5G is still on fire – Now is the time to act

Dave Gilbert here, editor of smart money.

In the good old days before COVID, one of the hottest investing themes was 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 reality and augmented, and more.

Oh, and you can also download a movie almost instantly.

Wireless service providers like Verizon communications inc. (VZ), T-Mobile US Inc. (TMUS)and AT&T Inc. (J) are still touting the benefits of 5G in their marketing, but their stocks aren’t exactly on fire.

T-Mobile has beaten the market for the past 24 months, but Verizon and AT&T are far behind.

Just last week, Bank of America downgraded Verizon from “buy” to “neutral.” Analyst David Barden wrote that the payoff for 5G is much slower in coming than for 4G…

Verizon has again been betting for the past several years that 5G will spawn a similar degree of new consumer and/or business demand. He does not have. Verizon’s understandable fixation, therefore, on “what’s next” has led it down a path where, sadly, it now falls short of “what’s now.”

It remains a forward-thinking team with top-notch assets and every right to win down the road when the market knows what to do with those assets and how to value them. In the meantime, the path is cloudy.

So, was 5G just hype, doomed to fall short of its predecessor?

Not likely. Even the analyst himself talks about winning “on the road”.

But that doesn’t mean investors have to wait forever to make money. It makes sense that Verizon’s fallout will take a while to materialize, but other companies are currently seeing the benefits.

The global expansion of 5G continues

Think of a wireless communications network like 5G as a road network. But instead of cars and trucks driving on those highways, it’s phone calls, texts, emails and payments.

At the moment, a highway is under construction. Eventually, companies that locate along this freeway – like Verizon – will make big bucks as traffic increases.

But we are still in the construction phase, where part of the highway is open but not all of it. Plus, companies like Verizon are paying for this build.

As you can imagine, every time a major highway is built in America, the companies that build the highway benefit from increased revenue. Lots of concrete, asphalt, gravel, and steel go into a highway, so raw material suppliers are doing well.

The materials are different for the 5G highway – base stations, mini-towers, network infrastructure, etc. – but the idea remains the same.

You don’t hear it as much these days, but 5G continues to expand around the world. India completed its biggest-ever auction for 5G wireless spectrum bands on Monday, 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 had accelerated its rollout of 5G (in the 700 MHz band) during the second quarter. This technology now affects 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 that vendors like Verizon will have to wait longer for payment than the companies building the networks. He also provided an interesting update to its subscribers. I can share some of it with you here…

An illustrative case study would beNokia Corp. (NOK)a company that is seeing impressive earnings growth at a time when many other tech companies are struggling to do so.

Much of Nokia’s recent success stems from the “sleepless” progression of communications networks…

I’m talking about 5G.

Last Thursday, the company reported “surprisingly” strong second-quarter results, characterized by strong North American demand for 5G infrastructure and technology.

Importantly, Nokia’s two largest divisions,Mobile networksandNetwork infrastructure, produced a combined 14.5% jump in year-over-year sales. This outstanding performance enabled Nokia to increase its operating profit by 16.5% year-on-year.

Thanks to these strong results, Wall Street analysts erased their old earnings estimates and added higher ones.

Nokia CEO Pekka Lundmark repeatedly stressed on the earnings call that the 5G boom is still in its infancy…

It’s worth remembering that there are countries and regions that haven’t even really started 5G yet…global fiber and 5G penetration rates outside of China remain low. For 5G sites globally it’s around 15% and even in some of the most developed markets it’s less than 25%… That’s why we think we’re still early in the 5G cycle… [T]this does not mean that we would be immune to any macroeconomic cycle… [But] the underlying trends…secular should continue to be there for some time…”

Within the overall 5G market, the Nokia team is particularly optimistic about the growth potential of the enterprise market, i.e. private networks for businesses and government entities.

Now that a big, big 5G boom is underway, Nokia is finally starting to reap the rewards of its long-term research and development efforts.

As this new reality becomes increasingly apparent to investors, Nokia’s share price should begin to attract a larger, more enthusiastic fan base…and a much higher valuation.

One thing about megatrends…they grow even in tough economic and stock market times. 5G is still expected to add over $12 trillion to the economy.

Typically, an industry measures its growth potential in billions of dollars, nottrillion.

As Eric says, someone will be there to collect…smart companies and smart investors.

Cheers,

David

PS Apple’s next trillion dollar product?

Silicon Valley venture capitalist says it could be 10 times bigger than the iPhone, MacBook and iPad COMBINED! Here’s what investors should do now.

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