Some technological advances are evolutionary, a simple next step from where we are now, but others are revolutionary, bringing us more than just more and better than what we have. 5G, the new wireless tech that has been rolling out since 2018, is shaping up to fall into the latter category.
It started out looking like that simple next step. 5G would be a faster network, just as 4G once had been. But as it has come online, the other advantages have started to pile up: clearer signals, lower latency, far greater data carrying capacity. That last may be the key – the greater data transfers available in 5G offers to bring the promise of the connected world and the Internet of Things to full fruition. Everything from industrial IoT to autonomous vehicles to remotely operated microsurgery may benefit from 5G, and once that happens, our world will never be the same.
The vista opening up as 5G’s expansion is not limited to the tech world. Finance and investment will also be impacted; companies with a direct – or even an indirect – link to underlying work of 5G will find the expansion of the networks to be a golden opportunity. Look for 5G to provide a potential boost for the stock of companies involved in providing wireless network services, infrastructure and hardware, handset devices, and semiconductor chips.
Against this backdrop, we used TipRanks’ database to find three 5G names that earned some praise recently from 5-star analysts. Not to mention, the analysts see a double-digit growth potential for each.
Applied Optoelectronics (AAOI)
5G won’t go anywhere unless the transmitting towers get a signal – and they get that signal over cable connections. That’s where Applied Optoelectronics comes in. The company designs and produces a range of optical-based communication products, from fiber optic cables to analog and digital lasers. AAOI supplies optical transceivers to data centers and cable hardware to networking providers.
Applied Optoelectronics has had several difficult years. The company relied heavily on Amazon in the mid-2010s, but saw that collapse when the online retail giant cut its orders in 2017. Since then, AAOI has had difficulty regaining traction in the competitive optical networking niche.
However, the company is now entering 2021 on a positive note. Shares are up 23% in the first two weeks of the year, and new products in the 5G front-haul application niche are expected to do well. The company announced early last year a line of 25Gbps LWDM cooled transistor laser diodes, which now – due to high demand – make up a majority of current production. The demand is coming from data center and 5G telecom wireless providers, and AAOI has expanded its manufacturing capabilities to meet the customer orders.
The result was strong Q3 revenues, with the top line growing 66% year-over-year to reach $76.6 million. Gross margins, at 25%, were up sequentially from the 21% recorded in Q2. The solid results come on the back of record laser production, which reached 1.1 million units by the end of July 2020. This figure marks a 65% increase from pre-COVID production levels – and reflects increased demand as 5G networkers expand their hardware.
Tim Savageaux, 5-star analyst with Northland, rates AAOI as Outperform (i.e. Buy) based on his belief that the company’s product line will clear a path forward. His $14 price target suggests ~34% one-year upside from current levels. (To watch Savageaux’s track record, click here)
Backing his bullish stance, Savageaux writes, “We believe the strength in Cable optics revenue seen at AAOI in Q3… is sustainable… This is especially the case given AAOIs focus on upstream transmission/Cable node technologies, the primary focus for Cable MSOs looking to relieve upstream bandwidth bottlenecks via node splits… we expect AAOI’s cable optics unit could account for 25%+ of total [revenues]… Recent press reports and forecasts from China point to 5G base station deployments from 600K-1M in CY21 vs ~580K in CY20, supporting a 1H21 recovery in AAOI 25G laser shipments for 5G fronthaul…”
Is the rest of the Street in agreement? As it turns out, the analyst consensus is more of a mixed bag. Split almost right down in the middle, 3 Buy ratings and 4 Holds were assigned in the last three months, giving AAOI a Moderate Buy status. (See AAOI stock analysis on TipRanks)
T-Mobile US (TMUS)
T-Mobile is well known as one of the largest wireless providers in the US – in fact, it has the third largest market share. In April 2020, the company completed its takeover of rival mobile carrier Sprint. The combined company is hoping to use its new pool of resources to expand its 5G capabilities.
The company introduced 5G in December 2019, and added 121 cities and towns to its mid-band 5G network in 3Q20. T-Mobile is also launching mobile hotspots, with capacity for up to 30 devices, allowing customer to take 5G on the road. In all, T-Mobile has the largest 5G network in the US, with low band extended range systems covering 1.4 million square miles and more an estimated 270 million people.
T-Mobile’s third quarter results showed top line revenue of $19.3 billion, up 73% year-over-year on the strength of the Spring merger. We’ll have to wait until next month to get the Q4 and full year 2020 numbers – but some preliminary indicators are looking good. The company recently reached a 100 million-strong customer base for the first time, and early Q4 numbers show an additional 1.7 million subscribers added.
Among the fans is Oppenheimer analyst Tim Horan, who sees the company in a solid position.
“We expect TMUS will aggressively launch 5G fixed wireless this year and its mid-band spectrum assets will help because of its favorable propagation characteristics… We expect TMUS’s network quality to improve as it deploys more of Sprint’s 2.5GHz this year. Customers will notice a difference in performance to LTE once 5G devices are widely adopted,” the 5-star analyst noted.
These bullish comments back an Outperform (i.e. Buy) rating, and Horan’s $160 price target indicates confidence in a 28% upside potential for the year ahead. (To watch Horan’s track record, click here)
Wall Street’s confidence on the telecommunications giant speaks for itself; TMUS has received a whopping 15 Buy ratings in the last three months vs. just two Holds. Meanwhile, the $147.44 consensus price target suggests a potential upside of 18% from the current share price. (See TMUS stock analysis on TipRanks)
II-VI, Inc. (IIVI)
Last but not least is II-VI, a manufacturer of engineered materials and optoelectronic components for industrial use, optical communications, and semiconductor capital equipment, among other uses. II-VI’s products are found in the manufacture of computer chips and telecommunication equipment – and this is where it finds a connection with 5G.
The company has focused its efforts on communications lasers, a vital component of 5G wireless tech, and in February of 2020 introduced a line of high-speed indium phosphide electro-absorption modulated lasers for 5G optical infrastructure. II-VI expects to find strong growth in Asia, as Chinese 5G networks expand outside of the major urban areas.
Anticipated growth has come on the back of earnings and revenue growth. In its fiscal Q1, reported in November, II-VI reported a 47% year-over-year increase in EPS, from 55 cents to 84 cents. Revenue came in just below expectation, but were still up 113% yoy and reached $728 million.
Merrill Lynch analyst Vivek Arya likes II-VI’s industry position, noting: “II-VI strengthened its product portfolio within its communications business (~70% of sales evenly split across datacom/telecom), levered to some of our favorite secular themes in 2021 including 5G infrastructure and cloud… II-VI continues to remain our top SMid-cap pick, with its leading position in the optical market well levered to 5G/cloud…”
To this end, Arya rates IIVI a Buy along with a $100 price target. This figure implies ~13% upside from current levels. (To watch Arya’s track record, click here)
Turning now to the rest of the Street, it appears that other analysts are generally on the same page. With 15 Buy ratings and 5 Holds assigned in the last three months, the consensus rating comes in as a Moderate Buy. (See IIVI stock analysis on TipRanks)
To find good ideas for 5G-related stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
