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Get rich af off the 5G rollout
🕑 Added 2020-08-15 21:06:14 +0000 UTCThe 5th Generation of Cellular Networks, or 5G, will undoubtedly have a tremendous impact on our lives. It will pave the way for new technologies that we are still awaiting, like Internet-of-Things devices that actually do something, or smart home devices that do more than play music on Amazon Prime or Pandora. In terms of capability, it will be a tremendous upgrade from 4G LTE.
4G boasts typical download speeds of 5-12Mbps, and peak download speeds of up to 50Mbps if you're willing to pay $250/month for internet. For comparison, 5G aims to provide 50Mbps as a bare minimum, with theoretical speeds reaching 10Gbps (10,000Mbps) at the peak. Common folk likely won't get speeds like that, but even at 25% of peak capability, 5G would provide speeds 5x the best package Cox can currently offer you.
But the 5G upgrade isn't about opening a web page in 0.2 seconds instead of 1 second. More importantly, 5G will boast ultra-low latency (the time it takes a machine to convert a signal into output). While 4G offers 50 milliseconds of latency, 5G will take only 5 milliseconds to convert a signal into output. For comparison, the human brain takes about 10 milliseconds to convert what the eye sees into an image. 5G devices will process input faster than your brain can interact with the rest of your body.
Together, the ultra-low latency and super-fast speed offer opportunities for smart cars to react faster to stimuli, enable Virtual or Augmented Reality, enable intelligent Supervisory Control and Data Acquisition (SCADA) Systems, and finally bring us a proper Internet-of-Things.
As investors, this is an opportunity for us to benefit financially from the 5G boom so that we can afford all of the fancy new gadgets 5G will create. This post will explore some exciting stock and ETF choices.
tl;dr:
- Wheel weekly LRCX ATM strikes for 2% weekly yield, reinvest premium into shares.
- Buy shares of AVGO, SWKS, FIVR, and SMH.
- BTO 1x 1/21/2022 AAPL $450c for $9,800.
- BTO 1/21/2022 NOK $4c for $150
- BTO 1/21/2022 ERIC $7c for $500
Basket #1: The Meta Innovator Lam Research Corporation
Ticker: LRCX
Price: $373.64
P/E Ratio: 24.71
Dividend: 1.23%
In the 1800s Gold Rush, it wasn't the gold miners who made a fortune. It was the people selling jeans, pickaxes, and shovels.
Likewise, the companies making the most off the 5G upgrade may not be the ones making chips or infrastructure. It may very well be the ones selling the tools that make the chips and infrastructure. Enter Lam Research Corporation (LRCX), a company that creates solutions and processes to chip design that challenge the literal limits of physics and chemistry.
LRCX does not produce chips or networking hardware. It produces the systems and tools to enable other corporations to satisfy their ever-evolving need to produce smaller chips with more capabilities. As the leader in this industry, LRCX is poised to benefit immensely from demand for 5G chip production capability, especially those that enable artificial intelligence.
Additionally, they provide services to clients to help them maintain and improve their systems. This is a rapidly growing proportion of their revenue. In 2019, LRCX's services program provided 33.2% of LRCX's revenue, a 17% increase from 2018. This source of revenue is highly reliable and gives the company a strong foundation so it can reinvest into its own research and development.
LRCX's 1.2% dividend won't make an impact on your portfolio. But the company has shown a willingness to support its shareholders with an upcoming buyback and annual dividend increases. And with a dividend payout ratio of only 25%, we can expect more dividend increases coming. Management also reiterated a commitment to eventually use as much as 75% of its free cash flow to build shareholder value. By all measurements, LRCX is a winner.
The Play: With a 2% weekly ATM yield, we have a wheel candidate. Wheel weekly ATM strikes (or at basis, whichever is higher) for approximately 2% weekly yield. Reinvest premiums and dividends into shares.
Basket #2: The Consumer Pipeline
Those who want to take a pass at finding the golden nuggets may well outperform LRCX holders if they can identify the right companies. This basket takes a stab at which stocks (not necessarily companies) will benefit the most from getting 5G hardware into consumers hands and focuses on the technologies that consumers will see and want to invest in.
