revenues from Apple. Losing a single contract could spell disaster for any major iPhone supplier.
Still, demand for the iPhone 12 is starting to look much like that of the iPhone 6, Apple’s most popular smartphone model to date. Preorders for the 12 are already double that of the iPhone 11, outstripping expectations. While AAPL stock could gain, here are other suppliers that could as well.
The apparent winner of the iPhone 12 reveal is, of course, AAPL stock itself.
For years, CEO Tim Cook has attempted to wean the tech giant off iPhone profits by cross-selling higher-margin services. It’s been a challenge, but sales from the App Store, iCloud, Apple TV+, Apple Music and other services now make up 30% of Apple’s revenues.
The 5G-enabled iPhone 12 could tip the balance even further. Faster connections will open more smartphone possibilities, from mobile gaming to replacing desktop computers. (Samsung already has a docking station that turns the Galaxy Note 20 into a desktop.)
Loup Ventures, which conducts an insightful iPhone intent-to-buy survey, reported that its latest poll suggests greater interest in the latest iPhones, compared to a typical year. “About 45% of respondents said they plan to upgrade their iPhone in the next six months. As a point of reference, a typical upgrade cycle sees between 17-22% of the iPhone base upgrading,” analysts Gene Munster and David Stokman wrote.
That means iPhone users will download (and pay for) an ever-growing list of app services.
It’s news that couldn’t come at a better time for Apple. The 2020 market run-up has pushed shares of the tech giant from their 10-year average of 10x EV-to-EBITDA to 24.5x today. And on a price-to-sales (P/S) ratio, the company has never been more expensive.
Put another way, investors are now valuing AAPL stock more like a software company. And while the tech giant might take several more years to make the full transition, its push into 5G phones is undoubtedly the right start.
On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.