The 5G market may be one of the most significant growth markets of the next decade. One estimate suggests the US 5G infrastructure market could grow at a compound annual rate of 87% between 2020 and 2027, from $1bn in 2019 to $152bn by 2027.
Figures suggest something similar will happen on this side of the pond. With that in mind, here’s a selection of 5G shares UK investors can buy today. I’d buy these stocks to capitalise on the growth of the market over the next five to 10 years.
In my opinion, there are two ways investors like me can buy into the 5G revolution. Either owning the infrastructure companies or the telecommunications giants. Each strategy comes with benefits and drawbacks.
5G shares
Telecommunications is a viciously competitive industry, and companies are constantly fighting each other for market share. As such, these businesses tend to be slow burners, although they can return a lot of cash to investors.
On the other hand, equipment suppliers’ products are usually protected by patents. This means profits can be higher, but these businesses have to reinvest a large percentage of their profits in research and development.
One company that falls into the latter bucket, which I’d buy today, is Spirent Communications. This business tests 5G and broadband connections and devices. It also has a small Connected Devices division that helps corporations with wireless networks. Thanks to the growing demand for 5G connectivity and connected devices, the group reported a 4% increase in revenues last year. Its operating profit margin increased to 20% from 18% in 2019.
While it looks as if the business could continue to benefit from the 5G trend, it’s highly dependent on contract revenues. If a contract is delayed or a competitor steals market share, Spirent’s growth could slow. This is the most considerable risk the business faces right now.
Another option I’d buy is XP Power. The power control solution designer supplies semiconductor manufacturers, among other customers. As the demand for connected devices grows, manufacturing capacity will likely increase, translating into more business for XP.
That said, this company is exposed to other industries as well. Even if the 5G market continues to expand, a general economic slowdown could hit the business. Competition from lower-cost Chinese competitors is also a significant threat the enterprise is facing.
Telecoms
In terms of customer-facing businesses, I’d also buy Vodafone and BT. The latter owns the largest 5G network in the country, EE, and the UK’s national broadband infrastructure, Openreach. This suggests the company has two ways to benefit from the data revolution.
Still, it’s facing increasing challenges from other competitors such as Vodafone, as well as newer upstarts. As I noted above, the group’s biggest challenge is competition in the telecommunications sector.
The same is true of Vodafone. This company has more geographic diversification and owns one of the largest data networks in Europe. This could make the corporation a better buy than the domestic-focused BT in the long run, although it still faces similar challenges and risks.
