Buy these 13 stocks poised to benefit from a boom in 5G smartphone adoption, UBS says – including one expected to surge 69%

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  • 5G is the next generation of mobile network technology and has the potential to transform a variety of industries.
  • The smartphone industry has been one of the first to adopt the technology. A new report from UBS deep-dives into what this means for the sector.
  • We break down the key sectors and stocks set to benefit from the transformation of the smartphone industry, according to UBS.
  • Visit Business Insider’s homepage for more stories.

5G is an innovation that is set to disrupt and transform a wide range of industries, alongside other technological advancements, such as Artificial Intelligence, Robotics, Blockchain and Genomics.

Investment analysts often examine 5G from a high level, exploring its potential to revolutionize and influence a range of sectors over decades.

However, on January 6, UBS’s Evidence Lab took a different approach. As 5G infrastructure and technology gets rolled out across the globe and it becomes available on mainstream smartphones, UBS equity analyst, Nicolas Gaudois and his colleagues, took a deep dive into the implications of 5G on the smartphone market from now until 2025.

“We delve into where 5G smartphone technology is, how much it adds to smartphone device costs and how this may change, and draw implications for the smartphone and smartphone component/semiconductor markets,” Gaudois said.

The 84 page report asked key questions such as:

  • How is 5G smartphone technology progressing?
  • What challenges could be ahead?
  • How fast could costs come down? 
  • How would cost influence the demand for 5G smartphones?
  • Which segments and companies could benefit, and which ones could be negatively impacted? 

Insider breaks down some of the key takeaways from the report as well as the key sectors and top stocks set to benefit from the changing 5G landscape.

What is 5G?

5G technology is the fifth-generation mobile network. Most smartphones currently leverage the 4G mobile network, so 5G is the next step in that technology.

The advantages of 5G technology is that it is expected to deliver higher data speeds, increased reliability and availability as well as significant network capacity.

Although 5G technology can be used in smartphones, the real benefit is for the internet-of-things ecosystem, where buildings are made up of a vast range of connected devices from digital assistants to app-controlled lighting, heating and security systems. The network capacity as well as high availability and data speeds will make it possible to have internet-of-things ecosystems at scale.  In the long-term, 5G connectivity could contribute toward making concepts such as self-driving cars in a city a reality.

Current 5G landscape

5G is currently being rolled out around the world. According to the Ericsson mobility report released in November, 2020, it was expected that there would be 220 million 5G subscriptions as well as 5G population coverage reaching over 1 billion people by the end of 2020.

In the US, AT&T claimed nationwide 5G status in 2020 and other providers, such as Verizon and T-Mobile , started to roll out services across the country. LifeWire is maintaining and updating a list of 5G expansion around the world.

Expectations were high for 5G in 2020 with over 150 5G device models already launched, according to the Ericsson mobility report, however COVID-19 threw a spanner in the works.

“Year 2020 was supposed to be the year of 5G; COVID-19 disrupted its path, and some of the initial China 5G smartphone sales disappointed,” Gaudois said.

The analysts have noted that momentum for 5G smartphone sales started to pick up again in China in November, 2020.

For the UBS report, analysts interviewed over 7,000 smartphone users. Surprisingly, they found 5G would not be a key driver in the smartphone replacement cycle, as some investors expected. In fact 5G ranked in the third quartile of features smartphone users cared the most about right now.

However, as 5G penetration progresses and more applications require it then analysts believe it will likely become more important. The survey noted smartphone users considered 5G as somewhat important or more had increased compared with other surveys  the team had done, with interest picking up particularly in the US and China.

The outcome of the survey suggests 5G might struggle to accelerate smartphone unit growth but the analysts do believe it will lead to a gradual increase in the smartphone average selling price as well as an increase in smartphone component value.

Future 5G landscape

Between 2021 and 2025, UBS Evidence Lab estimates 5G could add about 9% to the revenue value of the global smartphone market, taking into account the declining average selling price as 5G becomes more mainstream.

They also expect a 5% increase for component market revenues and 24% increase in RF cellular semiconductors.

In terms of adoption, by 2025, the team estimates that 5G smartphones will make up 80% of smartphone units, which is comparable to the adoption curve seen for 4G, Gaudois said.

“We assess that the 5G smartphone market could reach $137 billion in 2020E, rising to $332 billion in 2025E,” Gaudois said.  “A lot of this would be cannibalization of 4G. Hence most of the incremental revenue (assuming no meaningful changes in the replacement cycle) is likely to come from ASP accretion.”

This base case comes from analysis of four different scenarios of 5G and smartphones. Two of the scenarios looked at the upside while the other looked at the downside, which helped generate a base case.

“The smartphone installed base has been ageing,” Gaudois said. “At some point, this should trigger a re-acceleration of the replacement cycle, positive for demand. We believe this has tentatively started to fall into place.”

