You don’t hear about 5G like you once did. It’s no longer a telecom industry novelty but a necessity for businesses of all sizes. However, despite the technology becoming everyday and commonplace, that doesn’t mean there aren’t strong buy 5G stocks available to investors.
It’s hard to believe, but it’s been four years since all the major wireless carriers introduced their fifth-generation (5G) wireless networks nationwide across the U.S. As a result of 5G’s speed, businesses are using it for all kinds of applications.
One of the earliest ETFs created to provide exposure to 5G-related businesses was through the First Trust Indxx NextG ETF (NASDAQ:NXTG). It was a collection of companies “that have devoted, or have committed to devote, material resources to the research, development and application of fifth generation (“5G”) and next generation digital cellular technologies as they emerge,” states NXTG’s website.
The ETF consists of 100 eligible stocks with the highest market capitalizations. Then, the ETF allocates 80% of the fund’s assets to 5G Infrastructure & Hardware and 20% to Telecommunications Service Providers. Therefore, the stocks in each of these two categories are equally weighted.
While you could buy NXTG to ride future 5G innovation, take a closer look at three stocks to buy from the ETF.
Nvidia (NVDA)
Nvidia (NASDAQ:NVDA) shows up on most people’s lists for every type of technology, including 5G. In September, the company announced that it was working with Fujitsu (OTCMKTS:FJTSY) and Wind River. The plan enables NTT Docomo to launch the telecom industry’s first-ever GPU-accelerated commercial Open RAN 5G service on the Japanese telecom’s network.
“DOCOMO notes that, when compared to its standard network based on a proprietary solution, this new solution reduces TCO by up to 30%, improves network design utilization by up to 50%, and reduces power consumption at base stations by up to 50%,” Nvidia’s Sept. 26, 2023, technical blog post stated.
The solution uses Fujitsu’s virtualized centralized unit (vCU) and virtualized distributed unit (vDU), the Nvidia Aerial platform, and Wind River’s distributed cloud platform.
Also, Nvidia’s Aerial platform is part of the chip designer’s AI-on-5G unified platform to help companies accelerate their digital transformation. So, companies can deploy and manage the platform on-premises or through an infrastructure provider.
Further, Nvidia stock is already up 40% year to date (YTD). If you’re not a long-term investor, waiting for a correction to buy in the low $600s makes some sense.
Arista Networks (ANET)
Forbes contributor Jon Markman recently discussed why investors should buy Arista Networks (NYSE:ANET) stock. Specifically, he argued that Bill Gates’ assertion from May 2023. Gates had said that personal digital assistants will change our interaction with computers, potentially putting big tech firms like Google out of the loop.
As Markman points out, Gates believes voice will replace the computer keyboard and screen. Google may make its digital assistant available across various products, creating significant subscription revenue.
However, in order for Google to deliver all the information through its digital assistant, the networks sending the data need to be upgraded.
“Arista Networks makes the critical hardware and software infrastructure. The Santa Clara, Calif-based company has become a leader in next generation scalable switches, routers and other network equipment for data center, hybrid cloud, on premise, and edge computing customers. And they are now scrambling to upgrade their networks ahead of a barrage of data-thirsty new AI applications,” Markman wrote in October 2023.
Unfortunately, since Markman suggested buying Arista stock on a pullback to $160 last October, its shares have advanced by 42% in less than four months. ANET stock is now up 367% over the past five years, more than double the S&P 500.
Despite the gains, I don’t think Markman’s premise for owning the stock has changed much, so 18 out of 27 analysts rate it a buy or a strong buy.
AI and 5G were meant for each other.
T-Mobile US (TMUS)
T-Mobile US (NASDAQ:TMUS) has the best performance over the past year of the three top 5G U.S. wireless carriers. Its stock is up 13.1% over the past 52 weeks compared to -0.6% for Verizon Communications (NYSE:VZ) and -10.2% for AT&T (NYSE:T).
Oppenheimer analyst Tim Horan released a report about the wireless carrier at the end of January. He maintained a buy rating on TMUS stock with a price target of $190. That’s 19% above where it’s currently trading.
As Horan points out, the company has been leading the industry’s growth in terms of subscriber additions. Specifically, in 2023, it added 1.3 million postpaid accounts. And, it has the only “true” 5G network in the U.S. Also, he feels that the price-to-cash flow ratios for all three companies are extremely low. As is, their free cash flow yields.
Based on its adjusted 2023 free cash flow of $13.59 billion, 77% higher than 2022, and an enterprise value of $300.2 billion, it’s free cash flow yield is 4.5%. Anything between 4% and 8% is fair value. Additionally, based on 2024 projected adjusted free cash flow of $16.58 billion (22% higher than 2023), its forward FCF yield is 5.5%.
As the company pointed out in its Q4 2023 press release, approximately 300 million Americans (98% of the U.S. population) were covered by its Ultra Capacity 5G network.
It remains the best of the three stocks to own.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