1) Broadcom (AVGO)
Price: $327.82
P/E Ratio: 58.66
Dividend: 3.97%
Broadcom's ticker might make no sense. But it's product line is solid and it will certainly gain immensely from the worldwide 5G upgrade. The company provides a wide range of products and services ranging from storage systems to WiFi components to security. It is not a pure 5G play. However, this also means it is well postured to feed on 5G's expanded rollout into multiple systems. The most exciting Broadcom products in this regard are the WiFi 6 Ecosystem and Automotive solutions.
In terms of its WiFi solutions, Broadcom produces chips for residential and commercial gateways, smartphones, and routers. All of this hardware will need to get upgraded to work on 5G networks, so there will be continuous demand for these products. In terms of automotive equipment, we should anticipate that cars will join the ranks of the IoT, especially when they become fully self-driving, and Broadcom will likely see demand for chips for its driver-assistance systems.
In terms of the stock itself, the 3.97% dividend is generous, and the company has increased its dividend regularly over the past 9 years. However, it's P/E is a bit high right now, even though its forward P/E ratio of 13.68 is good, assuming they can meet their earnings goals.
The Play: AVGO is a buy-and-hold security. Buy shares below $300 and hold for a generous and ever-growing dividend.
2) Apple (AAPL)
Price: $459.63
P/E Ratio: 34.93
Dividend: 0.71%
I didn't want to do it. I didn't want to put AAPL on this list. But there is no way around it. Each and every iPhone that currently exists is incompatible with 5G networks. Every iPhone user who wants to use the 5G network will need a new phone. As of January 2020, there are about 1.5 billion AAPL devices active worldwide. If even 1/5 of these users upgrade in 2021, that's 375 million devices getting upgraded, or about 20x the number of iPhone X's sold to date.
With the iPhone continuing to cater to the high-end market, it stands to reason that iPhone users are the most likely to upgrade to 5G devices as soon as possible. The biggest barrier to iPhone sales will likely be in producing enough devices to meet demand. Despite its recent run-up to $450, AAPL is a buy. There's no need to wait for the split.
The Play: AAPL is a buy-and-hold security with too much upside to risk losing shares to covered calls. Buy shares and LEAPS, specifically BTO 9/19/2022 $450c for $9,900.
3) SkyWorks (SWKS)
Price: $146.12
P/E Ratio: 31.79
Dividend: 1.37%
SWKS is closely tied with the smartphone market, especially AAPL. In fact, 73% of SWKS's 2019 revenue came from the mobile phone market, with a full 47% from AAPL alone. Normally, this would cause concern that SWKS is not adequately diversified. But as stated above, AAPL is likely to ship a record-breaking number of phones in 2021, and any new iPhone12 models will incorporate SWKS chips. This lack of diversification actually gives SWKS an edge over other players like Qorvo (QRVO) that also make chips but are not as deeply tied with AAPL.
In addition to riding AAPL's coattails, SWKS is well-positioned to benefit from the emerging Internet-of-Things by providing small cell sites with hardware for their 5G infrastructure (5G relies on smaller but more numerous cell sites to provide data, as opposed to the gargantuan 4G towers, due to its functioning on a different wavelength). The opportunities with IoT are too numerous to count, and SWKS is poised to both diversify away from just AAPL and rake in more cash.
Beyond capital appreciation, SWKS pays a small dividend at just 1.4%, but demonstrated interest in giving back to shareholders with a recent 14% dividend increase. With SWKS bringing in more revenue over the next several years, we should expect to see that dividend increase further.
The Play: SWKS comes up just short of being a viable ATM wheel play due to its slightly lower volatility and because it carries less open interest than other options. Buy and hold shares, and keep an eye out for increasing options liquidity in case covered calls become viable.
Basket #3: The Nordic Paupers
The stocks mentioned in the sections above are generally expensive and may be out of reach for the young or novice investor. Those that cannot or do not want to invest a large proportion of their portfolios into the expensive selections above can benefit from changing tides in the 5G environment that stand to bring Nokia (NOK) and Ericsson (ERIC) into the spotlight. While China's Huawei is probably the strongest hand in delivering 5G infrastructure, Europe, India, and the US are skeptical of the Chinese Communist Party's influence on the enterprise. In light of Huawei getting the cold shoulder, NOK and ERIC have an opening to exploit.
