Tech stocks: 5G will live up to all the hype – here's how to invest

The latest generation of mobile wireless networks – 5G – promises instant connectivity and should accelerate progress in sectors ranging from artificial intelligence to robotic surgery, says Stephen Connolly.

It’s going to change everything. It’s a game-changer for humanity. It’s the next big thing. There is no shortage of big claims for “5G”, the term used for the fifth generation of the mobile wireless network that each of us relies on to carry our telephone calls, text messages and internet data. We are bombarded with hype all the time. But when it comes to 5G, to call the switch from the current 4G a revolution doesn’t seem so far-fetched. Even if the advent of 5G proves only a partial success, the prospect should be enough to get investors excited.

The previous Gs

Readers of a certain age may well remember the first wave of “1G” mobile phones in the 1980s. They were analogue and voice-only. Then “2G” in the 1990s used digital radio signals and saw the introduction of text-messaging, setting mobile communications on the path – via early internet access – to what we are accustomed to today. 

In recent years, 3G and 4G have been faster, more sophisticated versions of 2G. As for 5G, it’s the first network being built to serve much more than just phones and tablets. It is going to take communication to a whole new level, well beyond the current 4G, and it will change the way we live.

More often than not, however, 5G seems to grab headlines and trend on social media for the wrong reasons. For some the network has become an area of national rivalry between the US and China with each trying to win prestige with their rollouts and technical developments. 

The fuss over Chinese tech giant Huawei’s influence abroad is fuelling concerns about national security and cyberwarfare as well as the protection of intellectual property generally. And then there are unfounded fears that network radio masts are damaging to health and are even spreading Covid-19.

Shaking up a wide array of industries

Ignore this kind of furore and focus on 5G as a technology. It seems certain to trigger fundamental changes across whole industries and sectors. Waves of digitisation will spread further than we have seen before and help the technology sector deliver on many of its promises to bring us greater connectivity. The immediate investment universe, therefore, comprises the large incumbent telecoms network operators, the microchip makers, handset and device manufacturers, the network mast owners and builders, and many supporting businesses.

Perhaps the greatest opportunities, however, lie in how 5G will bring us closer to a fast-moving, real-time “internet of things”, or “IoT”, as it helps connect everything we use in our lives. Often this is portrayed as people living “smart” lives in which everything is joined up – your PC, fridge, car, watch and house are all talking to each other to make your life run smoothly while providing data on your health and welfare. Making this a reality will herald an ever-present, omniscient technology at everyone’s service. It’s not just your home. Your car routes and travel passes, your daily itineraries and interactions, and your spending and entertainment habits can all be tracked or planned with your devices facilitating it.

We see elements of this on the current 4G network, even though using it is not as straightforward and quick as it could be. The 4G network can be slow and in busy areas users can be crowded out as there simply isn’t enough bandwidth to accommodate everyone. 

Beefing up bandwidth

So what exactly are we getting instead of 4G? The biggest change will be in so-called bandwidth (the capacity of a connection). The more bandwidth, the more users that can be on the network at once. It will leap from six gigahertz (Ghz) on current networks to 300Ghz. While this sounds impressive, it will take a lot of money and time to get this completed at scale. 

Next, the network radio masts themselves will be able to receive and send more data, further boosting processing power. And new technology will be employed to propel radio waves more powerfully and in specific directions so that there is less blockage in urban areas, as we frequently experience now.

As we get there, if the technical claims are right, 5G will mean phone download speeds of about ten gigabits per second – that’s said to be 600 times faster than 4G. It is ten times faster than Google Fiber’s standard home broadband service, according to Wired magazine. 

To put that in context, users could download an entire 4K high-definition film in just 25 seconds and a household could stream several of them simultaneously. Videogames will also get a considerable boost in speeds, too, allowing ever more complex graphics and processing.

Tapping the cloud

Dramatically improved speeds and near-immediate processing will allow us to exploit cloud computing more effectively. Cloud computing refers to storing and accessing information and programmes over the internet instead of on a PC. The cloud contains vast amounts of data. 

The 5G network and the cloud working together are capable of joining up more and more interactions between people and their devices, accommodating the exploding amounts of associated raw data and providing the huge computing power needed to process it meaningfully. 

Taken together they are central to realising the potential from the key digital themes such as big data, artificial intelligence, machine learning, algorithmic processing and data storage. The investment case for some of the biggest themes currently driving stockmarkets is therefore effectively based on 5G.

Furthermore, there are many advances that will be possible because of the vastly greater speeds and capability that 5G will bring but we simply haven’t identified them yet. There is plenty of potential in “smart” hospitals, where medical devices can monitor patients at home, doctors can diagnose reliably online and surgery can be carried out remotely. Another area is better connectivity between schools, universities and students leading to more accessible and flexible education through virtual courses. The list is huge and will grow as 5G spreads and more uses are discovered.

Making driverless cars safer

For driverless vehicles, 5G is a big leap forward because of the instantaneous speed. Two cars will be able to talk to each other, one telling the other it plans to move out of a lane, so the other will begin making way. This is theoretically possible on a 4G network but any lags in transmission of the sort we experience on our phones would raise the risk of accidents.

Consider, too, that last year surgeons in China were, according to the South China Morning Post, able to remove a laboratory animal’s liver on an operating table 30 miles away. The surgeon controlled two robotic arms remotely across the 5G network. And more recently, again in China, a surgeon was able to carry out the first 5G brain procedure on a Parkinson’s disease sufferer 1,500 miles away by remotely controlling a robot over three hours. 

