3 Ways to Invest in 5G Growth

Apr 21, 2022 at 3:00 AM
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    3 Ways to Invest in 5G Growth

    There are several trends that are expected to reshape the way we work and play this decade. Among these so-called megatrends is fifth generation (5G) networking, which is poised to connect the world like never before and drive exciting new technological breakthroughs.

    According to the GSM Association, there will be more than 1.7 billion 5G network subscribers in the world by 2025. The increased bandwidth that comes with 5G broadband will not only make our computers and phones faster but support emerging technologies like internet-of-things (IoT) and machine learning.

    Over 200 commercial 5G networks have been launched since 2019 and many more are on the way. Hundreds of telecom operators worldwide are investing in 5G in anticipation of widespread global adoption. 

    Investors have several ways to invest in companies that have significant exposure to 5G, from service providers to equipment makers to materials specialists. These three stocks each represent unique ways to connect to the 5G revolution. 

    Is Broadcom an Apple Supplier? 

    Broadcom Inc. (NASDAQ: AVGO) makes a range of semiconductors and infrastructure software for networking, broadband, and wireless customers globally. In the 5G space, it supplies radio frequency (RF) chips that enable smartphones to communicate with cell towers. Broadcom is best known for being a supplier of multiple components for the 5-G compatible iPhone. 

    Industry-wide semiconductor challenges have largely subsided for Broadcom, paving the way to stronger growth ahead. After a recovery in FY21, management is anticipating high-teens revenue growth in its chip business this year. 

    The market got a glimpse of what lies ahead in the company’s Q1 report, which showed momentum across its semiconductor end-markets including data centers, enterprise, and 5G. Broadcom surprised the market by reporting growth in the wireless business when analysts were expecting a slowdown from the initial 5G launch in the prior year period. 

    The deployment of 5G networks was thrown a curveball during the early days of the pandemic but is now moving full steam ahead. So too is the production of 5G smartphones which is driving rising demand for Broadcom products. The stock is currently trading below its 5-year historical average valuation on a P/E basis and comes with a 2.7% dividend yield. 

    What Company Supplies 5G Telecom Providers?

    Ciena Corporation (NYSE: CIEN) makes open, scalable, and automated 5G network solutions for customers worldwide. This includes routers, optical switches, and analytics-driven automation solutions that allow users to work in any network environment. It is this open approach that appeals to customers who don’t have to be locked into any one communications equipment vendor. 

    Ciena’s networking technology is used by 85% of the world’s biggest telecom service providers including AT&T, Verizon, Bell Canada, and Deutsche Telekom. Its solutions also support leading tech companies such as Amazon and Google, as well as the U.S. Department of Defense. 

    A major step in Ciena’s relevance in the 5G space occurred in September 2021 when it announced a deal to acquire the Vyatta virtual routing and switching business from AT&T. The move gives Ciena greater access to the fast-growing network edge market which includes both 5G networking and cloud computing. 

    Over the long-term, Ciena is positioned to benefit from the global 5G buildout and demand for flexible technology solutions. The driving force behind the rapid growth in data center connectivity is 5G. As telecom operators and other enterprises continue to spend in this area, the undervalued Ciena should generate strong multi year growth.

    What is an Outside the Box 5G Play?

    DuPont de Nemours, Inc. (NYSE: DD) is far from a 5G pure play but does offer some interesting under the radar exposure. These days the longtime chemical company is getting into new businesses that offer higher growth and higher margins including 5G. 

    The pending acquisition of specialty engineered materials company Rogers Corporation is expected to significantly expand the former DowDuPont’s presence in 5G and other emerging growth areas like electric vehicles and clean energy

    Rogers Corp. manufactures a range of specialty materials that are found in connected devices around the world. It makes laminates for mobile devices and IoT applications in addition to gasketing and sealing materials that protect phone and tablet displays. 

    While much of the focus around 5G is on hardware and software, materials that make for better end user experiences are also part of the puzzle. DuPont’s antennas, connectors, and optical fiber cables address the requirements of today’s high speed connections. Its thermal management solutions are making 5G devices safer and more reliable while its elastomer and lightweight solutions are making 5G devices (including earbuds) more comfortable. 

    Granted, with DuPont de Nemours investors mainly get the legacy DuPont and Dow businesses that serve a wide range of industrial customers. The lower growth nature of these end markets is the reason for the stock’s below market P/E multiple. Yet there may be an underappreciated growth catalyst emerging in the form of Rogers and DuPont’s ongoing push into 5G.

     

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