Dave Gilbert here, Editor of Smart Money.
Back in the good old days before COVID, one of the hottest investment themes was the next-generation wireless technology called 5G.
It promised reliable and fast connections – as fast as the blink of an eye – that would enable or enhance other massive breakthroughs like the Internet of Things (IoT), artificial intelligence, driverless cars, virtual and augmented reality, and more.
Oh, and you could download a movie almost instantly, too.
Wireless service providers like Verizon Communications Inc. (VZ), T-Mobile U.S. Inc. (TMUS), and AT&T Inc. (T) still tout the benefits of 5G in their marketing, but their stocks haven’t exactly been on fire.
T-Mobile has beaten the market over the last 24 months, but Verizon and AT&T are way behind.
Just last week, Bank of America downgraded Verizon to “neutral” from “buy.” Analyst David Barden wrote that the payoff for 5G is a lot slower coming than it was for 4G…
Verizon gambled again in the last several years that 5G would give birth to a similar degree of novel consumer and/or business demand. It has not. Verizon’s understandable fixation, therefore, on ‘what is next’ led it down a path where, unfortunately, it now falls short on ‘what is now.’
It remains a forward-thinking team with premium assets and every right to win down the road when the market knows what to do with these assets and how to value them. In the meantime, the path is cloudy.
So, was 5G just a lot of hype, doomed to fall short of its predecessor?
Not likely. Even the analyst himself talks about winning “down the road.”
But that doesn’t mean investors have to wait forever to make money. It makes sense that the payoff from Verizon is taking time to unfold, but there are other companies right now seeing the benefits.
5G Global Expansion Continues
Think of a wireless communication network like 5G as you do a highway system. But instead of cars and trucks traveling on these highways, it’s phone calls, texts, emails, and payments.
Right now, a superhighway is under construction. Eventually, business that set up along that highway – like Verizon – will make a lot of money as traffic flow increases.
But we’re still in the construction phase, where part of the highway is open but not all of it. What’s more, companies like Verizon are paying for that construction.
As you can imagine, anytime a major highway is built in America, the companies that build the highway enjoy a surge in revenue. A lot of concrete, asphalt, gravel, and steel go into a highway, so raw material suppliers do well.
The materials are different for the 5G superhighway – base stations, mini-towers, network infrastructure, and more – but the idea remains the same.
You don’t hear it as much these days, but 5G continues to be built out around the world. On Monday, India completed its biggest auction ever for 5G wireless spectrum bands, receiving more than $19 billion in bids and extending the auction beyond its original end date.
Last week, Orange, a 5G operator in Spain, said it accelerated its deployment of 5G (in the 700 MHz band) during the second quarter. That technology now reaches more than 75% of the municipalities planned for 2022 with 40% of the year still to come.
Eric Fry told me this week that it makes sense providers like Verizon will have to wait longer for the payoff than companies building the networks. He also provided an interesting update to his subscribers. I can share a part of it with you here…
One illustrative case study would be Nokia Corp. (NOK), a company that is delivering impressive earnings growth during a moment when many other tech companies are struggling to do so.
Much of Nokia’s recent success derives from the “sleepless” progress of communications networks…
I’m talking about 5G.
Last Thursday, the company reported a “surprisingly” strong second quarter result that featured robust North American demand for 5G infrastructure and technology.
Importantly, Nokia’s two largest divisions, Mobile Networks and Network Infrastructure, produced a combined 14.5% jump in sales year over year. This outstanding performance enabled Nokia to boost its operating profit 16.5% year over year.
Thanks to these solid results, Wall Street analysts have been erasing their old earnings estimates and penciling in higher ones.
Nokia CEO Pekka Lundmark emphasized repeatedly during the earnings teleconference that the 5G boom is still in its infancy…
“We have to remember that there are countries and regions which haven’t even really started in 5G yet… the global penetration rates for both fiber and 5G excluding China remain low. For 5G sites globally, it’s around 15% and even in some of the more developed markets, less than 25%… So that’s why we do believe that we are still early in the 5G cycle… [T]his does not mean that we would be immune to any macroeconomic cycles… [But] the underlying… secular trends should continue to be there for quite some time…”
Within the overall 5G market, the Nokia team is especially optimistic about the growth potential of the enterprise market – i.e., private networks for businesses and government entities.
Now that a great, big 5G boom is underway, Nokia is finally starting to reap a bounty from its long-term research & development efforts.
As this new reality becomes increasingly obvious to investors, Nokia’s share price should begin attracting a larger and more enthusiastic fan base… and a much higher valuation.
One thing about megatrends… they power forward even through difficult economic and stock market times. 5G is still expected to add more than $12 trillion to the economy.
Typically, an industry measures its growth potential in the billions of dollars, not trillions.
As Eric says, somebody will be there to collect… smart companies and smart investors.
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