2 Cheap Chip Stocks to Cash in on 5G Networks
New 5G mobile networks are coming. The first commercially available service launched in late 2018, setting off a race to build out infrastructure and gain new network supremacy among mobile companies. Research group IDC predicts that worldwide 5G infrastructure and related hardware spending will increase at an average annual compound rate of 118% between 2018 and the end of 2022, coming in at $26 billion in 2022 -- up significantly from $528 million in 2018.
That's a huge potential wave for investors to ride, and one of the best means of cashing in could be the companies that help build the hardware itself. Two such companies are Skyworks Solutions (NASDAQ: SWKS) and NXP Semiconductor (NASDAQ: NXPI) -- both trading for reasonable price tags given the opportunity that lies ahead.
All about connectivity
Mobile connectivity specialist Skyworks Solutions hasn't had the best of times the last couple years. A flagging smartphone market sent revenues tumbling 8% during the company's fiscal 2019 first quarter, with another 10% year-over-year decline expected in the second quarter. As a result, the stock has fallen 15% as of this writing since the start of 2018.
The sliding sales should be a temporary situation, though. Management has said the outlook for later in 2019 is beginning to look much better, and 5G connectivity holds big potential. A slew of new product releases have been announced in recent months, including its new Sky5 chip platform for mobile devices, use of its connectivity chips to power new 5G mobile hotspot technology, and a partnership with Intel to develop modem-to-antenna solutions for new mobile networks.
It isn't just talk either. Skyworks management is backing up its confidence in its latest portfolio of products with cash. A $2 billion share repurchase program was announced in tandem with first-quarter results -- a sizable sum, as the company's whole market cap is currently $14 billion. Trailing price to earnings (PE) is currently 13.1, but the company trades at 12.4 times forward earnings estimates -- implying expectations that business will soon rebound. With 5G connectivity only just starting to get underway, now could be a great time to scoop up Skyworks on the cheap.
Connection chips and a little extra
NXP Semiconductor is also a leader in connectivity-enabling semiconductors, with a large focus on the auto industry. Forty-four percent of its 2018 sales were derived from connected autos, with other connected devices and mobile networks making up much smaller pieces of the pie. As at Skyworks, sales at NXP increased a meager 2% in 2018, and the first quarter of the new year is expected to yield at least a 5% year-over-year drop.
The deteriorating short-term outlook paired with Qualcomm's failed attempt at taking over NXP last year led to a 19% stock drop as of this writing since the start of 2018. But, in line with its peer, NXP thinks new mobile connectivity technologies will eventually come to the rescue. That's because 5G isn't only about smartphones. It could unlock new capabilities in other industries, including autos. With a broad portfolio of solutions, this chipmaker thinks it will see sales turn a corner by year end.
In fact, over the next three years, NXP expects its total growth to notch at least 5% a year. That's a modest figure, but earnings should increase even faster over the same time. Plus, NXP's forward PE of 12.6 values it cheaply. With 5G set to push demand for connectivity chips higher in the years ahead, the company should benefit.
The 5G mobile network revolution is just getting started, but it promises to completely change how we use the internet. Before spending on new mobile hardware and infrastructure buildout picks up steam, now looks like the time to scoop up struggling 5G stocks while they're going for a discount.
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Nicholas Rossolillo and his clients own shares of Intel and Skyworks Solutions. The Motley Fool owns shares of and recommends Skyworks Solutions. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends NXP Semiconductors. The Motley Fool has a disclosure policy.