Editor’s note: This article is part of InvestorPlace.com’s Investing for the Next Decade.
They call it “The Internet of Things.” I call it “The Machine Internet” because that term is more descriptive of what’s happening with technology and 5G stocks.
What’s happening is that all kinds of machines, some of which don’t even exist now, are going online over the coming decade. Any device that might be adjusted based on data is going to have a wireless internet connection thanks to 5G.
Factories, cars, even the watch on your wrist, will be collecting data, adjusting based on that data, and reporting up an electronic chain of command. Traffic lights, refrigerators, ovens, even hospitals will get their own intelligence.
The Machine Internet lets Virgin Galactic (NASDAQ:SPCE) re-use its space plane just as SpaceX reuses its rockets. It will let Thermo Fisher (NYSE:TMO) automate the process of biological research to an enormous degree. It will let Danaher (NYSE:DHR) automate hospitals and Rockwell Automation (NYSE:ROK) automate factories.
The underlying technology will come from companies like Qualcomm (NASDAQ:QCOM) and Advanced Micro Devices (NASDAQ:AMD), put together by Cognizant (NASDAQ:CTSH) programmers. The Machine Internet will create millions of new jobs and destroy millions of others.
While most internet traffic today is initiated by people, the Machine Internet is initiated by devices taking measurements. This will require a much bigger, robust, and secure internet than the one you use now.
In the last several days I have covered just a few of the companies working now to enable the Machine Internet. But know that, as with today’s internet, they’re just the tip of the iceberg. Every company — and every life — will be transformed by this technology, mostly without even knowing it.
Here are seven 5G stocks to consider to capitalize on that transformation:
- Qualcomm (NASDAQ:QCOM)
- Advanced Micro Devices (NASDAQ:AMD)
- Cognizant (NASDAQ:CTSH)
- Rockwell Automation (NYSE:ROK)
- Danaher (NYSE:DHR)
- Virgin Galactic (NASDAQ:SPCE)
- Thermo Fisher (NYSE:TMO)
5G Stocks: Qualcomm
The most prominent company to consider when it comes to 5G stocks powering the future is Qualcomm. Qualcomm is described as the “leader in 5G” because its chips are now going into phones that provide faster service.
But 5G isn’t about phones.
That’s because 5G brings a host of very low and very high frequencies into the cellular mainstream. It’s not just about speed. It’s about new applications that can be built into chips to control factory equipment, home appliances, cars, anything that depends upon measurement and acting on measurement. It’s 5G wireless networking that will make the Machine Internet a reality, and Qualcomm is going to be at the center of it.
Most 5G stocks look overvalued right now and Qualcomm is no exception. It has a price to earnings ratio of nearly 55x, and the dividend of 65 cents, while backed by earnings, yields just 2%. But there are good reasons for that.
The company plans to announce a new Snapdragon processor in December, built on a new core with circuit lines just 5 nm apart. Analysts expect Qualcomm to be a big winner from the new iPhone.
To stay ahead Qualcomm is working with a smaller San Diego company called Truepic to begin embedding photo verification into new chips starting next year. The idea of the “secure” mode is that each photo will have a “digital signature” proving it’s real, with the time it was taken and location. As “deep fake” technology grows and bad actors manipulate existing metadata on photo files, this could quickly become a “must have” feature.
Every machine, every device, anything that has a condition that can be changed based on measurement, is going to need a 5G connection. The ceiling for this market is unlimited, and 5G stocks like Qualcomm are essential investments for it.
Why AMD Bought Xilinx
Wall Street is doubling down on AMD as it prepares to buy Xilinx (NASDAQ:XLNX) for $35 billion.
What’s important to know about the Xilinx purchase is it’s AMD’s play on the Machine Internet.
Seen through the eyes of third quarter results, AMD is in the catbird’s seat. The company earned $390 million, 32 cents per share, on revenue of $2.8 billion for the September quarter. Revenue was up 56% year over year. Net income more than doubled. Its stock is highly valued, thus it’s in position to make acquisitions for its long-term future.
Xilinx designs both communications chips, which connect machines to the Internet, as well as Field Programmable Gate Arrays (FPGA), which can collect and process data for those machines. It had net income of $194 million, 79 cents per share, on revenue of $767 million for the quarter.
No cash is being exchanged in the AMD-Xilinx deal. It’s all stock. For the $35 billion price to hold, AMD stock must stay strong through the end of 2021, because it will take a year to get this past American and (more important) Chinese regulators.
AMD and Xilinx are currently supply constrained. Their chips are all made by Taiwan Semiconductor (NYSE:TSM), known in the trade as TSMC. But TSMC plans to build a new $14 billion chip plant in Arizona where production will start in 2024. That production will not just support AMD and Xilinx, but the Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) clouds all machines will connect to over the coming years.
AMD got its reboot during the last decade from game machines and other high-performance PCs. It has extended its lead by selling to cloud data centers. The next stage is using Xilinx to connect those clouds to the world.
