Investment Theme

5G is basically a new era in telecommunications, which is focused on speed, and software. It's a way of unlocking the spectrum to enable greater speeds, greater capacity, and lower latency than anything we've seen before in the 3G and 4G cycles.

Winners and losers

As part of our investment process, Munro Partners seeks to identify the potential winners, and potential losers, from key structural changes that occur in the world today. Here we consider the 5G structural growth theme.

In terms of 5G connectivity, firstly, there are the testing companies, which are required to provide high-quality, and reliable equipment as it's deployed to consumers over the next few years; the small cell enablers, which basically mean 5G can be deployed in any neighbourhood around the world; to the telecom providers, who are ultimately responsible for delivering the network; and then the tower companies, who are a critical part of the network infrastructure.

Figure 1: Changing the connected world

In the box at the bottom, we've identified the potential losers, which we think are the traditional cable and satellite operators. The reason 5G will become so dominant over the next decade is the speed which it can offer consumers and businesses.

Why all the hype?

On the left hand side of Figure 2, we're showing the average speeds of 3G, 4G and 5G out to 2022. As you can see, on an average speed of 170 megabits per second, 5G clearly dwarfs the 4G and 3G cycles underneath.

Figure 2: Mobile speed = Commercial applications

In simple terms, 5G has the capacity to be able to download a typical high-definition movie in just seven seconds. On the right, we're showing some of the everyday applications which you and I can relate to that 5G speeds will enable. For example, the connected home, the connected car, medical devices or industrial robotics, even super fast gaming.

The key point here is the increased speed, and complexity that 5G operates, means that it's applicable to many more industries than just telecommunications.

Ultimately, the cycle of 5G will be significantly larger than previous cycles before. There is also a long runway of growth for 5G, which you can see in Figure 3. Currently 5G is virtually non-existent in connections and mobile devices.

In its current form, 5G exists primarily in laboratories around the world in the testing phase, where the technology is being tested for quality, and reliability before it's deployed to consumer use. However, you can see that 5G testing is currently underway in most of the developed nations around the world.

Importantly, as the rollout of 5G happens over the next decade, many more countries will adopt this technology, and start testing this technology over various timelines.

Figure 3: The runway for growth

A key beneficiary of 5G

Keysight Technologies is the number one player in the test and measurement space around the world today. As you can see from the middle of Figure 4, Keysight is responsible for producing these types of technologies to test the reliability, quality and speed of 5G.

Figure 4: Stock idea for 5G testing

Keysight will ultimately be able to grow the sales of these technologies into a new, and growing customer base. It will be able to leverage this technology, and the sales in providing higher software content in its products driving upside in margin, and also selling to new customers as new customers, and countries adapt to 5G.

The growth is clearly sustainable given we're only in our relative infancy in terms of 5G penetration, and Keysight was a recent spin out of Agilent Technologies, so it has a highly aligned and focused management team.

We think earnings per share can continue to grow to over $5, with the multiple going to approximately 21, or 22 times, this could deliver a 12-month forward price target of just over $100.

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The information contained herein is for general information purposes only and does not constitute financial product advice. This article contains information about securities, opinions and forecasts, all of which may change without notice and none of which has been prepared taking into account your objectives, financial situation or needs. There can be no guarantee that any projection, forecast or opinion in this article will be realised.



Comments

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Nicole Cameron

Maybe I trust you because you're not ALWAYS trying to push A Subscription

Maureen Riggs

I hate to be the elephant in the room when talking 5G. The very bad reality to all life on earth when 5G is up and running will be exactly what the scientists are concerned about. Here is only one article describing the damaging effects of the intensive wireless radiation from 5G towers and networks will impact on humans.

adam de petro

Nice write up Kieran - insightful.