Stocks tuned in to turbocharged 5G

Cellphone service is about to get 20 times faster, opening up a new world of wireless possibilities, and profit opportunities for these companies

Vikram Barhat 11 September, 2019 | 1:23AM

Person holding iPhone

This week, Apple (AAPL) announced the new iPhone, the 13th generation of its handsets. While the new phone has some noteworthy new features, they lack 5G capability. The U.S. tech heavyhitter is expected to roll out its lineup of 5G-enabled iPhones in 2020.

However, the new blazing-fast cellular network, 5G, has already come on line in the U.S., as has the first batch of 5G-capable mobile devices. Claimed to be more than 20 times faster than 4G, the breakthrough wireless technology is set to ignite a whole new experience ranging from gaming and entertainment services to Internet of Things (IoT), and business applications.

It’s early days in what’s widely regarded as the dawn of the 5G wireless connectivity era. As the technology becomes more mainstream and gains widespread acceptance over the next few years, it could provide a meaningful revenue boost for a wide swath of tech companies and their stocks. The following companies in the smartphone, wireless services and semiconductor industries are well positioned to reap rich financial benefits as 5G technology gains traction following greater adoption worldwide and across industries.

Apple Inc.

 

Ticker

AAPL

 

Current yield

1.47%

 

Forward P/E

16.13

 

Price

US$209.19

 

Fair value

US$200

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of September 04, 2019

Tech behemoth Apple (AAPL) makes a range of consumer electronic devices including iPhones, iPads, iMacs, Apple Watch, and Apple TV. As well, the company offers a variety of services including Apple Music, iCloud, Apple Care and Apple Pay. The company generates about 40% of its revenue from the Americas, while the rest of the world makes up the remainder.

In a strategic move, Apple settled its bitter legal battle with chipmaker Qualcomm earlier this year. As a result, Qualcomm will supply chips for Apple 5G iPhones rolled out in 2020, according to Reuters, enabling connectivity to high-speed 5G networks, marking the beginning of Apple’s 5G business cycle.

“The iPhone makes up the majority of Apple’s total revenue,” says a Morningstar equity report, but points out that there may not be “a major rebound in iPhone unit sales, particularly as customers await a 5G iPhone model in 2020.”

Meanwhile, in a further 5G push, Apple splurged US$1 billion to scoop up Intel’s 5G smartphone modem business in July this year, the company’s second largest acquisition (after acquiring headphone company Beats for US$3 billion in 2014). “This deal validates Apple’s strategy of trying to bring as much chip development in-house as feasible, though we don’t expect the firm to replace Qualcomm’s 5G modems in future iPhones for at least a few years,” says Morningstar sector strategist, Abhinav Davuluri, who pins a price tag of US$200 on the stock’s fair value, and projects modest growth in iPhone sales and double-digit services growth, driving total revenue growth to the mid-single digits, beyond 2019.  

Verizon Communications Inc.

 

Ticker

VZ

 

Current yield

4.14%

 

Forward P/E

11.82

 

Price

US$58.18

 

Fair value

US$58

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

***

Data as of September 04, 2019

The largest U.S. wireless career, Verizon (VZ) serves about 89 million postpaid and 4 million prepaid phone customers and generates 70% of its revenue and nearly all operating income from its wireless business. The firm also generates revenue from its media business, which includes AOL and Yahoo.

Verizon is aggressively ramping up its fibre-optic cable network, Fios, to serve wireless and business customers while also expanding capacity in other major U.S. markets. “This undertaking should support the firm’s effort to lead the industry in 5G technology deployment and enable it to serve new customers, providing strategic benefits and new avenues for growth,” says a Morningstar equity report.

The company is increasingly blending the capabilities of its wireless and fixed-line networks, in order to maintain a network edge and retain its industry-leading cost advantage.

The carrier’s focus on fibre deployment makes a strategic sense in a competitive wireless landscape. Verizon’s fibre efforts will help “leverage its scale advantages to prepare for 5G technology and potentially create some differentiation against competitors,” says Morningstar sector director, Michael Hodel, assuring that Verizon would remain far larger than the combined entity resulting from the merger of T-Mobile and Sprint.

The firm’s wireless business provides considerable heft with roughly 40% share of the postpaid phone market. “Leading scale enables Verizon to generate the highest margins and returns on capital in the industry,” says Hodel, who appraises the stock’s fair value to be US$58, and asserts that “Verizon’s continued network focus will enable it to outperform its rivals in the wireless industry.”

Qualcomm Inc.

 

Ticker

QCOM

 

Current yield

3.22%

 

Forward P/E

18.08

 

Price

US$77.09

 

Fair value

US$72

 

Value

Fairly valued

 

Moat

Narrow

 

Moat Trend

Negative

 

Star rating

***

Data as of September 04, 2019

U.S. chipmaker Qualcomm (QCOM) develops and licenses wireless technology and designs chips for smartphones. The company's raft of patents around CDMA and OFDMA technologies, which form the backbone of all 3G and 4G networks, make it world’s largest wireless chip vendor with many premier handset makers as its clients

The firm is well positioned to be a leader in 5G. Given the solid growth of Qualcomm’s licensing business (QTL), presently driven by continued 4G penetration, “5G appears to be another strong opportunity as the technology ramps up in 2020 and beyond,” says a Morningstar equity report which adds that the company continues to charge device-makers a royalty fee as a percentage of the price of each 3G and 4G device sold.

Qualcomm has historically held a competitive edge in baseband chips, critical to devices’ inherent connectivity. The recent settlement deal with one of its biggest customers, Apple, and the expansion of 5G in the coming years position “Qualcomm to regain its baseband position in the iPhone,” and also benefit the company from “its pivot into non-smartphone areas such as automotive and Internet of Things,” says Davuluri, who estimates the stock’s worth to be US$72.

While the chipmaker has been facing Huawei-related headwinds associated with the transition from 4G to 5G, the greater number of connected devices should allow for comfortable growth in licensing sales, adds Davuluri, who forecasts average CDMA business (QCT) revenue growth in the high-single digits (driven by the upcoming 5G ramp) and low single-digit growth in QTL (licensing business), leading to a top-line CAGR of 5% from 2020 through 2023.

Editor’s note: The author owns a small position in shares of Apple.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Apple Inc217.69 USD-1.48
Qualcomm Inc76.43 USD-2.30
Verizon Communications Inc60.29 USD0.52

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.