1) Nokia (NOK)
Price: $5.00
P/E Ratio: 38.17
Dividend: 2.24%
Nokia used to be the world's leader in cellphones back when you could hang up on someone by slamming your flip phone shut. While NOK actually does make some smartphones for the Cricket network, it will never be a cell phone leader again. NOK is a relic of its old self that makes most of its money by producing networking and routing hardware and by licensing out its intellectual property to other firms.
It does not sound terribly exciting. But NOK has managed to stay profitable, sustain a dividend, and weather the storm until the next opportunity arrived. Now, that opportunity is here with Huawei getting boxed-out of Europe and the US for 5G upgrades.
NOK, in concert with some partners like Bell Labs, has the capability to support Europe and the US's 5G infrastructure. It may not be done as quickly as Huawei could manage it, but growing distrust of China means Huawei and ZTE are out. The US even proposed buying stake in NOK, which would be an odd move, but one that would surely benefit investors.
The Play: This is a long-term hold that will likely see relatively little gain until the 5G rollout gains momentum. Hold shares or buy LEAPS, especially 1/21/2022 $4c for $150.
2) Ericsson (ERIC)
Price: $11.56
P/E Ratio: 119.18
Dividend: 0.61%
ERIC is the inventor of Bluetooth technology that controls about 27% of the 2/3/4G mobile network infrastructure. But just like NOK, it has dropped way off since its peak in the 2000s. Likewise, its stock missed out on some of the visibility that drove other telecommunications companies higher over the past decade.
However, ERIC is already receiving orders to fulfill 5G infrastructure needs across Europe, especially in Slovenia. This will likely lead to more contracts that already position ERIC to lead the 5G network rollout in Europe.
ERIC's current P/E is very high at almost 120. However, its forward P/E ratio is only 16.71, indicating that the company will likely experience growth throughout the remainder of the year and into the first half of the 2020s. ERIC is a solid choice for the aggressive investor who wants to benefit directly from the development and resourcing of 5G infrastructure.
The Play: Just like NOK, ERIC will need some time to build momentum. Hold shares or buy LEAPS, specifically 1/21/2022 $7c for $500.
Basket #4: The Minimalist
Beyond all the noise, there are a couple of ETFs that will capture anything the investor needs to benefit from 5G. There is little reason to try to find the emerging 5G winners when an ETF can do that for you. These ETFs come in two types: semiconductor ETFs and 5G-specific ETFs.
1) VanEck Vectors Semiconductor ETF (SMH)
Price: $170.68
Expense Ratio: 0.39%, or $39 on a $10,000 investment
Dividend: 1.39%
SMH is heavy on most of the chipmakers we all know and love, including Su Bae and some of the companies mentioned prior. It is also top heavy, with 65% of its portfolio in its top 10 holdings, but that is okay. We want to benefit from the big players, which will likely pull the majority of 5G's share.
There are other semiconductor ETFs that are not as top-heavy, like SOXX, and there are some leveraged ETFs like SOXL that can get the job done. But SMH pays the highest dividend, however meager, and has the lowest expense ratio.
The Play: Hold shares or buy LEAPS, specifically 1/21/2022 $160c for $2,700.
2) Defiance 5G Next Gen Connectivity ETF (FIVG)
Price: $29.55
Expense Ratio: 0.30%, or $30 on a $10,000 investment
Dividend: 1.05%
The first 5G-centric ETF, FIVG has some more weight allocated toward the infrastructure and networking side than SMH, with a combined 8.48% weighted toward NOK and ERIC. However, FIVG also has exposure to the semiconductor market through Qualcomm (QCOM), SWKS, and some others.
For those who want exposure to both sides of the 5G rollout, FIVG is the obvious choice. Although the dividend is minuscule, its expense ratio is remarkably low and the companies it holds will not remain laggards. There is hidden value in FIVG- this is the art of buying low.
The Play: Buy shares, because FIVR does not have options.
Disclaimer
The above is my good-faith assessment on which securities will provide the most value to investors. However, I am not a financial advisor and these securities may not fit your risk profile. Conduct your own analysis before making any investment, and when in doubt, consult a financial advisor.
