Motley Fool Hidden Gems Investing - Diving Into 5G

Episode Date: February 6, 2022

Greater speeds. More capacity. Jason Moser and Matthew Frankel, CFP, discuss the wide ranging implications of 5G technology, and how investors should think about the rollout. Because it’s not just faster speeds for your phone– 5G technology could change the way you bank, game… and even smoke your ribs. Additional topics include: - The fundamentals of 5G - Implications on artificial intelligence, internet-of-things devices, immersive technology, and connected vehicles - Allocation strategy for 5G investors For more information on investing in 5G stocks, click here: https://www.fool.com/investing/stock-market/market-sectors/communication/5g-stocks/ Stocks: QRVO, TSLA, T, QCOM, CCI, AMT, AX, V, MSFT, ATVI, TCEHY, SONY Host: Jason Moser Guest: Matthew Frankel Producer: Ricky Mulvey Engineers: Rick Engdahl, Dan Boyd Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill. For folks out there thinking about 5G today, it's worth remembering, all of these companies that are out there working on 5G today, you know what else they're working on? I'm already seeing this in their calls. They're already developing their 6G strategy. For folks who think that 5G is the finish line, that's not it at all. 5G is just one more step in the journey. I'm Chris Hill, and that was Motley Fool senior analyst, Jason Moser. Faster speeds and more capacity are just two of the ways to think about 5G technology. Today, Jason goes deep on 5G with his longtime co-host from the Industry Focus podcast,

Matt Frankel. They discuss the fundamentals of 5G, allocation strategy for investors, and the ripple effects on everything from towers and banking to smart coffee mugs. Matt, it's great to see you again. You know, I mean, we may not be doing Monday financials every week, but the neat thing about this new format, and I hope listeners are enjoying this too, is it sort of broadens our playing field. We get to dig into more stuff. And I think that's really a lot of fun because we get to learn more from each other. And I think this week is another great example of that because we're talking about 5G this week, right? I think that's a big buzzword a lot of folks have heard in certainly the financial media and just the regular media

over the last year. 5G, there's a lot of anticipation out there. What we wanted to do today, we want to step back a little bit, talk about 5G, try to simplify what exactly 5G is, and then ultimately dig into why it matters for investors. Let's just get this out of the way first and foremost. Let's explain 5G from a high level. How would you define 5G? What does 5G mean to you? It's difficult to define 5G in a simple way. A lot of people don't have the simple definition. When we were researching for this, I read three different definitions of 5G, and each one was more than 10 pages long. A lot of investors need the simplified version of it. So, basically, 4G technology is the last version, as you probably know. That was designed to maximize

mobile networks in simple terms. 5G takes it a step beyond. 5G is meant to maximize connectivity capabilities. Think of how many more internet-connected devices you have in your house than you did just, say, five years ago. I'm looking around in my office, and I have a printer, a vacuum cleaner, a heart monitor that I wear in the gym, 10 different things in my office that are all connected to the internet. Matt, I got a Traeger grill for Christmas this past year. That thing is connected to my phone. I'm managing that thing from all over the place. You want to talk about internet of things. The fact that my grill is connected, I'm all in. Right. I got this coffee cup

that's connected to the internet that controls the temperature of my drink. That tops the grill. My wife got me that. And just side note, I like my coffee at 134 degrees exactly. That's my sweet spot. And I can control that through an app. Things like that are really why we need 5G technology. I mentioned that 4G was meant to maximize mobile networks. 5G takes it a step beyond. The biggest misconception is that the whole point of 5G is to make things faster. That's certainly a part of it. But there are two other things that people need to know as well. 5G is meant to be able to connect more devices, which is a big problem these days. A lot of the existing infrastructure just simply can't handle

the number of devices that need to connect. And two, to reduce latency, meaning lag time when you're trying to access a network, which, as we'll get through some of the applications, is very important. Just to name one, virtual reality, you can't have a delay when you're using a virtual reality application. So, there are a lot of benefits to 5G over 4G that investors need to really realize that go beyond speed, because that's definitely part of it. But it's also designed to 100X increase in traffic capacity, and a lot more devices. So, there's a lot more to it than just speed. Yeah, I like that. And you're right, we could dig down into the nitty-gritty there and talk about sub-3 gigahertz used in 4G,

