OOne of the biggest misconceptions for tech investors is that you have to invest in unproven frontier concepts to make money. While investing in game-changing start-ups can be lucrative (although often risky), investors shouldn’t overlook the value created by companies that innovate on existing technology.
In fact, a huge evolution in technology is happening right now. The transition to fifth generation wireless network – or 5G – is in progress. With speeds almost 100 times faster than its 4G predecessor, 5G supports super-fast video streaming and reduces lag time for games.
Most importantly, 5G is needed to power what is known as the Fourth Industrial Revolution – internet of things. Artificial intelligence or AI-powered robots and autonomous vehicles will require lightning-fast networks to process data and execute commands. 5G is only scratching the surface of this opportunity, and smart investors can position themselves for decades of successful investing. Here are three companies ready to benefit from increased use of 5G.
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5G is expected to drive growth in Verizon’s network
As a wireless service provider, Verizon (NYSE: VZ) will be one of the biggest winners in the 5G boom, as the increased traffic will help Verizon better monetize its wireless network.
Despite the opportunity, Verizon stock has remained stable over the past five years, advancing only 4% from the S&P 500a 107% gain over the same period, due to slow growth, including the 2.7% drop in the company’s revenue last year.
Due to poor performance, Verizon shares are trading at an extreme discount to the overall market. The company is trading at 11.3 times trailing earnings, nearly a third of the multiple of 34.8 times the S&P 500. Although Verizon’s 4.6% dividend yield is more than three times the to that of the S&P 500.
While there was a year-over-year decline in revenue in 2020, the dividend is not in jeopardy – Verizon’s $ 20 billion free cash flow (free cash flow operating minus capital expenditures) are double the $ 10.2 billion in dividends paid that year.
Due to its massive undervaluation, Verizon could be seen as a good deal if 5G turns out to be as big a catalyst as many experts expect. Even though 5G provides modest tailwinds, Verizon’s cheap valuation and monster dividend payout make stock a value investor’s dream. In the meantime, the company is paying investors more than three times the yield on the 10-year US Treasury bill to wait.
American Tower is a 5G owner
If you are in the United States, it is likely that your wireless service provider is AT&T, Verizon or T Mobile. Collectively, these big three hold almost 95% of the total subscriber market. This is because it is expensive to build and maintain a nationwide network, including the towers and the physical support structures that house the communications satellites. Costs act as a natural barrier, blocking new entrants to the industry.
Despite the concentration, it is a competitive market when it comes to providing the best network, and companies are looking to scale up their coverage cards cost-effectively. The Big Three are working with a real estate investment trust for wireless communications, American Tower (NYSE: AMT) do this. American Tower owns and leases communications sites, with 214,000 sites in the second quarter. It’s a win-win solution for all parties: the rental economy is more favorable for the wireless service provider and, in general, American Tower rents to multiple customers per site, providing a significant return on capital.
American Tower recently released its second quarter results, beating analysts’ expectations for revenue and adjusted operating funds with year-over-year increases of 20.2% and 18.7%, respectively. The company also increased its quarterly dividend by 15.5% from the prior year period, maintaining its streak of quarterly dividend increases that began in 2012.
The continued growth of 5G connectivity will significantly boost American Tower’s operations. Wireless service providers must continue to grow their networks, a process known as densification. American Tower has a long track for growth as the pace of 5G adoption accelerates.
Microsoft’s Azure to Benefit from Improved Cloud Computing Speeds
5G connectivity is needed to bring about the Fourth Industrial Revolution, as self-driving cars and the Internet of Things require low latency. However, super-fast connectivity will require a significant increase in storage and compute functions.
One of the main beneficiaries of this demand will be cloud providers like Microsoft‘s (NASDAQ: MSFT) Azure. In the recently released fourth quarter, Microsoft revealed Azure revenue increased by 51%. Azure becomes Microsoft’s growth engine to become a serious competitor of Amazon Web Services (AWS). According to market research firm Canalys, AWS has nearly 31% market share compared to 22% for Azure – no other vendor has more than 8%.
Seek continued growth in the cloud. According to market research firm Global Industry Analysts, the valuation of the global cloud infrastructure market is expected to triple by 2026. Microsoft is expected to continue developing Azure at a rapid pace due to user foreclosure effects already on its cloud system, a expansion and expansion strategy increase customer spending and include solid software as a service characteristics.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. Teresa Kersten, an employee of LinkedIn, a subsidiary of Microsoft, is a member of the board of directors of The Motley Fool. Jamal Carnette, CFA owns shares of Amazon and Verizon Communications. The Motley Fool owns shares and recommends Amazon, American Tower, and Microsoft. The Motley Fool recommends T-Mobile US and Verizon Communications and recommends the following options: January 2022 long calls at $ 1,920 on Amazon and January 2022 short calls at $ 1,940 on Amazon. The Motley Fool has a disclosure policy.
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