We’re at a new turn in cellular technology, and the next few years will be interesting – to say the least – for techies. 5G networks are rolling out, and in fact, are already here. T-Mobile has a nationwide network in place, and other major providers have introduced 5G in large urban centers. The new technology promises to bring faster data streaming and higher density signals, making cell systems clearer, quicker, and more reliable.
It will also change the hardware, a fact that usually slips below most casual users’ radar. But device and chip makers are well aware of 5G’s impact on handsets and tablets. Older chips are not compatible with the new technology, and semiconductor and smartphone makers – who have had a rough time in recent years – see a positive turn ahead as they roll out upgraded products.
From an investor’s perspective, the hardware makers’ coming 5G boom represents an opportunity. As equipment manufacturers and end users switch to the new devices, the hardware companies will see increased sales, higher profits, and a consequent rise in share prices. In fact, the gains have already begun.
With that in mind, we opened up the TipRanks’ Stock Screener tool and pulled up three names that are going to make waves in 5G. All are large- or mega-cap companies, heavily invested in cellular and smartphone tech. All are Buy-rated – but they show different patterns of strength and weakness. Let’s jump into the details, and find out what makes them so compelling.
Skyworks Solutions (SWKS)
First up is Skyworks, a semiconductor chip supplier to the wireless handset industry. The company is focusing on small-cell and MIMO technology, applicable to the new networks. Small-cell, especially, will be important, as the high-end 5G signals have shorter range than existing systems – and will require a much denser network of small-cell towers and transmitters.
Skyworks is a major supplier of RF chips, with heavy investments in the broadband, mobile, and wireless infrastructure segments. About 10% of sales go to the Asian giants Samsung and Huawei, but by far its largest customer – making up some 47% of total sales – is Apple (see below). Skyworks provides parts for the latest iPhone models, particularly the power amplifier and diversity receive front-end modules.
Apple is predicting higher iPhone sales in the coming year, as the company adapts to the maturing handset market and rolls out 5G capable units. Skyworks, providing parts to the giant, is well-positioned to make gains on those new products – and, as a component provider, with minimal marketing overhead.
Writing for B. Riley FBR, 5-star analyst Craig Ellis sees four positive takeaways from Skyworks’ latest earnings report: “First, execution was strong down the line with high-quality sales, margin, inventory management, and cash generation outperformance. Second, 5G design wins with Sky5 product are broadly occurring, lending confidence F2Q’s above-seasonal guidance can persist in C2H20… Third … gross margins bucked adverse segment mix to surpass our expectation…. Lastly, a robust 32% FCF margin augurs well for ongoing cash return…” Ellis set a $150 price target on SWKS, along with his Buy rating, suggesting a 22% upside potential. (To watch Ellis’ track record, click here)
Rajvindra Gill, another 5-star analyst, reviewed SWKS for Needham and also came to a bullish conclusion: “SWKS’ higher-margin broad markets products continue to ramp across Wi-Fi, 5G infrastructure, and automotive. Given increased RF complexity in 5G handsets, we expect a meaningful Y/Y increase in iPhone blended $ content in FY20 ($7-$8). We expect sales growth and GM expansion throughout CY20 on increased strength in mobile and broad markets, driven by a strong rollout in 5G handsets…” Gill’s Buy rating comes with a $145 price target, showing confidence in an 18% upside. (To watch Gill’s track record, click here)
Overall, SWKS holds a Moderate Buy rating from the analyst consensus view, based on 15 Buys and 8 Holds. The stock’s $131.70 average price target indicates room for about 13% upside from the current share price of $117. (See Skyworks’ stock analysis at TipRanks)
Telefonakiebolaget LM Ericsson (ERIC)
Next on our list is a major name in telecommunications, the Swedish-based manufacturer Ericsson. The company has long been a big name in mobile network technology, developing the software and equipment necessary for business and consumer wireless networks. Ericsson also has interests in the cable TV, mobile platform, and power module segments. Among the company’s assets, spread across 180 countries, are more than 49,000 patents, with a heavy emphasis on wireless tech.
Canaccord’s top analyst Michael Walkley sees plenty of reason for optimism in ERIC shares. In his comments on the stock, written just after the earnings report, Walkley states, “We believe Ericsson has the potential to gain market share and grow faster than their market growth assumptions… 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. With the recent EU cybersecurity report not singling out China as a threat… we believe Ericsson has the potential for solid share of China 5G contracts beyond the ~10% LTE share. We believe management has successfully stabilized the business and made the necessary changes for the company to invest for the 5G cycle…”
Walkley puts a Buy rating on ERIC shares, and backs it with an $11 price target, implying a 33% upside potential to the stock. (To watch Walkley’s track record, click here)
Ericsson stock is priced at a bargain for a major tech name – just $8.96 per share. With an average price target of $11.20, shares are showing room for 36% growth potential. The Strong Buy consensus rating is unanimous based on 5 Buys. (See Ericsson’s stock analysis at TipRanks)
Apple, Inc. (AAPL)
Last on our list is Apple, the Silicon Valley mega-corporation that recently became the most valuable publicly traded company in the world, with a market cap of $1.35 trillion. Apple boasts an installed customer base – that is, device users who have bought hardware and set up accounts – well over 900 million strong around the world, and reported total revenue in 2018 exceeding $265 billion.
Apple will report fiscal Q1 results today, but the results from October’s fiscal Q4 report showed that the company is successfully implementing its shift away from dependence on iPhone sales to drive profits. The Services and Wearables segments posted 185 and 54% growth respectively, so that even though iPhone sales were lower than expected total revenues still gained, reaching $64 billion. EPS, at $3.03, beat the estimates by 6.7%. Apple beat the estimates in each reported quarter of 2019 so far, and calendar Q4 is normally the company’s strongest of the year – so analysts expect the company to report good news on Tuesday.
As for guidance, Apple is sanguine. The company’s new iPhone models will be 5G compatible, and management expects the new technology to drive an increase in sales, as established customers upgrade their devices. AAPL shares have been rising steadily in the past twelve months, after high volatility in 2018, and closed at near-record levels last Friday. The stock’s 90-day gain is an impressive 29%.
Writing on AAPL from Wedbush, 5-star analyst Daniel Ives sees the company continuing to make gains. He says, “We believe the company is poised to handily beat Street expectations in light of a strong holiday season with pent up demand catalyzing iPhone 11 purchases across the board… With currently 925 million iPhones worldwide and roughly 350 million of these iPhones in the “window of an upgrade opportunity” we believe Cupertino has a unique opportunity to capture this super cycle opportunity which will include a host of new smartphone versions/ models for iPhone 12. To this point, there are at least 5 iPhone versions that will launch in 2020 with the main event the 5G launch in September…”
Ives gives AAPL a Buy rating, and backs it with a powerful $400 price target, suggesting room for 25% share appreciation. (To watch Ives’ track record, click here)
Apple’s recent sustained share price gains have pushed the stock well above the average price target, faster than Wall Street’s analysts have been able to react. As Ives’ review shows, there is likely plenty of room for continued growth here. AAPL’s Moderate Buy consensus rating is based on diverse views, including 18 Buys, 12 Holds, and 3 Sells. (See Apple stock analysis at TipRanks)