and the 100 gigahertz and beyond for 5G. The beauty of 5G, it puts to use a wider spectrum of bandwidth. Ultimately, to your point, I think the simplest definition, that Peter Lynch write it out with a crayon, greater speeds, more capacity. That really ultimately is what it's for. It's because of all of those reasons you just really described right there. We're just becoming more and more connected, which I think hopefully ultimately is a good thing, but it also presents fair share of challenges. Something I think about often, because I get the question a lot, is in regard to 5G. When I talk about 5G, some people feel like they either missed it already or they haven't noticed it. They feel like maybe 5G hasn't really impacted them. Others feel like,

well, 5G should be just like flipping a switch and everything should magically just improve. right? I feel like that's sort of expectations, I think. I think that when you look at the media outlets, just general kind of expectations that have been created for 5G, that probably has something to do with it. I think consumers have been conditioned to feel like, OK, 5G is here, flip the switch, now everything is going to be so much faster. That's not really the way this works. And a lot of that boils down to building out networks like these, it costs a lot of money, it takes a lot of time and it's a lot of work. I mean, even when we have all of this established in 4G, for example, I mean, making that leap from 4G LTE up to 5G, it's requiring a lot of work

that folks don't see, which makes it really, it's not like flipping a switch. It feels like it's more incremental that we'll realize over time. Yeah. The best way I heard it described is that there's a difference between 5G technology and the 5G experience. The 5G technology is here now. That's already starting to be rolled out in cities. Like you mentioned, companies are building out their networks, things like that. But until, one, we're operating on the right bands, which I don't want to get too far into the weeds, but until the networks are built out to the point where they need to be, you're not going to get the 5G experience where things are flowing 100X faster. 5G is built to handle 20 gigabits per second data speeds. That's fast.

That's better than any internet I can get in my house. But we're not there now. That's the 5G experience. The Qualcomm study, this is from Qualcomm, which is one of the leaders in 5G technology. They did a study that says that the 5G experience won't be rolled out across the globe completely until the mid-2030s. Minimum 13 years or so. They said 2035. It's going to take a long time. It'll probably happen a little quicker in the United States. That's globally, including emerging markets. But until the networks are built out, they use something called small-cell technology, which means, in simple terms, more access points closer together. Smaller access points, not just the big cell towers you see driving down the road. These are things you

can see a small cell attached to the side of a building or on a billboard. One of the billboard companies I follow, Outfront Media, rents space on their billboards for small cell purposes. It's a slow rollout. It's not just flipping a switch. The technology is like flipping a switch, like incorporating the technology. All the major carriers now have 5G phones, for example, which are significantly faster than 4G networks, but not 100 times faster or anything close to that. So, the technology is here, the experience is not. Yeah. And I like that you use that word, experience, because I think you're right. I think that makes perfect sense. I think that describes it very well. And let's talk a little

bit more now about the experience. When you think of 5G, and the way I like to view 5G is just from a mental picture. I like thinking about space. To me, it's fascinating. I always think about 5G as the sun. Then you have all of these opportunities, all of these planets that are orbiting around that 5G sun that represent all of the opportunities that 5G is going to help power. You get things like artificial intelligence. You get things like Internet of Things or IoT, like we were talking about. Immersive technology, virtual reality, augmented reality, connected vehicles, gaming, entertainment. There are so many opportunities for that experience. No, it's not going to be like flipping a switch. We're going to see, over time,

incremental improvements in a lot of those types of experiences, but they will come. And furthermore, I think it's also worth remembering, too, for folks out there thinking about 5G today, it's worth remembering, all of these companies that are out there working on 5G today, you know what else they're working on? And I'm already seeing this in their calls. They're already developing their 6G strategy. So, for folks who think that 5G is the finish line, that's not it at all. 5G is just one more step in the journey, right? I mean, there's going to be 6G, there's going to be 7G, it's going to keep on going as long as the tech allows us. So, I think that's something to look forward to. But also, given the timeline that you offer there, it's

worth remembering. I mean, this is something that is going to play out over decades, over the rest of our lives. And as an investor, I feel very encouraged. I feel like this is just going to continue opening up opportunities for investors to participate not only on the technology side, but the experience side, as you said. So, let's dig into a little bit of both here, the tech and the experience. Let's talk first about the technology, because I think that's really where this all begins. You mentioned small cells and tower companies. We can talk about these in tandem, I think, but you've got the tower companies and the network operators that are really enabling all this, right? Yeah. There are two big tower companies.

