5G stocks may be one of the next hot stock market trends to monitor in 2020 and beyond. In a recent article on The Wall Street Journal, investors could get an idea about how important the 5G network is not only for the future but for now.
“The U.S. military is preparing to fight on a new battlefield: the 5G networks going up around the world,” according to the article. “The Pentagon is testing how lightning-fast 5G networks could transform warfare, from training and logistics to mission planning and communications to new battlefield tactics like the deployment of drone swarms. It is throwing a lot of money at harnessing the new technology—partly, analysts say, with an eye on China, which has made 5G a military priority.”
The numbers in the sector are eye-popping. “The global 5G services market size is estimated to reach USD 41.48 billion by 2020 and expand at a compound annual growth rate (CAGR) of 43.9% from 2021 to 2027,” according to a Grand View Research report.
The growth of 5G should impact many business sectors, from manufacturing, energy, and utility to media and entertainment, retail, and construction.
Qualcomm (NASDAQ:QCOM) has a special section on its website explaining what 5G is, and mentioning that 5G’s applications include “enhanced mobile broadband, mission-critical communications, and the massive IoT.” The critical communications sector is one of the priorities set by the Pentagon.
Tech stocks have outperformed the stock market compared to the S&P 500 and Dow Jones, and the Defiance 5G Next Gen Connectivity ETF (NYSEARCA:FIVG), which is composed of companies that have business activities focused on the development of 5G network, has outperformed the broader market in 2020. Some of the top holdings include Qualcomm, Ericsson (NASDAQ:ERIC) and Analog Devices (NASDAQ:ADI).
Here are three 5G stocks that you can consider buying based on their prospects, fundamentals and valuation:
5G Stocks: Skyworks (SWKS)
As the 5G network requires substantial capital expenditures, the majority of the companies involved in this future of telecommunications turn to debt financing for the expansion of their business activities.
Skyworks has almost zero debt and a very strong balance sheet. Its forward dividend and yield are $2 and 1.45% respectively. Not much, but what I like about this stock is its five-year trend of revenue, profitability, and free cash flows.
For the past five years, it has shown a relatively stable trend in key financial metrics, which is not easy. And with a current net margin of 24.28%, profitability is very attractive. Zacks estimates an expected earnings-per-share of growth of 12.44% for the next three to five years. And with an increased dividend for the past few years, prospects look good for a stock that balances between value and growth.
For AT&T, wireless communication remains its largest business, and the company offers nationwide 5G network plans to cover most of the consumer’s needs.
It’s another company with a strong cash position, a strong balance sheet, and good positive free cash flows. The 5G network expansion is a very important priority as AT&T “has revealed that it has stepped up its Capex related investment in networks to $5 billion in the first quarter of 2020 as compared with capital expenditures of $3.8 billion in Q4 2019.”
While the expected growth for the next three to five years is 3.42%, this stock has an attractive dividend yield. Its forward dividend and yield are $2.08 and 7.27% respectively, compared to the average S&P 500 yield of about 1.64%.
Another 5G stock to consider is Cisco. The most recent quarterly earnings report released on Nov. 13, 2020, was a strong one, as both revenue and earnings were better than expected. “The company said it earned 76 cents a share in its fiscal first quarter, above consensus forecasts of 70 cents. Sales fell 9.6% to $11.9 billion, though came in slightly above analysts’ forecasts.” as reported on TheStreet.
CSCO stock is another value stock with decent yet not excessive growth. Zacks estimates an expected growth of 6.67% for earnings-per-share for the next three to five years. The forward dividend and yield of $1.44 and 3.48% respectively are attractive.
2018 was a year of challenge for CSCO stock, with a collapse in the profitability. Its net margin for 2018 fell to 0.22% compared to 20.02% in 2017. But a turnaround seems to be underway and be resilient too. Profitability has grown and the stock has a net margin of 22.75% for 2020. Free cash flows are strong. Plus, the two past consecutive increases in dividend show a stock that could provide income and price appreciation.
These 5G stocks have the potential to perform well as 5G infrastructure investments are set to increase in 2020. But as always, investing comes risks, and competition in the 5G market is expected to be intense.
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article.