Cognizant: Machinists for the Machine Internet
Outsourcing company Cognizant has spent 2020 looking for cloud service start-ups to replace its old data center business. It has been buying companies with links to Microsoft, Amazon and Salesforce (NYSE:CRM).
But its latest deal is aimed straight at the Machine Internet.
The acquiree is Bright Wolf, a Durham, NC company that automates factories. It connects sensors on machines to wireless networks that then feed decision-making software. Bright Wolf will become the hub of a Cognizant lab dedicated to industrial machine markets in the Research Triangle.
It’s easier to connect factories to the Machine Internet because they have one owner and because the resulting savings are obvious. Not only can sensors tell managers about production volumes and when machines need repair, they help game out changes in production systems. When several factories are connected in this way, it means top management knows precisely what its plants are up to.
In addition to factories, Bright Wolf works with larger systems like energy, transport, water, and agriculture. Medicine is also a big niche, because hospitals are filled with machines and processes that need optimization. Hospitals also face constant demands to cut costs.
Other big Machine Internet deals signed this year include Microsoft’s purchase of CyberX, focused on the security of industrial networks, and Dialog Semiconductor’s (OTCMKTS:DLGNF) purchase of Adesto. The idea is to create critical mass and expand into medicine and urban planning, where jobs are more public and complex.
While the company grew rapidly in the 2000s, growth has been harder to come by in recent years as the cloud has replaced data centers. Growth in 2019 was just 4%, and the company will be hard pressed to match its 2019 performance this year.
But Cognizant knows where technology is going. It’s going to the cloud and cloud applications. The Machine Internet is, for the most part, a cloud application.
What Cognizant is doing is what growth investors should be doing, seeking out new opportunities in 5G stocks before they ripen. Cognizant’s purchase of Bright Wolf shows that the Machine Internet is one of those opportunities.
Cognizant itself has yet to feel renewed love from analysts, with a slight majority having it on their buy lists, and one shouting sell. It’s a stock you can wait for, but as the Machine Internet ripens it should ripen, too.
Rockwell Automation: The Factory Internet
Rockwell Automation has always been about factory automation, machine controls and the like. This puts Rockwell squarely in the center of the Machine Internet, with factories automating under software control.
Rockwell has divided its part of this work with Microsoft. The companies recently extended their partnership for five years. The idea is to connect Rockwell hardware controllers to the Microsoft cloud so that factories can be reconfigured using real data.
The result could be a hot stock, although it looks fully valued now. Rockwell has a market cap of $27.5 billion on expected sales of $6.5 billion. The price to earnings ratio is 36x, and the $1.02/quarter dividend’s yield is down to 1.72%. The stock seems expensive because Rockwell was hit hard by COVID-19.
To prepare for the Machine Internet, Rockwell didn’t just hand off work to Microsoft. It bought a software consulting firm called Kalpyso in May. It followed up in October with the purchase of Oylo, a cybersecurity firm in Spain. Hardware may become software, but some hardware will stay hard, and all of it needs to be secured.
To justify its current valuation Rockwell needs to grow, which it hasn’t been doing lately. The 2020 sales total should be lower than that of 2018, and profits lower than those in 2017. The stock is riding a high from the Microsoft announcement but that won’t last.
The two companies have already developed 20 use cases across the production of food, cleaning products and life sciences. More will be needed. The company’s product announcements, like an edge gateway, read like those of a computer company. To some extent, they are.
Two types of investors of 5G stocks are now looking at Rockwell. Income investors compare that 1.72% yield to a bond, and a 30-year government bond now yields just 1.64%.
Speculative investors, seeing how the Machine Internet will transform how things are made, are also looking for a price that makes sense. If you want to invest in 5G stocks, this could be your time to get in.
Danaher: The Machine Internet’s Machines
Danaher may be the most beloved stock on Wall Street that you never heard of.
Danaher has a market cap of $165 billion, a price to earnings ratio of nearly 47x, nine times last year’s sales of about $18 billion.
Don’t look for the Danaher name on a supermarket shelf. It’s a conglomerate made up of dozens of companies, described by Danaher’s website as being in life sciences, diagnostics or environmental areas.
You must get into the weeds to find the value. Arun Saksena, described as a Danaher “digital transformation officer,” explained how it works a few years ago at Videojet, which makes industrial printers.
Printers have been connected to the Internet for years, he wrote, but now Videojet is looking at “placing data collection devices along the packaging and extended production line, and even downstream.” The result is finer control of production, less downtime, less waste, and more productivity. Sensors on a production line give managers a “dashboard” of precisely how things are operating, from which they can brainstorm improvements.
Danaher managers don’t just know how to run their companies. They know about buying and selling other companies to keep growth high. In 2018, for instance, they spun out Envista (NYSE:NVST), which made dental equipment. Then they bought the biopharma business of General Electric (NYSE:GE) from their former CEO, Larry Culp, who needed the money to keep the rest of GE afloat.