There's American Tower and Crown Castle. Ticker symbols are AMT and CCI. They're both real estate investment trusts. I always say that they should switch names, because American Tower is the global company, and Crown Castle is American. They're only in the U.S. You know, I always thought about that. I say that they should switch names. They should just sell each other their own brand names. These are the companies building out these networks. They've both specifically called out small-cell deployments as their big growth area over the next few years. I personally like Crown Castle because it's going to be a quicker rollout. I mentioned the 2035 figure

is worldwide. I think of American Tower, because they have a lot of emerging markets and things like that in their portfolio, I think that's going to be the long-tailed 5G play. But both of them are good. You're not going to go wrong with either one. They're both massive companies. They both make money no matter what the market's doing. They're not very recession-susceptible, like a lot of the companies we talk about are going to be. A lot of the other 5G beneficiaries are going to be cyclical businesses. But the tower companies are essential. I can't think of a business that's much more essential these days than data infrastructure. They also play a big role in that small-cell strategy that you mentioned before.

I think for folks to be able to picture this in your mind, small cells, we're talking about things that can be the size of a pizza box. These are constellations of small cells, particularly in heavy, dense urban environments. But small-cell is great for stadium experiences. You go to a football game, an NFL game, or a college game, or you go to an NBA game, you see more and more of these stadiums building out that small-cell technology to enable more of that 5G experience inside the stadium, inside the arena, so to speak. Crown Castle, I agree with you. I know I I recommended Crown Castle over American Tower, but I think I recommended it over American Tower for a number of reasons, some of which you just mentioned, but also, Crown Castle has been a

little bit more enthusiastic in pursuing that small-cell strategy early on, which I think is making a difference for them. Yeah. They've been the better capital deployer over the last few years, I think, by far out of the two. Like I said, I like the U.S. rollout. They're a great dividend stock. They have a good track record of raising the payout. They're a great combination of income growth and safety, which I've often said is the trifecta that I look for. Well, speaking of income growth and safety, then, what do you think of the operators, the network operators themselves? I think a lot of folks, they think 5G. They immediately think, oh, well, you're investing in AT&T, Verizon, T-Mobile.

And yes, those are the companies responsible ultimately for connecting us, but there's a specific investment thesis involved with these types of businesses. 5G isn't something that is going to cause these stocks to double over the course of the next five years, I wouldn't imagine. No, and I know that firsthand. AT&T is one of the biggest positions in my portfolio, and it's been one of the worst performers in my portfolio as long as I've owned it. I've often brought up the story that in 2013, to pay for my wedding, I had a choice to sell my Tesla stock or AT&T, and I picked the wrong one. But I learned a valuable lesson, so I'm not bitter about it. Yes, you did. Well, as long as you learned something from it,

that's what happened. But AT&T has been a poor performer. I mean, they've made questionable management choices. But the point is, they're a slow, steady growth name. If you buy AT&T, Verizon, T-Mobile even, you're expecting to get a 5%-ish dividend yield. You expect the stock to go up 2% or 3% a year over the long term, and you expect it to make money no matter what the economy is doing. They are not growth plays. They are income safety plays, period, the end. When they try to branch out to other growth areas, like AT&T did with Warner and DirecTV and things like that, we see what happened. So, if you buy them, buy them because they are like buying a utility, essentially. People pay their phone bills and internet bills like

they pay their electric bills and water bills. It's guaranteed income, but it's not a growth story, even with 5G. 5G is an essential expense for these businesses, not a growth expense. Yeah, and they are investing a lot. If you look over the past year plus, you see these auctions for all of the spectrum. We're talking about hundreds of billions of dollars that these companies collectively are bidding for the spectrum. It requires a lot of investment upfront. But to your point, they are utilities, which means that in certain instances they can be very good investments. I'm sure as a certified financial planner, you run into this question often, folks who are either in the grow their wealth stage