These operations, if carried out using slower 4G, would have been vulnerable to mistakes with serious consequences. 5G makes these medical advances possible because of what boffins call “latency”. Data takes time to shuffle across a network and the lower the latency the faster things move. With 5G, the latency is almost zero, which makes response times across the network almost instantaneous – allowing the breakthrough operation to take place. This is “telepresence” – because the moves made by the surgeon were replicated immediately somewhere else in almost real time, he was digitally present.

The size of the 5G market

The potential of 5G makes it easy to paint a picture of out-performance versus the broader markets over many years to come. The number of mobile broadband subscriptions globally has exploded over the last ten to 15 years. What’s more, that growth has been accelerating. 

This will keep going and users will be shifting up to 5G as their hardware is upgraded. And there are 5G usage forecasts. Business data provider Statista says that the number of 5G subscriptions is likely to reach 1.9 billion accounts by 2024. There were only 12 million in 2019! 

The disruptive potential of the transition to 5G is also under appreciated. There are fund managers who have described it as significant as the breakthrough launch of the first Apple iPhone. Lightning-fast data processing will allow new entrants in various industries to steal a march over incumbents more easily, or shake up a sector with new services or products. 

Where to look for winners

With all this in mind, and given the wide array of companies that could gain, we have tried to see the opportunities in broad terms and looked for stocks accordingly. 

The technical feat of completing this network will itself lead to advances in technology. So it is important not to focus narrowly on, say, early winners like BT with its EE mobile network (it launched its 5G services late last year). As one market commentator put it, investors might be better off seeking out 5G “enablers” rather than mere “deployers”. 

Similarly, Apple has just announced rolling out its own 5G-enabled phones. This is good news but perhaps more for the microchip makers or companies producing the latest fibre-optic technology, aerials, and the cloud data storage providers. They’re all needed if the promise of 5G is to be fulfilled. 

There are numerous market research firms producing projections for the future market size as they try to assess the implications for the broad infrastructure around 5G. The projections can be startling. Grand View Research, for example, sees the global market reaching $497bn by 2027. This implies an annual compound growth rate of just over 100% a year. On their numbers, this growth is largely being driven by communication-service providers. 

They see market growth accelerating because as technology around 5G itself rapidly improves, installing the network gets cheaper, meaning more money to boost the pace of rollout. Certainly these are big growth numbers and are projections over many years. No two market researchers seem to agree. However, while the numbers may differ, the strong growth trends looks broadly right. A recent report from Kenneth Research had the annual compounding growth rate at over 50%. 

Whatever the exact figure turns out to be, 5G is clearly a huge global transformation that industries will be working through for many years to come. There is no single “5G” company, but nonetheless plenty of ways investors can get on board the next big tech theme. We look at some promising stocks below.

The 5G stocks to buy now

Qualcomm (Nasdaq: QCOM) is a $138bn wireless-technology group that has been enjoying a resurgence over the last few years as it gains from 5G. It’s also profiting from the Covid-fuelled move to remote working and the demand for technologies that can support this. 

Qualcomm’s activities are broad. For example, it produces and sells chips as well as software used mainly in smartphones, in addition to tablets and laptops – in fact anything that needs to be connected up via the network. It also has considerable intellectual capital from years of research that is essential for wireless communications, and which it licenses out. 

Its most recent results beat analysts’ expectations and, given 5G will boost growth and thus profits, the shares should be good performers on the back of double-digit growth rates. The management is giving a bullish and strong indicator of how it sees the business moving forwards near term. 

Another key beneficiary of 5G as well as broader trends like cloud computing and artificial intelligence is Nvidia (Nasdaq: NVDA). Its highly-regarded graphics boards and processors support high-demand software such as videogames. Its products also work well in fast data- processing, giving the company a leading position. 

The shares have had a decent run but growth expectations are high. It might be tempting to wait for a pullback but momentum is currently strong. 

As with Qualcomm, the last set of results were better than anticipated. Nevertheless, investors should take a long-term view as it can be volatile. It is becoming more dominant as a business and can continue to beat the market.

Crown Castle International (NYSE: CCI) is a good example of the diversity of opportunities when it comes to 5G. This dedicated real-estate company in the US rents out telecoms towers and has expanded quickly on the back of high demand for leases. 

Not only does it benefit from high cash flows in the business, but its “tenants” are generally highly-regarded big multi-billion dollar companies with strong financial resources. Indeed, as property market exposure goes, there is little that beats this niche sector for dependability and stability. It is not without risks but the near-3% yield adds a degree of safety. The current price is not demanding for the attractive medium-term returns on offer. 

Swedish telecoms and networking group Ericsson (Stockholm: ERIC-B) is benefiting as companies turn to it for help, having spurned the advances of Chinese technology group Huawei , now widely shunned. 

This will allow Ericsson to gain new market share but this is not being adequately reflected in the share price, creating an opportunity. 

Ericsson had been in the doldrums for years after the “dotcom” boom a decade ago and has more recently been through a successful restructuring. These are all positive developments and while the company does come with risks like many in the sector, the shares offer good value.

Skyworks Solutions (Nasdaq: SWKS) is another microchip stock but its speciality is radio-frequency chips. According to recent data, over 73% of the firm’s sales are exposed to 5G. Its products find their way into handsets, devices communicating over the network, and the equipment that makes up the broader network. 

Radio frequency chips are in demand so Skyworks seems very well placed given the compelling outlook for 5G . Apple is a key customer and it has now announced plans to roll out 5G handsets later this year, which should be a big event for Skyworks. The market sees the company on a growth trend over the medium term.

• Stephen Connolly writes on finance and business, and has worked in investment banking and asset management for over 25 years (sc@plainmoney.co.uk)

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