Opinion: These 4 companies will be the big early winners from the $326 billion push to 5G
By Daniel Newman
Commercialization of 5G cellphone technology is slated to begin in early 2019
With the commercialization of 5G cellphone technology slated to begin in early 2019, it’s a good time to start talking about 5G’s value to investors.
Let’s start with the obvious: mobile connectivity is the beating heart of every modern economy, and its lifeblood is data. The faster the data flow, the more efficient the communications systems can be, especially at scale. This is why the transition from 4G to 5G will be as radical for the global economy as was the evolution from 3G to 4G (which, among other things, ushered the era of smartphones, mobile commerce, and mobile banking).
5G is very fast. Very fast. Think 100 times faster than 4G, and 10 times faster than your average broadband connection. This will enable the next wave of technological and societal advancements that will transform our economy: Autonomous vehicles, smart factories (IIoT), smart cities, virtual and augmented reality, edge computing (high-performance data processing in real time without needing the cloud), health-care-specific IoT and more. Moor Insights & Strategy, which I consider to be one of a handful of research firms with a thorough understanding of 5G’s economic potential, estimates the infrastructure spending on 5G by 2025 will exceed $326 billion.
This spending will initially focus on these key areas: data centers; edge computing; network transformation; and 5G network protocols (also known as 5G IP) and modems. While each of these categories will continue to see a flurry of new entrants, I believe QualcommQCOM, +0.72% Intel INTC, +0.41% Dell and Ericsson ERIC, +0.62% ERICB, +0.04% will be the biggest immediate beneficiaries of 5G.
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Here’s how the winners break down by category:
Data-center OEM (including edge computing): Nearly 80% of 5G infrastructure spend, according to Moor Insights, will come from hardware and network transformation projects to support the new 5G standard. Key players are Cisco CSCO, +0.62% DellEMC, Hewlett Packard Enterprise HPE, +0.37% IBM IBM, +0.33% and Lenovo LNVGY, +1.61%0992, +0.56%
Data-center component suppliers (Including edge computing): These companies supply components that manufacturers use to build their hardware solutions. Key players include Intel, Qualcomm, Broadcom AVGO, +1.34% AMD AMD, +1.04% Samsung 005930, +1.30% and Nvidia NVDA, +0.42%
Network transformation providers: These help telecom and other communication companies upgrade their networks to handle 5G. Companies include Ericsson, Intel, Nokia, Samsung and Huawei.
Modem and IP suppliers: These companies build modems, and/or supply intellectual property that contributes to the 5G standard. Companies to watch include Ericsson, Qualcomm, Huawei, Intel, Nokia and Samsung.
Mobile telecom companies: China Mobile CHL, -0.02% 0941, -0.39% SingTel, VodafoneVOD, +1.49% VOD, +1.54% AT&T T, -0.08% Verizon VZ, +0.24% T-Mobile TMUS, +0.44%Sprint S, +0.67% Orange ORA, -0.24% and a handful of other operators deliver cellphone services for retail and businesses.
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5G’s biggest winners
The four biggest winners mentioned earlier are driving the transition from 4G to 5G. Qualcomm has continuously developed the most capable modems, and the 5G uptick will be good news in what’s been a challenging year on the legal and regulatory front. Intel has the most complete end-to-end solution, DellEMC will lead in the data-center category, and Ericsson should be tops in network transformation.
Others will benefit too, however, Modem and IP suppliers should reap healthy returns from their investments in 5G, and I expect this will most likely exert a meaningful impact on their share price. This is in part because companies licensing their IP technology, like Qualcomm, stand to rake in revenue from every device that uses it, regardless of who ultimately manufactures modems and other components. Component providers will make the chips that will power the billions of new devices that our transition to 5G will bring to market.
Carriers will see continued growth from mobile use. However, they stand to gain the least among these categories since competition and commoditization will likely push down data pricing. Nonetheless, I expect carriers to continue to do well with retail hardware sales, and I foresee mobile-enabled laptops as a potentially strong new product category starting next year.
Although infrastructure spending will come first, IP providers should see the longest run for their returns as the 5G standard picks up momentum.
Pay attention to which companies take the lead in launching midterm standards (5G+) and ultimately stake a claim on 6G (or whatever the next standard will be).As requirements for network capabilities continue to grow, it won’t be long before 5G becomes the launchpad for the next phase of our collective connectivity evolution. It is never too soon to start thinking ahead.