of life or the protect their wealth stage of life. Maybe an AT&T or Verizon isn't necessarily attractive to someone who is in that grow your wealth stage. But if you're in the protect your wealth stage, you're closer to retirement or in retirement, those are relatively stable businesses, pretty good capital preservation. I don't know, I just don't feel like those dividends are really under threat at all. To be fair, I'm 40, so I'm not near retirement yet. I am probably eventually going to get out of my AT&T stock. The reason I keep holding onto it, I want to own WarnerMedia. I think they have a lot of streaming potential, especially when combined with Discovery. After that spin-out happens, I'm probably going

to keep the media side of it and get rid of the AT&T. But if I were 60, not 40, I'd probably feel a lot differently and would be very inclined to hold onto my AT&T. Interesting. Well, absolutely worth keeping in mind there. Let's move over to some of the hardware that is making this all work. I know that you don't really dabble a whole lot in the chip space, but it does feel like the chip companies themselves are playing a much bigger role today with this move towards connectivity than ever before. They are as relevant as ever, it feels like. Sure. Well, I mean, chips pass power all the other technologies that are benefiting from 5G. We mentioned self-driving cars,

we mentioned Internet of Things, we mentioned augmented reality. What do you think's inside all of those devices? I follow those spaces a lot. I don't follow the chip makers directly. But what are your favorites in that space? I do follow that space a good bit. One thing I think is really neat, chips historically have had this reputation for being very cyclical, and because they were, they still are to an extent. I think this isn't really a unique thought at this point, but that cyclicality window is really tightening because of the connected nature of everything. We're just becoming more and more reliant on these chip companies, this technology, which means that demand seems to be more persistent.

I look at companies like Qualcomm, for example, which is obviously a very big company and probably fell off of a lot of investors' radars after the smartphone saturation point from 4G. Very understandable. But you look at something like Qualcomm, Qualcomm's foundational to the build-out of 5G. Some of the company's inventions that form the foundational technology for 3G and 4G development also now serve as foundational tech for 5G. All of the work they had done on that 3G and 4G side is serving a role there in building out 5G. Today, you've got more than 275 5G devices announced or in development that are actually being built on Qualcomm solutions. Things like their Qualcomm Snapdragon modems. You see, certainly, they continue

to invest heavily in that 5G opportunity because they are so foundational to it. But then you could go to the other side of the spectrum. They're looking for smaller companies that maybe don't quite have that same foundational reputation as a Qualcomm, but still, you can see the role that they play and the importance in it. A company like Corvo, for example, where I feel like you're going to hear more and more about this technology called ultra-wideband. That's a technology that's being utilized more and more in our smartphones. Ultimately, It's radio technology that moves large quantities of data over a wide-ranging scale of frequency bands, but it uses very low power. It specializes in covering short distances. It really is great

for superior location accuracy. It's good for security. That word you mentioned earlier on the show, latency, as compared to other short-range technologies. Corvo is a company that has made big investments in that ultra-wideband technology. A big supplier to Apple, of course, given their lean towards smartphones. But those are a couple of the companies I feel like are examples of ways that chip companies are finding their way in the value chain in regard to this 5G rollout, which I think that's exciting. Yeah, for sure. I'm glad you mentioned 4G in there, because it's worth pointing out to investors that we have a precedent for the timetable here. Because this is 5G, it's the

fifth generation. Just to give you some dates, 4G technology started to deploy in the U.S. in 2008. The first 4G phones came in 2010. But the things that really took advantage of the technology didn't come out until years later, when the technology was more built out. Do you happen to know what the biggest change in 4G in our daily lives, the biggest change 4G caused our daily Lives was? I feel like it has something to do with Netflix. Very quick, video. Being able to call people with video was probably the biggest change to our daily lives, being able to upload videos easily. 4G technology is what enabled platforms like Snapchat to grow. GPS technology is the other big one. Having GPS integrated into your

