Investors Excited About 5G Networks Should Ignore Verizon and AT&T

Coverage map. Image source: Verizon Communications.

There has been much hype this year about the next-generation 5G wireless network. However, investors looking to bet on the new network should forget about big wireless providers Verizon (NYSE: VZ) and AT&T (NYSE: T). For two main reasons, smaller, behind-the-scenes companies that are helping develop the new technology look like a more promising option.

Telecom giants aren't pure plays

The country's two largest telecom businesses are working hard to bring the faster, more reliable network to market. Both have begun running technical trials and are planning real-world pilot programs beginning next year.

A new wireless network will bring a flood of new sales of devices that are 5G-compatible. And a new round of fighting over wireless subscribers among the country's handful of carriers will no doubt ensue as well. But AT&T and Verizon aren't betting the farm on it, as made evident by each company's recent activity.

For AT&T, it started with last year's DirecTV purchase, followed up by last month's proposed acquisition of Time Warner. Verizon has taken a slightly different path with its AOL and proposed Yahoo! acquisitions, as well as a slew of smaller tech and media company purchases. The goal in both instances are the same, though. The wireless carriers are transforming themselves into multimedia conglomerates rather than wireless network pure plays. A new 5G network will certainly play a part in both businesses, but it won't be leveraged in the same way as older networks were.

How 5G is different from past network iterations

Past wireless networks were all about increasing speed and reliability, and the next-gen network also won't disappoint. Initial testing is toting 5G as anywhere from 10 to 100 times faster than the current 4G network.

But download speeds are only part of the discussion. The 5G network will move beyond the world of cellphones and will encompass the entire universe of technology, what has been dubbed the Internet of Things. The needs of the new network will include being able to support billions of connected devices, everything from wearable tech like smartwatches to autonomous cars to sensors on industrial equipment.

Much more than just a newer and faster network for telecommunications, 5G is really a new medium of data transmission that paves the way for new technology that will shape our world in the decades ahead. With that in mind, let's take a look at two stocks that could be good ways to play the latest tech revolution.

Two investment options worth a look

With 5G set to encompass much more than just your smartphone, the companies that are helping develop the network and devices that will use it are a more appealing investment than the telecoms. Here are two companies much smaller than Verizon and AT&T that are at the forefront of this research.

Image source: InterDigital.

InterDigital (NASDAQ: IDCC), which helped develop past wireless network technology, is also involved with engineering the latest 5G network. The company makes its money by developing solutions and earning patent fees and royalties for their use.

Currently, InterDigital revenue comes from a combination of past technology royalties and new technology solutions income. It has been a good year as the top line has expanded with a large royalty sale of a past patent during the last quarter. In tandem with increasing sales has been an increasing bottom line as well, as the company has been looking for ways to keep costs down.

IDCC Revenue (TTM) data by YCharts.

Much work remains for the development of the 5G network platform, and InterDigital's engineers have been tasked with solving some critical issues. On the work docket is developing ways to address the need for reliability of ultra-sensitive data transmission for autonomous driving and remote healthcare, and the need for traffic prioritization for billions of interconnected machine communications.

Image source: Skyworks Solutions.

Skyworks Solutions (NASDAQ: SWKS) is a designer and maker of wireless-connectivity-enabling semiconductors. The company's technology has been powering smartphones for some time, but as a new wave of devices come to market requiring connectivity, Skyworks has been there to answer the call as well.

The company saw top-line sales slow dramatically this year, taking a breather after revenue more than doubled in the last five years. Profits also initially slid, but ended up finishing the fiscal year on a high note and notched a 26% year-over-year increase on decreasing expenses.

SWKS Revenue (TTM) data by YCharts

Global smartphone growth has slowed since 2015, but the Internet of Things movement is just getting under way. When 5G begins to roll out in the next few years, new chips enabling connection to it will need to be developed and sold. Skyworks is in a good position to benefit when that happens.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Skyworks Solutions. The Motley Fool has the following options: short January 2017 $75 calls on Skyworks Solutions. The Motley Fool recommends Time Warner, Verizon Communications, and Yahoo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.