The 5G Revolution Could Send These Stocks Higher
Fifth-generation (5G) wireless technology is almost upon us, as 2019 is expected to be the first year when we'll witness meaningful deployment of this standard. Some of the major telecom carriers are set to launch commercial 5G wireless networks in the U.S., as well as in other regions around the globe, this year. Several smartphone original equipment manufacturers (OEMs) are also prepping to launch their first 5G devices to take advantage of the new wireless standard.
The rollout of 5G infrastructure across the globe is estimated to boost spending on networks and networking infrastructure from $528 million in 2018 to $26 billion in 2022, according to IDC, which it says is a compound annual growth rate of 118%.
So now is a good time for investors to take a closer look at Xilinx (NASDAQ: XLNX) and Qorvo (NASDAQ: QRVO) as these chipmakers could win big from this hot new trend.
Xilinx
Xilinx has been a surprise package of late thanks to tremendous 5G-driven growth. The chipmaker is best known for supplying programmable chips -- known as FPGAs (field-programmable gate arrays) -- that can be bought off the shelf and programmed to perform specific tasks. Just a few quarters ago, artificial intelligence (AI) in the cloud was looking like its next big opportunity, and the company was busy shoring up its product development to keep archrival Intel at bay.
However, thanks to the programmable nature of its FPGAs, Xilinx became the go-to supplier of chips for telecom carriers deploying 5G networks in China and South Korea. When 5G networks start up, carriers might need to make tweaks to their infrastructure to iron out flaws, and FPGAs are well-suited to this purpose because they can be programmed and reprogrammed as required.
As a result, Xilinx saw a massive spike in its communications business last quarter. It was the company's fastest-growing segment, with annual revenue growth of 41%. More importantly, it accounted for 35% of Xilinx's total business.
Xilinx should witness higher FPGA demand in the quarters ahead as the 5G rollout gathers pace. Since its communications revenue was driven by what it called "very early production 5G and pre-5G deployments," there's reason to believe that the anticipated sharp spike in infrastructure investments would be a tailwind for Xilinx.
Moreover, the chipmaker is looking to future-proof its 5G business before the arrival of specialized chips: It's developing advanced 5G platforms that should allow it to take advantage of this opportunity for a long time to come.
Qorvo
Qorvo has managed to come out of Apple's shadow this year despite relying on the iPhone maker for a large chunk (around a third) of its revenue. The stock has ticked upward even with weak iPhone demand, and some of the credit for this resilience should go to the uptick it's been witnessing in its 5G business.
Qorvo's infrastructure and defense products (IDP) revenue has now recorded double-digit growth for 11 quarters in a row. Revenue from this segment was up 14% in the latest quarter, as an increase in investments by telecom carriers boosted demand for the company's infrastructure products.
More specifically, Qorvo "enjoyed significant demand for our massive MIMO solutions from multiple OEMs," management said in the conference call with analysts. Massive MIMO (multiple-input, multiple-output) technology is critical to the deployment of 5G technology as it allows the network to send and receive multiple signals over a single radio channel.
According to Qorvo, a massive MIMO deployment ideally contains eight to 12 times the radio content present in a typical base station. In fact, the company specifies that each base station with massive MIMO capability contains $1,200 worth of radio frequency content. This means that Qorvo's end market will increase as more 5G base stations are deployed.
What's more, 5G opens up the possibility for Qorvo to turn its mobile business around. It's currently working on designs with several smartphone OEMs, some of which could eventually choose its 5G radios for use in their devices. So 5G has the potential to lift Qorvo's business to another level as it will impact not just its infrastructure business, but mobile as well.
The Foolish takeaway
This may be as good a time as any for investors to start scouring for 5G stocks as deployments have begun, and infrastructure investments should increase rapidly as more telecom carriers decide to take the plunge. Xilinx and Qorvo are already benefiting from this trend, and that makes them a great place to start.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.