There are easy choices when it comes to 5G stocks. In the U.S., investors can simply look at the three major wireless carriers.
AT&T (NYSE:T), Verizon Communications (NYSE:VZ), and T-Mobile (NASDAQ:TMUS) all have at least the potential to benefit from 5G (fifth-generation) wireless. Faster speeds should make mobile devices more useful — which in turn should allow carriers to boost profit margins via higher pricing. That’s particularly true given that the now-closed merger between T-Mobile and Sprint removed a major competitor from the market.
The catch is that each of those stocks has questions beyond 5G. For TMUS, it’s valuation and a potentially messy, multi-year integration of its acquisition target. Meanwhile, Verizon and AT&T still generate significant, but declining, profits from their wireline businesses. AT&T adds a heavy debt load and potential pressure on its WarnerMedia subsidiary.
Investors could look to device manufacturers, but at this point the only real choice on the public markets is Apple (NASDAQ:AAPL); Android isn’t quite big enough to materially change the outlook for Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL).
After a literally historic bull run, AAPL has its own valuation concerns with a market cap north of $2 trillion. At this point, it’s tough for an investor to see much of an edge in that name given the intense coverage in the market.
But there are 5G stocks beyond the headline names, with the potential to capitalize on a trend that should last into the next decade. Here are four of those names:
5G Stocks That Aren’t Phone Companies: Ericsson (ERIC)
A year ago, I called Ericsson my favorite play among 5G stocks. ERIC stock has rallied 42% since then — but the bull case still holds.
After all, the case hasn’t changed all that much. Ericsson is one of the three major manufacturers of the networking equipment that delivers 5G wireless. One of the other two is China’s Huawei, which continues to be hamstrung by political pressure. As a result, Ericsson’s market share continues to grow.
Combine growing market share with a growing market and strong results follow. That’s exactly what happened with Ericsson’s fourth-quarter report last week, which “crushed earnings expectations” on the back of strong profit margins.
After that quarter, and even with the rally, ERIC stock is hardly expensive. It only trades at about 15x 2020 free cash flow (excluding the impact of mergers and acquisitions), and 18x current 2021 earnings per share estimates. Those estimates are likely to rise after Ericsson’s strong Q4.
I still see ERIC as the best play in 5G. In fact, I still see it as one of the better plays in the market as a whole.
The other Western equipment play is Nokia. From a short-term perspective, caution is advised. Nokia became a so-called “Reddit stock” along with GameStop (NYSE:GME) and AMC Entertainment (NYSE:AMC) during the crazy trading of the last week. At one brief point on Jan. 27, the stock had risen more than 100% intraday.
Some semblance of normalcy has returned, but NOK still has gained 17% in seven sessions on basically no news, with earnings due later this week. The Ericsson report perhaps accounts for some of those gains, but lingering effects from the brief volatility remain.
That same caution should hold from a longer-term perspective as well. As bullish as I’ve been on ERIC, I’ve been equally bearish on NOK. Nokia has been a serial disappointer.
Whether it was the $8.5 billion sale of the mobile phone business to Microsoft (NASDAQ:MSFT), or the acquisition of Alcatel-Lucent, Nokia’s big deals haven’t driven shareholder value. Execution has been substandard.
Nokia stock has lost more than half its value over the last decade — during one of the great tech booms of all time and with the benefit of a Microsoft deal that proved disastrous for the acquirer.
And yet, Nokia can’t be written off. It has the same tailwinds as Ericsson in terms of both 5G and a more beneficial competitive environment. Valuation is reasonable. If Nokia can finally execute on its turnaround, and finally deliver on its potential, NOK stock does have upside. That remains a huge “if,” however.
5G Stocks: Qualcomm (QCOM)
The chip space is another source of 5G stocks, and QCOM is a natural choice. With the long-running dispute with Apple now settled, Qualcomm has a big opportunity to drive significant growth in the coming years.
Indeed, it’s already doing so: adjusted earnings per share rose 18% year-over-year in fiscal 2020 (ending September). Wall Street sees far better performance on the way, with a 70% increase in FY2021, thanks in large part to the normalization of the Apple business, and another 12% the following year.
Certainly, QCOM has priced in that growth to some extent. The stock has doubled since June. But at 20x FY2022 consensus EPS estimates, valuation is reasonable in the context of a chip sector trading at all-time highs. The rally in Qualcomm stock probably slows, but it doesn’t have to end just yet, particularly with fiscal Q1 earnings on the way.
Skyworks Solutions (SWKS)
Skyworks has an even larger reliance on Apple — roughly half of its revenue. That makes it an intriguing (and cheaper) backdoor play on 5G iPhone growth.
As with QCOM, the story has played out to some extent. SWKS has rallied 64% over the past year. But, as with Qualcomm, the Skyworks story isn’t over yet.
Indeed, Skyworks is coming off a blowout quarter, driven by help from Apple. The stock has rallied to all-time highs, but at 18x forward earnings hardly looks expensive.
It’s worth noting that, over time, Apple’s chip suppliers have seen their fair share of volatility. SWKS is no exception, with Cirrus Logic (NASDAQ:CRUS) another notable example. But AAPL stock itself shows that, at least for now, investors see stability ahead for iPhone sales ahead, particularly with the 5G tailwind ahead. SWKS already is performing well, while offering a cheaper way to get exposure to precisely that stability.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.