According to third-party estimates, 5G connections in the first quarter of 2020 shot up 308% quarter over quarter to 63.6 million as more than 100 smartphone models supporting the latest wireless technology have already hit the market. Not surprisingly, tech companies that stand to gain from 5G deployment have been flying high, beating the broader markets in 2020 by huge margins.
However, amid the coronavirus emergency, 5G related spending has dipped below 2020 forecasts. A game of catch-up could ensue as focus shifts back to the progress needed to fulfil 5G deployment timelines. 5G capital spending will increase from $10.1 billion this year to 23.8 billion in 2021, according to estimates provided by Analysys Mason, a global consulting firm specializing in telecoms.
A few stocks could be positioned to fare better than the others as the 5G rollout moves past the coronavirus interruption. Our research team has found three such hot stocks that have delivered impressive returns so far this year and look good for more.
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Telefonaktiebolaget LM Ericsson (NASDAQ:ERIC)
5G networks will utilize higher frequency airwaves in urban areas. As a result, they require more equipment – a long-term bullish sign for network gear maker Ericsson (ERIC).
The Ericsson network segment provides hardware, software and related services for radio access and transport, as well as related services such as design, tuning, network rollout and customer support.
Ericsson offers a relatively direct play on 5G infrastructure and it is trading at just 20x forward earnings. That means there’s a path for ERIC to show market-beating returns in the next couple of years. The Swedish company is executing well ahead of 5G demand tailwinds and continues to build its market share lead.
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Ciena Corporation (NYSE:CIEN)
5G networks will connect to fiber-optic networks for “long haul” purposes. That will provide reliability for emerging automotive, robotics and medical applications. Ciena (CIEN) controls close to a quarter of the optical hardware networking market worldwide (excluding China).
The optical network transport market that was worth just over $23.6 billion in 2019 is expected to hit $56 billion in revenue by 2025, according to Mordor Intelligence. That translates into a compound annual growth rate of 15.4%, indicating that Ciena could ramp up its current modest pace of revenue growth.
In the last fiscal quarter the company reported a revenue increase of 3.4% year over year. Considering that only 8% of global telecom networks are expected to be covered by 5G this year. According to GSMA Intelligence the coverage could go up to 34% by 2025. So don’t be surprised to see Ciena climb in the forthcoming quarters since we are still in the early stages of 5G deployment.
CIEN stock is currently trading at a relatively attractive valuation with a trailing price-to-earnings ratio of 29, which is much lower than the 5-year average multiple of 55.
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Skyworks Solutions Inc. (NASDAQ:SWKS)
Chipmaker, Skyworks Solutions (SWKS) products will play a critical role in helping 5G smartphones connect to the network.
Big opportunities lay ahead for SWKS. Two of Skyworks’ biggest customers are Apple and Chinese smartphone maker, Huawei. China will account for most 5G smartphone sales in 2020. 5G phones make up nearly half of new smartphones coming to market, with most in China, according to a Susquehanna report. Samsung, Huawei and others lead in 5G smartphones shipped.
Apple is expected to roll out new 5G iPhones in the fourth quarter, this could be a key event for 5g stocks. While many analysts expect 5G iPhones to spark a new upgrade cycle in 2021, Apple’s pricing could be a key factor.
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Skyworks CEO Liam Griffin estimates that the company’s revenue opportunity in a 5G handset could be double or triple that of 4G devices. He said in the latest earning call, “So you could be looking at platforms that in a 4G world maybe offered $4to $5 for us; in a 5G world it could be $8 to $10, or even $15.”
Skyworks peer Qorvo estimates that 250 million smartphones could be shipped in 2020. That number could go up to 1.5 billion annually by 2025, according to third-party forecasts. Skyworks Solutions’ mobile business accounts for 69% of its total revenue and could drive revenue growth in the years to come.
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