Technology evolves, and the next step in cellular tech is upon us. 5G is here, and effects will build over the next several years, as providers, device makers, and app writers adapt to the new capabilities. The new standards were set two years ago, and carrier networks started going live in the middle of last year. Early in December, T-Mobile launched the first 5G nationwide network.
The main advantages that 5G will bring are already known: more room on the data channels will speed up connections; lower signal latency will make connections more responsive; and most important of all, 5G will allow users to connect more devices simultaneously. For the moment, these advantages are not fully available, as the new system still relies on existing 4G networks to make the initial connection.
This brings up a final key point about 5G. The low- and mid-band frequencies on the new tech will expand the channels but won’t offer huge changes in performance. That will come with high-band 5G, on the new millimeter wavelengths. This is a segment of the radio spectrum that has not been used much for consumer applications yet, and so it has a lot of available space. As those regions start to fill – that’s when users will really see service improvements.
Of course, the high-band 5G comes with a drawback – its range can be measured in hundreds of feet than quarters of miles. Providers will need to set up much denser tower networks to provide full nation-wide coverage.
Those denser networks, making available the high-band frequencies, will also require changes in the devices, and the semiconductor chips, in the customers’ hands. And that, in turn, will give a boost to the tech sector – especially the companies making those devices and chips.
With the information about the lightning fast technology in hand, then, we opened TipRanks’ Stock Screener to get the scoop on 3 companies ready for the oncoming 5G onslaught. Let’s take a closer look.
Telefonakiebolaget LM Ericsson (ERIC)
Swedish-based Ericsson operates on the network end of the telecom industry. The company develops and provides the software and equipment necessary for business and consumer wireless networks. In addition, Ericsson has its fingers in the cable TV, mobile platform, and power module pots, and operates in 180 countries. Among the company’s assets are more than 49,000 patents, with a heavy emphasis on wireless tech.
The strength of Ericsson’s products and market position is evident from the quarterly numbers. In Q3, despite having to account for a $1.23 billion fine from the SEC, and the consequent net income loss, the company reported strong sales growth of 6%, with the largest gains in the North American and Northeast Asian markets. Totals sales reached $5.8 billion. More importantly, the company revised its 2020 full-year earnings guidance upward, to the $23.5 to $24.5 billion range – a billion-dollar increase.
Ericsson is heavily invested in China’s emerging 5G conversion, although the company states that it is still too early to quantify precise results. CEO Borje Ekholm said of the new network rollout, “5G is taking off faster than earlier anticipated, and we see initial 5G buildout as a capacity enhancer in metropolitan areas.”
Some of Wall Street’s top analysts are impressed with Ericsson’s quick moves into what is shaping up as the world’s largest 5G wireless market. From Canaccord, 5-star analyst Michael Walkley writes, “We believe Ericsson has a solid foundation for continued margin expansion and remains on track to achieve its 2020 operating margin target of >10% and 12-14% by 2022. Further, with the recent EU cybersecurity report not singling out China as a threat, followed by Huawei being allowed in France… we believe Ericsson has the potential for solid share of China 5G contracts beyond the ~10% LTE share.” Walkley backs his optimism with a Buy rating and an $11 price target, indicating confidence in a 24% upside for the stock. (To watch Walkley’s track record, click here)
Exane BNP Paribas analyst Stefan Slowinski added, “After a small downgrade to margin expectations post Q2 results, consensus margin momentum has again moved higher, as we expected, post Q3 results. Consensus now expects 11.6% 2020 adj op margins. Consensus expects Networks op margins to decline 20bps in 2020, despite the end of the ‘strategic projects’ headwinds, likely due to cautious Chinese assumptions. The stock is trading on just 9x EV/2020 co. adj EBIT, despite improving cash flows, a likely growing dividend, and major 5G ramps in 2020.” As a result, Slowinski rates ERIC stock an Outperform with a price target of $11.40. (To watch Slowinski’s track record, click here)
Overall, ERIC shares get a unanimous analyst consensus rating of Strong Buy, based on 4 recent Buy reviews. Shares are priced low for the tech sector, at just $8.85, while the $12.13 average price target suggests room for 37% growth to the upside. (See Ericsson stock analysis at TipRanks)
Nokia Corporation (NOK)
We stay in Scandinavia with our second stock, Finland-based Nokia. The company is well known-for its cell phone handsets, and its classic 3310 ‘dumb phone’ model continues to have a following even in today’s smartphone market. Nokia, like Ericsson, manufactures and markets network equipment, software, and related services on a global scale, with operations in over 130 countries. With annual revenues well upwards of 20 billion Euros, Nokia is a significant part of Finland’s entire economy.