mobile network. It wasn't really practical on 3G networks, but is on 4G networks. This is what enabled companies like Uber to really rise out of this, which happened in the 2013 range. We're just starting to see 5G phones roll out, the point is. You have two or three years until you're really going to start to see how 5G is transforming our daily lives. It's going to be a long-tail deployment. We saw this with 4G. It's going to be really interesting to see it play out with some of these technologies. Yeah, it definitely sneaks up on you. Let's talk a little bit about those opportunities, getting away from the technology and then talking more about the companies that are utilizing this technology to solve problems

in different ways or figure out new ways of doing things. You and I spent many years talking financials on Industry Focus together. That's obviously a space that we know well and enjoy talking about. Payments is a space that is being impacted by connectivity, by 5G. It's something that's going to continue to evolve as connectivity continues to get better. Let's talk a little bit about payments. We like a lot of companies in the payment space, but what are some of the companies you see utilizing technology and connectivity in particular to make their business is better? I see the banks that rely heavily on the internet to do business. There are obvious internet-only banks. Axos Financial is one

that immediately comes to mind. Right now, their ability to serve customers is somewhat limited by the connectivity. They can't do things like real-time client interaction very well. They're not set up to do things like immediate money transfers in the way that traditional banks are, that have hardwired infrastructure, you can just walk into a branch, things like that. So, banks that really lean heavily on their internet infrastructure. And then, payment processing companies. Right now, Visa's network can handle about, I want to say it was about 65,000 transactions per second, which sounds like a lot, but when you're processing trillions of dollars of payments, that can be a limiting factor as

the world goes increasingly cashless. So, improving the technology there, and I mentioned the latency advantage of 5G, meaning that connectivity is just instant almost, that's a big advantage to payment networks to get things done quickly. So, I'd say payment processors and financial institutions that really lean heavily on their ability to serve customers over the internet. Yeah. And one of the questions I get from folks all the time in regard to payments. You talk about payments and 5G, and they have a little bit of a difficult time connecting the dots. It's very understandable. But when you think about how money works, how money moves from point A to point B, obviously there

are a lot of parties involved in that value chain. The one thing, I think the way I look at it in simplest terms is, we live in a world, as you mentioned, where digital payments are only growing. More and more people are relying on digital payments to move money every day, multiple times per day. I look at it essentially as a road system. You've built this road system that's built to accommodate a certain level of traffic. At some point, growth starts to clog that road system. You start to run into more and more traffic jams because you have more cars going through that system. So, what do you do? You expand your road system, you make it bigger. And I think that's probably the easiest way to look at the payments space here

when it comes to 5G, is you're just having more demand of that bandwidth. You're having more people using those roads now, and that's going to continue to grow. So, they have to widen those roads. They have to introduce additional capacity and the speed that comes with that capacity. So, I think that's probably the simplest way to look at how the payments industry can benefit from 5G, but it's also on the back end, too. Security is something that continues to be an issue, fraud particularly. The FTC disclosed recently, consumers lost more than $3.3 billion to fraud in 2020. That was up from $1.8 billion in 2019. Fraud is a big concern for these issuers, for these banks. They're utilizing technology to find new ways to combat it.

I like that angle. There's definitely a lot of payment applications. It's worth mentioning that there are so many 5G-adjacent investments out there. If you name a random financial stock right now, I can make the case where 5G technology could transform their business. I agree. I totally agree. I can, too. It takes thinking a little bit outside the box sometimes, but really, you can see more and more how technology is changing the face of everything, from how we eat, to how we bank, to how we sleep, to how we drink our coffee and smoke our ribs. Matt, are you much of a gamer? Not really, a little bit. I'm not either. Back in the day,

