The ongoing advance in digital wireless technology, 5G, is bringing a sea-change to the way we connect in the virtual sphere. By now, we all know the advantages that 5G will bring: faster connection times, lower latency, and improved connectivity – especially in networked systems and Internet of Things. First introduced at the end of 2017, 5G is going to dominate the digital landscape. The current crises – health and economic – have only slowed it down slightly.
The major US providers – Verizon, AT&T, and Sprint/T-Mobile – have all introduced 5G coverage, at least in the largest urban markets. It’s only a matter of time before the new systems are available uninterrupted coast-to-coast. The tech is expanding in Europe and Asia, too. China already has the world’s largest 5G networks, and Europe is working on cross-border networks.
From an investor’s perspective, 5G is going to send successful providers and supply chain companies soaring. Investors have a rare opportunity here – there is a new technology in the offing, it has been around just long enough that we know it works, and it’s public knowledge where to find the companies involved. We’ve pulled up the TipRanks data on three tech firms that are tied to 5G; here are the details.
Analog Devices, Inc. (ADI)
We’ll start with a chip maker. Silicon semiconductors are the heart and soul of modern electronics, and leaps in chip technology usually stand behind advanced in computing and networking. Analog is well known for its data conversion and signal processing chips.
That know-how in processing chips is Analog’s entry into 5G. The company announced earlier this year that it is entering a partnership with Marvell, combing ADI’s wideband RF transceivers with Marvell’s 5G digital platform. The collaboration aims at optimizing solutions for 5G base stations, a key part of the new network’s hardware.
Also in the news from ADI, related to 5G, is the company’s announcement in May that it is introducing a new millimeter wave solution. Access to the millimeter wave band is what makes 5G special; it allows the networks to improve performance. Analog’s advance in beamformer IC and up/down frequency conversion is step forward in using the radio frequencies.
ADI showed a sequential earnings increase in Q2. While earnings are still down from Q4 2019, the $1.08 reported was up 4.8% from Q1 and beat the forecast by 2.8%.
5-star analyst Rick Schafer, writing form Oppenheimer, likes what he sees in ADI. He says, “Comms grew 15% Q/Q led by 5G RAN. Unsurprisingly, Auto was weak reflecting COVID-inspired OEM shutdowns… We applaud mgmt.’s proactive cost control efforts and continue to like ADI’s 5G-led structural growth story.”
Schafer’s $140 price target on ADI shares implies an upside potential of 24% for the coming year, and supports his Buy rating.
Overall, Analog has a Moderate Buy rating form the analyst consensus, reflecting some remaining caution from the grim Q1. Shares are selling for selling for $112.97, and the average price target of $122.83 suggests room for an 9% upside this year.
Micron Technology (MU)
Next up is Micron, a major name in the chip industry. Micron boasts a $53 billion market cap – and a leading position in the memory chip segment. Micron’s products are widely used in the gaming and data center markets, and its new DRAM chips will have a solid niche in 5G.
In fact, just last month Micron revealed that its DRAM memory chips and its NAND long-term storage chips are already featuring in top-end Chinese-made 5G smartphones and will soon have a world-wide presence. The improved performance of the memory chips will make a strong compliment to the higher performance of the digital networks, giving users an all-around better experience.
MU shares have rebounded from their heavy coronavirus hit in Q1 – the economic closures disrupted both supply chains and distribution networks – but are still trading at a discount relative to peers. This gives investors a chance to buy a top-notch stock before it pops.
"Micron is confident 5G will lead to a return to smartphone unit growth in 2021 and over the next few years," says 5-star JPMorgan analyst Harlan Sur following an investor meeting with management. "Micron is well-positioned to drive dollar content higher in the 5G era in both DRAM and NAND," the analyst added.
Looking at the bigger picture, the analyst noted, "We continue to expect relatively strong data center demand to continue into the back half of the year as drivers of strong demand from work-from-home, e-commerce, gaming, etc., that are likely to persist."
Sur rates Micron stock a Buy and backs that with a $65 price target, implying room for an impressive 39% upside this year.
MU’s Moderate Buy analyst consensus rating is based on a mix of reviews, 26 in all, including 19 Buys along with 6 Holds and 1 Sell. The stock is priced at $47.91, and the average price target, $63.78, indicates a 37% upside potential.
Keysight Technologies (KEYS)
Last on today’s list is Keysight, a player in the lab equipment segment. Lab equipment? Yes, because every chip that goes out in a 5G product – especially the newly designed models – must be rigorously tested. Keysight produces the in-circuit testers, multimeters, oscilloscopes, and signal generators necessary for lab certification of silicon semiconductor chips.
Keysight was the first test equipment provider to enter the 5G market, and holds a leading position. The company works closely with 5G manufacturers and providers, and offers a variety of 5G wireless test platforms. As the new networks ramp up, Keysight will only see a growing demand for these services.
And this is what makes Keysight special, for an investor. The strength of its niche can be seen in the share performance: KEYS is the only stock on this list which has outperformed the markets during the current bear cycle. KEYS is up $10 since the February market slide.
Credit Suisse’s 5-star analyst John Pitzer paints a powerful case for KEYS in his ‘blue sky scenario:’ “Note that during both 3G and 4G transitions there were periods when the Company grew more than 10% y/y - as 5 G starts to become bigger investors will start to believe in growth. Assuming increased defense spending, 5G adoption and further broad-based demand across its segment we see the multiples expanding…”
Pitzer’s $125 price target implies a healthy 17% upside, and justifies his Buy rating.
The stock’s recent gains have pushed it right up against the $110.57 average price target, so the upside is only 2.2%, but as Pitzer shows above, there may be more room than that available for share appreciation here. KEYS has a Moderate Buy from the analyst consensus, based on 6 Buys and 3 Holds set in recent weeks.