The adoption of 5G by consumers and business is likely to be one of the major growth drivers for telecommunication companies in the decade. Amid the novel coronavirus pandemic headwind, 5G network roll-out has continued. As of September 2020, there were 113 operators with 5G networks across 48 countries. As investments in the sector continue coupled with growing penetration, 5G stocks are likely to be market performers or out-performers.
It’s expected that 5G adoption will be 51% in North America by fiscal year 2025. For the same period, 5G adoption is likely to be 34% in Europe and 25% in Asia Pacific. At the same time, 5G is not just about mobile phones. There will be incremental opportunities in the business-to-business segment.
Be it manufacturing, retail, healthcare or agriculture, 5G is likely to make meaningful inroads. McKinsey and Company believes that “companies will adopt 5G to enable new use cases or to comply with future connectivity standards.”
Therefore, there is a big addressable market, which is at an inflection point. Given the market potential, let’s talk about four 5G stocks that are best positioned to benefit from the tailwinds:
- Qualcomm (NASDAQ:QCOM)
- T-Mobile US (NASDAQ:TMUS)
- Ericsson (NASDAQ:ERIC)
- American Tower Corporation (NYSE:AMT)
5G Stocks for the Long Run: Qualcomm (QCOM)
QCOM stock has been trending higher with an upside of 36% in the last six months. Recently, the company reported first quarter results for 2021 with the top-line missing analyst estimates. Some correction and sideways movement are likely in the foreseeable future. However, QCOM is among the top 5G stocks to consider on dips.
It’s also worth noting that the company’s Q1 2021 results did miss analyst estimates. However, on a year-on-year basis, top-line growth and earnings growth was strong. One of the key reasons for strong earnings growth was “strong 5G demand in handsets.” It goes without saying that 5G handset demand will sustain in the coming years and Qualcomm is well positioned to benefit.
I am also bullish on the company’s steady cash flows from the licensing business. As of Q1 2021, the company has signed 120 5G licensing agreements. Qualcomm is also working on a wider adoption of 5G. Business-to-business sales will drive growth in the next few years.
Coming back to valuation, QCOM stock currently trades at a price-to-earnings-ratio of 20.2. Over the next five years, the company’s annual earnings growth is likely at 19.8%. Therefore, the stock remains attractive from a valuation perspective.
T-Mobile US (TMUS)
TMUS stock is another top name among 5G stocks for the long-term. As a leading 5G carrier, the company is poised to benefit from industry tailwinds. TMUS stock has been relatively sideways in the last six months. I see current levels as attractive for fresh exposure.
T-Mobile US claims to be the largest and fastest mobile network in the United States. As of December 2020, the company had 280 million people covered under its 5G network. In addition, the company’s ultra-capacity 5G network already covers 106 million people.
A June 2020 reported cited that T-Mobile’s 5G network reach is the best among competitors. With T-Mobile remaining aggressive in terms of expanding availability, the company stands to benefit. In addition, the ultra-capacity 5G network is likely to deliver faster speed.
From a financial perspective, the company reported free cash flow of $3 billion for the last year. As 5G adoption increases, I expect EBITDA margins to improve in the next few years. For the current year, the company has guided for FCF in the range of $4.9 billion to $5.4 billion.
Overall, TMUS stock is attractive for long-term exposure. I expect the stock to be among the top performers among 5G stocks in the next few years.
When it comes to 5G technology, Ericsson is possibly the top stock to consider. ERIC stock is also undervalued at current levels. The stock trades at a P/E of 16.5. In the next five years, average annual earnings growth is likely to average 28.9%. At a price-earnings-to-growth ratio of less than one, the stock has significant upside potential.
As of Q4 2020, Ericsson had signed 127 agreements with 79 live networks. The company believes that its “cloud-native 5G core portfolio has a very high win ratio and will start to generate revenues in the next 12 to 18 months ahead.” This is likely to ensure that the company continues to report strong numbers.
It’s also worth noting that the 5G enterprise market was valued at $2.3 billion in FY2020. The market size is expected to increase to $31.7 billion by FY2026. I believe that Ericsson is likely to be a key beneficiary of strong growth in enterprise markets.
Ericsson has also guided for long-term EBITDA margin in the range of 15% to 18%. This is likely to ensure robust free cash flows. Continued investment in research and development is likely to ensure that the company remains a technology leader in the 5G space.
American Tower Corporation (AMT)
AMT stock, which has been sideways in the last year, is another name among 5G stocks to consider. I also like AMT stock from a dividend perspective. The stock has an annualized dividend of $4.84, which implies an attractive yield of 2.08%.
Among the key growth drivers, U.S. mobile data traffic growth has accelerated in the last few years. With 5G and Internet of Things, data traffic growth will sustain at a robust pace. This implies strong demand for the company’s infrastructure network.
American Tower has already initiated deployment of “urban and venue-focused millimetre-wave solutions” along with “complementary wide area 5G coverage and capacity across low and mid-band spectrum in suburban & rural areas.” Capital expenditure is likely to be relatively high in the near term. However, over the next few years, these investments will deliver incremental free cash flows.
Overall, AMT stock is worth considering at current levels. After under-performing in the last year, I expect the stock to break out on the upside.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.