I'm a bit more of an old-school guy. I really enjoyed Ms. Pac-Man, Galaga, Donkey Kong, things like that. I'm not really part of the gaming crowd today. But nevertheless, 5G is having a profound impact on the gaming market. More and more folks are obviously playing games via connecting to the internet and streaming versus loading a physical game into a console. Cloud gaming becoming a bigger and bigger market opportunity. We have seen some real consolidation here just over the past couple of weeks, a couple of big deals announced in the gaming space that I think is really playing into more this cloud gaming and connected gaming idea. I know gaming is a massive opportunity

right now, and that's a space that has evolved dramatically over the past few years. When you think of just the technology, the immersive technology, I guess you'd say, and 5G is really a play on, it's essential for a truly immersive experience, I guess you'd say. I mentioned the lower latency. I hate to keep harping on it, but it's really the game-changing technology. Right now, our current streaming technology is enough to stream pretty much whatever you want to stream. But it's the latency factor that makes it a less immersive experience than it could be. So, I see a lot of opportunities to continue to improve and grow and new technologies to really take hold over the next few years. Yeah. You're seeing companies like

Nvidia, which has obviously been known historically for its specialization in graphic processing units, GPUs. They're basically building out a platform business. They have a cloud gaming division of the business. Microsoft, massive headline here just a couple of weeks ago, Microsoft acquiring Activision Blizzard in order to really stake their claim in this gaming market. And then not to be outdone, just the other day, we see the headline, Sony will be acquiring Bungie for a little bit more than $3 billion to sort of up the ante, so to speak. When you look at the top gaming companies in the world, you're going to have Tencent, I believe, you're going to have Sony, and you're going to have Microsoft, assuming the Activision Blizzard deal goes

through. Those are going to be three very large gaming behemoths that are utilizing this connected wireless technology really to deliver the goods, which then just goes to show you how critical it's going to be because hundreds of millions of folks are playing these games every day and every month. This is a tremendous, tremendous opportunity in this space, and certainly 5G is a technology that's going to make it better. Matt, before we wrap up this week, whenever we talk about investing, it's easy to just sort of skate over the topic of allocation, but it is really important to discuss, right? I mean, the better you are allocated, the better you are diversified in your portfolio, the easier the long-term investing journey is.

This clearly is a long-term trend. This is something that is not, like we said, it's not like flipping a switch. It's something that's going to play out over many years. How do you view investing in the 5G opportunity? How much would you say an investor can allocate from their overall portfolio, or do you look at it a little bit differently? Well, the way I look at it is that 5G is such a broad range of investment opportunities that you could create a fully diverse portfolio just from 5G opportunities. We mentioned real estate investment trusts like Crown Castle and American Tower. You mentioned the big tech companies like Microsoft. We mentioned self-driving vehicle technology.

You mentioned virtual reality and augmented reality. So, if you ask how much you can allocate, I would say, if you're just looking at 5G growth plays, like the gaming industry, like self-driving cars, I'd say 10% to 20% of a portfolio is a good maximum. But if you really broaden it out to infrastructure companies, we didn't even mention data center companies that could be big beneficiaries, it's possible to create a very diverse allocation of income stocks, growth stocks, value stocks, things like that. I hesitate to put an overall limit on it just because of how broad 5G technology is. How about you? Well, I think you're right. I think if you could take all of the companies that we mentioned

in today's show and probably form a very nicely diversified portfolio just from those names, because we talked about some growth ideas, some stable income plays, and everything in between. Generally speaking, I think if you're looking more towards the high-flyer-type growth-style 5G investment, where you're willing to take a little bit more risk, an investor could look, depending on their stage of life, depending on whether they're growing their wealth or protecting their wealth, you could see anywhere from 10% to 20% of someone's overall portfolio being dedicated towards those specific type 5G names. But by the same token, like you said, I think you can connect virtually, everything is connected today. Technology is essentially

the air that we breathe. You could absolutely, I think, build out a very nicely diversified portfolio, all focused on this theme of 5G connectivity, and ultimately 6G and beyond, because a lot of these companies are playing that similar role as this technology develops. yeah, I think you could absolutely develop a nicely diversified portfolio just focusing on this technology. I think we've covered a lot of good names this week that speak to that. Matt, I think we're about out of time, but I want to thank you for digging into this space, digging into these companies, and talking 5G investing with me today. Of course. Jason, I could talk stocks with you for an hour.

That's all for today, but coming up this week, we've got a lot more in store, including the latest with real estate, company takeovers, and the business of the Super Bowl. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill, thanks for listening, we'll see you tomorrow. you