Many financial journalists, technology aficionados, securities analysts and investors have an unwavering belief that the 5G wireless standard is going to revolutionize manufacturing, improve health care and speed up the development of autonomous vehicles. The claims of some 5G evangelists are starting to resemble those who claimed in the dot-com era that the internet was going to displace and upend many 20th century processes and traditional media and communications protocols.
Investors should be circumspect before getting on the 5G bandwagon. That is not to say there won’t be opportunities with select companies, but only that the forecasted earnings potential for many companies may not pan out as initially predicted. For example, Nokia (NOK, Financial), a network equipment manufacturer, reduced its profit forecast, citing its need for additional investment outlays to keep up with intense 5G competition. The company’s stock dived 23% on the news.
Another miss by analysts and investors alike was their anticipation that demand for Apple’s (AAPL, Financial) iPhone 11 would be tepid, as consumers eagerly waited for the new 5G-capable phones. However, iPhone 11 demand has been more robust than investors expected, prompting new thinking that argues 5G-ready iPhones won’t be as important as once thought.
But what about the 5G fields of plenty that await wireless carriers, as many have predicted?
The difficulty carriers must surmount is finding a way to monetize or extract revenue from the new higher-speed devices. The 5G build out for telecommunications companies is a monumental capital equipment and labor-intensive undertaking. In a recent report, Craig Moffett , a telecom analyst with MoffettNathanson, calculated that over the past nine years, data consumed per wireless device has increased 89-fold, while average revenue per device has dropped 12.6%. “The carriers have failed at extracting additional revenue from additional data consumption,” he wrote.
Moffet further contended that: “Most of the use cases we’ve heard don’t make sense, yet the capital requirements for densifying networks are very real.”
But what about the return for the carriers supplying the higher speeds? As Moffett noted: “Simply using more data at higher speeds— we’ve all heard about the dream of downloading a full season of 'Game of Thrones' in seconds before boarding a plane—has up to now been a dry well for wireless revenue generation.” The dilemma for the carriers is, given the enormous expense associated with building out the 5G network, what strategic plan is in place to profit from the enterprise?
For the moment, investors should steer clear of telecommunications companies and focus on component manufactures of equipment that will be necessary for the new 5G-capable smartphones. Chipmakers will be among those in the tech sector that will stand to profit in the immediate future from the dramatically increased memory requirements the architecture of the new 5G phones requires.
The advantage for investors is that regardless of the enhanced benefits to consumers from 5G-capable wireless networks, new handsets will need more memory and other newly engineered components in great quantities.
Consider the quantum increase in memory chips that will be needed to handle the new, faster 5G networking demands. According to Sumit Sadana, chief business officer at memory maker Micron Technology (MU, Financial), an average midrange 5G phone will need six gigabytes of DRAM, an increase from the four gigabytes design in current phones. Higher-end handsets will need eight to 12 gigabytes of DRAM, an increase from that current configuration of six gigabytes.
Qualcomm (QCOM, Financial) is another company that stands to profit, given its core markets for mobile phone chips. The company is well positioned to gain more revenue with the demand for increased components as well as increased licensing fees. CEO Steve Mollenkopf says that the company, on average, gets approximately 1.5 times as much revenue from a 5G phone as from a 4G handset.
Investors need to be prudent and selective concerning the companies that can leverage their existing products to take advantage of the 5G rollout. For the moment, that universe, to an extent, is limited to chip manufactures, who can respond to the dramatically increased demand for the necessary memory configurations required.
Disclosure: I have no positions in any of the securities referenced in this article.
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