5G will allow for improvements in AR, VR, robotics, cloud gaming, immersive education, healthcare and more.
5G heralds a new era in telecommunications, one that’s focused on speed and software. It’s an area of interest for Munro Partners, one of GSFM’s investment partners and manager of the Munro Global Growth Fund. In this article, the benefits of 5G are examined and the investment thesis explored.
Some commentators are heralding the arrival of 5G as the dawn of a new industrial revolution. Whether that’s hyperbole or an accurate summation, 5G will usher in a new era in telecommunications. It will be the one to enable the ‘internet of things’ to fully emerge and will give companies leverage to reach consumers with speed and efficiency.
What is 5G?
We started with 1G and moved through 2G, 3G and 4G. 5G is the next iteration, a way of unlocking the spectrum to deliver greater speeds, greater capacity and lower latency than anything seen before in 3G or 4G (see figure one). 5G refers to 5th-Generation Wireless Systems and uses additional spectrum in the existing long term evolution (LTE) frequency range to improve upon the capabilities of 4G.
It’s hard to remember 1G – mobile phones weren’t ubiquitous in Australia in the 1980s, so most early adopters’ first experience of mobile technology was 2G – basic data services, calls and text messages.
The advent of 3G enabled the first generation of smart phones (iPhone was launched in 2007) and suddenly the internet was at our fingertips, albeit not always quickly. Today, in most countries, people using mobile devices are also using 4G wireless technology.
Why all the hype?
There are an ever-expanding number of high-tech devices trying to connect to the internet every day, many of which require extensive bandwidth. In the average house on any given day there may be smart TVs streaming from Netflix, several smart phones or tablets connected to YouTube, Spotify or social media, and perhaps a google home device, ready to respond to your command to know the following day’s weather forecast or footy scores from the weekend.
According to a spokesman from wireless telecommunications company Verizon:
“Through a combination of high speeds, massive bandwidth and super low latency, 5G will allow for improvements in AR (artificial reality), VR (virtual reality), robotics, cloud gaming, immersive education, healthcare and more. It will allow you to send so much more data so much faster and technology will be more responsive[1].”
The projected speed of 5G eclipses the previous iterations (left side, figure two), with an average speed of 170 megabits per second. 5G clearly dwarfs the 4G and 3G cycles. 5G will use higher and more directional radio frequencies to transmit data, which are less cluttered and carry information much faster. According to 5G.co.uk [link website], this means 5G will support up to 1,000 more devices per metre than 4G.
Currently, 4G towers tend to send data all over the place, wasting power and energy and increasing latency. 4G networks use frequencies below 6 GHz, while 5G will use frequencies in the 30 GHz to 300 GHz range. The higher the frequency, the greater its ability to support fast data without interference from other wireless signals.
Remember when it took some hours to download a movie? To give 5G some perspective, it provides the capacity to download a typical high-definition movie in just seven seconds. It is this speed that will propel 5G to dominance over the next decade.
On the right of figure two are some of the everyday applications which 5G speeds will enable. For example, the connected home, smarts cars, medical devices or industrial robotics, even super-fast gaming.
For many people, the increased speed delivered by 5G will be its stand-out feature. However, speed is not the only benefit. 5G promises better responsiveness from reduced latency and the ability to connect more devices at the same time. This will become critical as an increased number of people use a greater number of ‘smart’ or connected devices.
The increased speed and complexity that 5G operates means it’s applicable to many more industries than just telecommunications – therefore the cycle of 5G will be significantly larger than the cycles that came before it.
The runway for growth
5G has a long runway of growth ahead of it. So far, 5G is almost non-existent in connections and mobile devices in terms of penetration. Ultimately, the cycle of 5G will be significantly larger than previous cycles; it has a long runway of growth, which is illustrated in figure three. Currently, 5G is virtually non-existent in connections and mobile devices.
In its current form, 5G exists primarily in laboratories around the world in the testing phase; the technology is being tested for quality and reliability before it’s deployed to consumer use. As illustrated in figure three (right hand side), most 5G testing is taking place in developed nations worldwide; however, many developing nations are undertaking 5G research and development. Very few nations are settling with 3G and 4G.
Importantly, as the rollout of 5G takes place over the next decade, many more countries will test and adopt this technology.
Case study one: A key beneficiary of 5G
Many investors want access to growth stocks with structural tailwinds. Of the 20,000 listed corporates in the world, many profess to be growing; however, only a small portion actually grow independently of the broader economic cycle. An example of such a stock, one which is a key beneficiary of 5G technology, is Keysight Technologies (Keysight).
Keysight is a recent spin out of Agilent Technologies and has a highly aligned and focused management team. It is the number one player in the test and measurement space of 5G technology around the world today and is responsible for producing technologies to test the reliability, quality and speed of 5G.
According to analysis by Munro Partners, Keysight will ultimately be able to grow the sales of these technologies into a new and growing customer base. It will be able to leverage this technology to improve sales by providing higher software content in its products. This in turn will drive upside in margin. It will also open new markets as new countries and customers adapt to 5G.
The growth is clearly sustainable given 5G penetration is in its relative infancy. Munro Partners believes earnings per share can continue to grow to over $5 per share, and the multiple grow to approximately 21 or 22 times earnings. This could deliver a 12-month forward price target of just over $100 per share.
Case study two: Potential winners and losers from 5G technology
Not every company will benefit from new technology; there are those leveraged to technology that will be made redundant by 5G. Munro Partners has identified the potential winners and losers from the 5G structural growth theme in figure five.
Under the overall Area of Interest of Connectivity, there are several sub-trends within which companies are poised to benefit. The potential winners are:
- The 5G testing companies, which are required to provide high quality and reliable equipment as it’s deployed to consumers over the next few years
- The small cell enablers, which facilitate the deployment of 5G in any neighbourhood around the world
- The telecom providers, who are ultimately responsible for delivering the network
- The tower companies, which are a critical part of the network infrastructure.
The potential losers from 5G are the traditional cable and satellite telecommunications operators.
At any one time there are several medium-to-long-term structural themes and resulting investment trends playing out in the market. For Munro Partners, it’s an opportunity to distinguish between trends that are well understood and priced-in by the market, and those that are under-appreciated and overlooked, which, in turn, become an Area of Interest (AoI). Munro Partners’ research process has been designed and honed over 13 years to successfully sift through the world’s listed corporates to find sustainable growth trends that are under-appreciated and mis-priced by the market, and the resulting winning and losing stocks.
[1] https://www.adweek.com/digital/the-shift-from-4g-to-5g-will-change-just-about-everything/
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