This means that a new cycle of upgrading consumer devices may be coming. Along with the continued infrastructure improvements that network operators will need to make to support their 5G services, companies involved in hardware manufacturing could benefit the most. Three that are worth seeing in September are Solutions Skyworks (NASDAQ: SWKS), Applied optoelectronics (NASDAQ: AAOI), and Micron technology (NASDAQ: MU).
Connect to 5G
Nicholas Rossolillo (Skyworks Solutions): As of this writing, semiconductor stocks are finally taking a break after a relentless rally from March lows. Many chip companies have had increasing demand as organizations scramble to update their equipment to deal with social distancing and the resulting remote working. Skyworks is not one of these companies. Its turnover in the first three quarters of its current fiscal year 2020 remains down 6% compared to a year ago.
However, Skyworks is slowly returning to growth mode despite 2020 being a worse year for smartphone sales (blame the pandemic). But the connectivity chipmaker could gain a bit this fall. Almost half of its income comes from Apple (NASDAQ: AAPL) – it provides the iPhone with radio chips that connect the device to a wireless network. Whether it’s a new 5G-capable iPhone or an iPhone still using “old” 4G technology, Skyworks could end up selling a lot of components as consumers start buying devices and upgrading them again. old phones.
Along with an upcoming wave of 5G growth, Skyworks also manufactures WiFi and connectivity gear for a myriad of devices outside of the smartphone market. It could be a solid place in the coming decade, because apparently everything these days has a chip that enables internet connection – from cars and smart home devices to industrial equipment. To help its cause, Skyworks has an impeccable balance sheet with $ 1.16 billion in cash and cash equivalents and zero debt. It also pays a decent dividend, which is currently earning 1.3%, with plenty of room to increase the payout over time.
After the recent pullback, shares of Skyworks Solutions are trading at 24 times 12-month free cash flow. That’s a steep price that assumes this company will return to growth over the next year, but not an unreasonable amount to pay if the smartphone market does make a comeback – boosted by new demand for 5G phones. Now seems like a good time to make a long-term purchase.
Data centers and wireless towers need fiber optic connectors
Anders Bylund (Applied Optoelectronics): This manufacturer of fiber optic networking products might look like an odd game in the 5G market, but applied optoelectronics is actually closely related to the wireless industry. High-speed wireless networks need to be connected to the global Internet through even faster, ultra-reliable links, and optical networks are perfect for this job. The increasing use of mobile networks is also driving significant traffic to, from and within data centers that serve content to mobile devices, giving Applied Optoelectronics another entry point.
The coronavirus pandemic has limited this company’s incoming orders in the first half of 2020 and its earnings reports have been mixed. As a result, the stock is trading around 30% below its 52-week highs and 2% lower since the start of the year. Management sees better days ahead, however.
“We are encouraged by the increased demand for data centers from a diverse set of customers and by the improvement in 5G-related activity which started earlier this year and will continue into the third quarter,” CEO Thompson Lin said during the second quarter earnings call last month. “During the second quarter, we saw significant improvement in our telecommunications and cable businesses. Revenues in our Telecom segment more than doubled sequentially and outperformed our Cable TV business, driven by increased 5G activity.
The next few quarters could be a bit bumpy due to the unpredictable pace of 5G installations during a pandemic, but the long-term promise of solid growth is clear. Applied optoelectronics is a solid buy right now, and the 5G revolution is an important ingredient in this company’s attractive growth prospects.
5G will dramatically increase demand for DRAM and NAND
Billy Duberstein (technologie Micron): The era of 5G is only just beginning, which should mean ever greater and better demand for memory and storage for the foreseeable future. Micron Technology is one of the best positioned stocks to take advantage of this opportunity, with a premier portfolio in DRAM, NAND flash storage and a new type of “fast storage” called 3D Xpoint.
DRAM is particularly important to Micron, as it derives approximately two-thirds of its revenue from this product and an even higher amount of gross profit. Fortunately, the DRAM industry has only three big players so far, and 5G phones will require a lot more DRAM than 4G phones. Even low-end 5G phones, which make up the biggest chunk of the phone market, will require twice as much DRAM and NAND per unit. So even without strong unit growth, the demand for mobile DRAM is expected to double in the 5G era.
But it’s not just phone memory that will take off from 5G. Faster 5G networks will create a “virtuous cycle” in which more computing power will also be needed in data centers, edge computing clusters, “smart” vehicles and IoT devices to interact with 5G networks, thus creating more memory demand for many applications. .
5G will also go hand in hand with artificial intelligence. Until now, Micron hasn’t had an AI-specific High Bandwidth Memory (HBM) product, but luckily the company recently launched its first HBM. Going forward, I would expect this product to lead to additional strength for Micron that tech investors have achieved in AI-driven chip companies such as NVIDIA (NASDAQ: NVDA) and Advanced micro-systems (NASDAQ: AMD).
Even with these favorable long-term winds, investors can buy Micron shares cheaply in September, at just 1.3 times book value. The stock has pulled back a bit recently, as investors fear that strong demand in the first half of this year has pulled demand forward into the second half, which could lead to a quarterly pullback. In addition, new US trade rules targeting Chinese tech giant Huawei could mean Micron will have to stop shipping products to Huawei from September 14, and Huawei accounted for nearly 10% of sales in the last quarter.
While these two factors may be headwinds for the current quarter, it should be noted that Micron also sells a lot of products to a competitor of Huawei. Xiaomi (OTC: XIAC.Y), which could potentially take 5G market share from Huawei if Huawei were forced to use substandard components. In fact, Xiaomi and Micron teamed up in a February press release touting Micron’s LPDDR5 DRAM memory inside Xiaomi’s new flagship 5G phone, the More 10.
Basically, the COVID-19 and trade war era has caused a lot of volatility around memory supply and demand, but Micron’s long-term picture still looks rosy as the 5G era boosts demand for memory accelerated over the next 5-10 years, starting now.