The wireless industry’s move to 5G, while opening up plenty of opportunities, does not come without cost. That was made clear by NOK’s Q3 2019 report. The company noted the high cost of first-gen 5G equipment and crossover pricing pressures as headwinds. The numbers showed both the good and the bad. Total sales were up, to 5.69 billion Euros, while EPS rose from a loss of 2 cents in the year-ago quarter to a profit of 1 cent now. The EPS did, however, miss the forecast by 1 cent. Investors could stomach the revenue and earnings number, but the company also lowered its outlook for both 2019 and 2020.
Canaccord’s Michael Walkley, quoted above, has also reviewed NOK, and says of the stock and company, “[We believe] Nokia will execute on its revised margin and cost reduction targets to drive improving margins in 2021 when global 5G builds drive better top-line trends and cost reduction plans are achieved… Despite near-term margin pressure from 5G first generation products [and] pricing pressure on early 5G deals… we expect Nokia to emerge as a long-term leader for 5G buildouts with steadily improving margins over the next several years…”
Walkley’s Buy rating on Nokia comes with a $5.50 price target, suggesting that this stock will see 44% growth in the coming year. (To see Walkley’s track record, click here)
Overall, Nokia’s Moderate Buy consensus rating is based on an even split among the analysts – stock has 4 Buys and 4 Holds. Like shares in ERIC, NOK is priced at a discount – just $3.81. The average price target of $4.73 implies an upside potential of 24%. (See Nokia’s stock analysis at TipRanks)
Micron Technology (MU)
Micron is one of the semiconductor industry’s big names – in 2018, the company had the fifth highest global sales among its peers, at $31.8 billion. With a large part of Micron’s design and manufacturing infrastructure heavily dependent on the movement of materials and components between the US and China, the trade tensions between the two giants has put serious pressure on the company.
Micron’s market position as one of three major producers of DRAM chips ensures it a secure position as the expansion of 5G networks increases demand for semiconductors. The company’s NAND flash storage will also be a key component in the new systems. Micron’s experience with gaming systems and data centers – and their need for lots of memory – puts it in an enviable position to capitalize on the growth of data storage in the new networks.
Wedbush analyst Matt Bryson is bullish on Micron’s opportunity to take advantage of the 5G expansion as it ramps up this year. He writes, “Demand for both NAND and DRAM should accelerate through the course of 2020. There are numerous product cycles in place driving additional demand, including: 5G handset roll-outs, new gaming consoles, as well as improving hyperscale server spend.”
Getting into details, Bryson makes it clear that it’s not just new handsets – and their associated chips – that will drive demand for Micron products. He adds, “[W]e would note that we see memory consumption in 5G networking equipment, new last mile servers (needed to support lower 5G network latencies), new IoT equipment related to 5G, etc. as all ancillary demand drivers tied to 5G that should benefit memory consumption, at the margin.”
Bryson is confident in his Buy rating on MU shares, and gives the stock a $65 price target. His target implies an upside of 19%. (To watch Bryson’s track record, click here)
Like Nokia above, Micron has a Moderate Buy consensus rating. But in Micron’s case, this consensus includes 16 Buys. The stock’s 64% gain in 2019 clearly impressed Wall Street’s analysts. MU shares are selling for $54.53, and the average price target of $62.36 suggests a further upside of 14%. (See Micron’s stock analysis at TipRanks)