Challenges

There are many challenges going forward for 5G as a whole, but for smartphones in particular it will be balancing incremental performance while not compromising on power consumption and competing for space with other components, Gaudois said.

This is in essence nothing new for mobile technology, but it certainly is not getting any easier with 5G,” Gaudois said.

Key sectors

As 5G will boost smartphone volumes incrementally, the analysts believe certain sub-sectors and stocks will benefit more than others.

“Cellular and RF semis, MLCCs, semis packaging, modules and foundry could benefit the most from 5G,” Gaudois said.

One surprising sector that will benefit is any company focused on the internet space as 5G will bring faster internet.

“Over time, the use of 5G should drive increased mobile engagement, higher conversion while decreasing user churn, improve capabilities and drive the adoption of technologies like VR/AR and cloud gaming,” Gaudois said.

The stocks UBS think will benefit alongside these sectors are listed below:

Stock picks

Prices, ratings and price targets as of January 6 report:

1. Alphabet

Ticker: GOOG

Sub-sector exposures: Internet

Price target: $2,050

Price target upside: 17%

Analyst commentary: “Could benefit from 5G rollout through recent cloud gaming initiative, Google Stadia.”

Source: UBS

2. Amazon.com

Ticker: AMZN

Sub-sector exposures: Internet

Price target: $4,000

Price target upside: 23%

Analyst commentary: “Could benefit from 5G rollout through recent cloud gaming initiative, Amazon Luna”

Source: UBS

3. Deutsche Telekom

Ticker: DTEGF

Sub-sector exposures: Telecommunications

Price target: €21.50

Price target upside: 41%

Analyst commentary: “Well positioned in attractive markets and offering defensive growth and income.”

Source: UBS

4. Facebook

Ticker: FB

Sub-sector exposures: Internet

Price target: $330

Price target upside: 21%

Analyst commentary: “Could benefit from 5G rollout through recent free-to-play cloud gaming initiative.”

Source: UBS

5. Murata

Ticker: MRAAF

Sub-sector exposures: Smartphone components

Price target: 9,600 Japanese yen (Since UBS published the report, the stock has moved above this price target)

Price target upside: 2% (Since UBS published the report, the stock has moved above this price target)

Analyst commentary: “Beneficiary of MLCCs, RF front-end including AiP modules, MetroCirc.”

Source: UBS

6. NetEase

Ticker: NTES

Sub-sector exposures: Internet

Price target: $105 (Since UBS published the report, the stock has moved above this price target)

Price target upside: 9.6% (Since UBS published the report, the stock has moved above this price target)

Analyst commentary: “One of the largest pure game developers globally.”

Source: UBS

7. Samsung electronics

Ticker: SSNLF

Sub-sector exposures: Smartphone OEMs, semiconductors, telecommunication equipment

Price target: 93,000 South Korean won

Price target upside: 12%

Analyst commentary: “Upside from DRAM undersupply in 2021E and foundry/smartphone unit share gain.”

Source: UBS

8. SK Telecom

Ticker: SKM

Sub-sector exposures: Telecommunications

Price target: 273,000 South Korean won

Price target upside: 15%

Analyst commentary: “Multiple 5G-related businesses within portfolio amid limited exposure to Huawei.”

Source: UBS

9. T-Mobile

Ticker: TMUS

Sub-sector exposures: Telecommunications

Price target: $140

Price target upside: 4%

Analyst commentary: “Subscriber growth and right-sizing of the cost structure to drive faster FCF growth.”

Source: UBS

10. Tencent

Ticker: TCTZF

Sub-sector exposures: Internet

Price target: 700 Hong Kong dollars

Price target upside: 22%

Analyst commentary: “China’s leading online media and social network platform.”

Source: UBS

11. TSMC

Ticker: TSMC

Sub-sector exposures: Semiconductors

Price target: 625 New Taiwan dollar (Since UBS published the report, the stock has moved above this price target)

Price target upside: 17% (Since UBS published the report, the stock has moved above this price target)

Analyst commentary: “Potential upside from overall semis content increase in 5G smartphones.”

Source: UBS

12. USI

Ticker: SHA:601231

Sub-sector exposures: Smartphone components

Price target: 33 Chinese Yuan

Price target upside: 69%

Analyst commentary:“Could benefit from Apple AiP modules and eventually Qualcomm’s.”

Source: UBS

13. WIN Semi

Ticker: TWO:3105

Sub-sector exposures: Semiconductors

Price target: 370 New Taiwan dollar (Since UBS published the report, the stock has moved above this price target)

Price target upside:  2% (Since UBS published the report, the stock has moved above this price target)

Analyst commentary: “Key enabling compound semis foundry for sub-6GHz RF.”

Source: UBS

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