Analysts who like sustainable, well-managed businesses with bright futures are taking victory laps over owning Danaher. That’s because Danaher is at the heart of the “digital transformation” now taking place in every manufacturing business. Factories are where the Machine Internet is starting.
Factories can deploy sensors, wireless communications, and analysis software quickly. Unlike consumers, they can make wholesale changes justified by savings. Unlike cities, they don’t have to go through a multi-year process to make change happen.
The result is productivity. The Machine Internet creates higher production, lower cost, and greater competitiveness. This is how the world will be transformed, and Danaher is on the ground floor. If you have a 5- to 10-year investment horizon, don’t worry about Danaher’s stock price. Buy it, hold it, and let it work for you.
Virgin Galactic: Machines in Space
Despite what science fiction says, getting people into space and getting them back down alive isn’t easy.
Space is only possible because of the Machine Internet. Sensors, single-chip computers, and wireless connections make it possible to land rockets back on Earth. They make it possible to land a satellite on an asteroid as easily as you parallel park. They make it possible for ordinary people to go into space, even if briefly. That’s what Richard Branson, who has been buying and selling concept companies for a half-century, sees in Virgin Galactic.
Branson keeps getting capital for these kinds of ventures thanks to the halo effect of Elon Musk’s SpaceX, a proven commercial rocket company, and Amazon CEO Jeff Bezos’ Blue Origin. All these companies are built on the fact that fast computers can adjust vehicle flight paths faster than humans can, allowing SpaceX to re-use its rockets multiple times.
Virgin Galactic has designed a motorized glider launched from a commercial jet. It descends from SpaceShipOne, which flew back in 2003. Virgin Group originally thought tourist flights to space would start in 2008, but the first SpaceShipTwo wasn’t rolled out until 2009 and so far the company has only made test flights. Two more test flights are planned, but the lack of specific dates at its October announcement of those flights sent shares skidding. Again.
While waiting for the current plane to make back some of its investment, Branson is pursuing other shiny objects.
One is the Mach3, a space plane that could cross the ocean with 19 passengers in 90 minutes. Then there’s the small satellite launch vehicle Branson is selling as Virgin Orbit. That failed its initial trial, but Branson is seeking more capital to get it flying. Like Virgin Galactic, Virgin Orbit depends on commercial jets to get partly out of the Earth’s gravity well.
Virgin Galactic is, and always has been, a pure speculation. Press announcements and short squeezes are what are keeping this stock in the air. The excitement Wall Street gives can easily be taken away, as Goldman Sachs (NYSE:GS) did to the stock on Oct. 23.
Personally, I want Virgin Galactic to succeed. I think most people do. If I had some mad money to throw around at 5G stocks, I might throw some there. But I’m an investor. My money is on my retirement. I can’t afford to mess around.
I’ll continue to give Virgin Galactic a pass until it gets closer to its final frontier.
Thermo Fisher: Beyond the Machine Internet
Last up on this list of 5G stocks isn’t necessarily a 5G stock — yet. There is something beyond the Machine Internet. Once machines are connected in medical laboratories, they can efficiently become the hardware for treating DNA as a programming language.
That’s what makes Thermo Fisher a company worth watching amongst 5G stocks.
Thermo Fisher is a distributor of scientific tests and equipment. It was a big winner in the COVID-19 pandemic. The company blew the doors off with its September quarter earnings, revenue growing 36% and adjusted earnings per share rising 91% from a year earlier. The numbers beat estimates by a whopping 45%.
So far in 2020 the shares are up 48%. Thermo Fisher has a market cap of $191 billion, with yearly revenue now expected at $29 billion. Just by way of comparison, the company’s value is now just $4 billion short of AT&T (NYSE:T).
What has driven 2020 results is systems for virus testing and drug manufacturing.
In October the company rolled out two new tests for COVID-19 antibodies. This includes both the collection of samples and the actual testing, as well as personal protection equipment (PPE) for those working on it.
The company also announced a new cell processing system, which will speed manufacturing and reduce drug makers’ capital costs. The CTS Rotea system separates processes that take time from those that run quickly, but it’s still sterile, closed, and modular.
Thermo Fisher got $2 billion in revenue during the quarter just from COVID-19. But there is more to come since the entire biotech industry is focused on cell-level chemical discovery and treatment. Major drug companies are separating out their biotech operations for growth, and the entire biotech center is exploding with genetic-based discoveries and therapies.
The catalyst for Thermo Fisher’s growth this decade and the next was its 2014 acquisition of Life Technologies for $13.6 billion. Marc Casper, who has been CEO since 2009, built a new Life Sciences Solutions division around it, under a former Life executive.
Life Sciences is now a huge part of the business, with much of the rest producing equipment or products that feed it.
Thermo Fisher isn’t just a Machine Internet story. The growth of the entire biotech sector will depend heavily on the equipment, test kits, and manufacturing technologies Thermo Fisher brings to the party.
For Thermo Fisher the Medical Internet is just the start.
At the time of publication, Dana Blankenhorn had long positions in QCOM, TSM, AMZN and MSFT.
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.
