What the 5G Rollout Really Means for Consumers...And Investors

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We recently discussed the market opportunity and some of the technical aspects associated with 5G, shorthand for the fifth generation of mobile network technology that is widely expected to expand the scope of mobile data and connectivity. The simple truth is that for carriers to recoup their hefty investments in any new mobile network, consumers and businesses need to be able to connect to that new network as well as the existing ones. That means devices not only need to access the latest and greatest network, they also need to be backward compatible with prior ones to ensure usage as the new network’s capacity is built out.

While there have been several devices that have connected to mobile networks, including PCs, tablets, and wearables, the original big seller was the mobile phone. While such a rudimentary device can still be found if one searches high and low, it has been replaced by the ubiquitous, wondrous and highly addictive smartphone. Smartphones don't just make calls -- they are used increasingly to access the internet, shop, chat, stream videos, interact on social media, and access other services. In 2019, smartphone shipments totaled 1.38 billion, down modestly from 1.41 billion according to data published by IHS Markit, but as we’ve seen in the past, the deployment of next-generation networks that bring greater data speeds tend to foster a smartphone upgrade cycle. For context, exiting 2019 GSMA found there were 5.175 billion unique mobile subscribers across the globe.

Not only are we poised to see that as 5G networks start lighting up across the globe in the coming quarters, but the coming of the industrial mobile internet and the internet of things is poised to explode the number of devices connected to the network. According to the Cisco Systems (CSCOAnnual Internet Report, by 2023, global mobile devices will grow from 13.1 billion up from 8.8 billion in 2018, of which 1.4 billion will be 5G capable.

From smart homes to the smart grid and from industrial to wearables, the number of connected devices is rapidly proliferating. IHS Markit Ltd. projects the Internet of Things (IoT) market to grow from an installed base of 15 billion units in 2015 to more than 75 billion units by 2025.

We admit those are some hockey stick like growth forecasts, but they hinge on the seemingly unquenchable thirst for connectivity and data that will only continue to grow with 5G’s quicker data speeds, greater network bandwidth capacity, and lower latency. Findings from the Deloitte Insights seem to confirm the expected consumer uptake in 5G:

  • 67% of consumers said they would be more likely to upgrade to a 5G-compatible smartphone when 5G becomes available;
  • 62% of consumers said they will likely replace their home internet with 5G Wi-Fi service;
  • More than 40% of Gen Z consumers said they will play more mobile video games with 5G;
  • Nearly 35% of Gen Z and millennials said 5G would change how they use augmented reality and virtual reality (AR/VR), the report found.
  • 62% of home automation users rank 5G's potential to offer better connectivity in the home as one of the top three capabilities likely to drive them to use 5G.

Here’s the thing: In order for all of those devices to connect to a mobile network they will need RF semiconductors, which perform tasks such as amplifying and filtering wireless signals. That market is slated to explode in the coming years. Forecasts have the global RF semiconductor market growing to $26.2 billion by 2025 up from $17.4 billion in 2018, a compound annual growth rate of 8.5%.

There are two key drivers of that forecasted growth rate – first is the sheer volume of devices and the second is the greater number of RF semiconductors needed per 4G or 3G device. The reason for that greater RF content per 5G device is twofold in that not only do those devices need to backward compatible, as we mentioned above, but they also need to connect to the 5G networks that are utilizing different frequency bands.

As result, a 5G smartphone will need to be able to connect across 30 frequency bands compared to 15 with a 4G smartphone, which means a significantly greater number of filters, switches, and power amplifiers are needed. All told, RF semiconductor content is expected to reach $25 per 5G smartphone compared to $18 for a 4G model and $8 for a 3G one.

For the trivia buffs out there, a basic 2G mobile phone contained just $2 in RF semiconductor content. That’s a remarkable increase in the dollar content per smartphone and it helps explain the revenue and EPS growth at companies like Skyworks Solutions (SWKS) and Qorvo (QRVO) over the last decade.

Even so, 5G is slated to bring an opportunity with even greater RF semiconductor content – the Connected Car. While we are still at least a few years away from autonomous cars being unleashed on local roads and autonomous semi-trucks on highways, infotainment, telematics, and real-time monitoring applications are expected to result in $50 worth of RF semiconductor content by 2024. Similar to the smartphone market, there are dollar content and volume drivers at work. According to the 5G Automotive Association, today connected cars account for roughly 12% of all vehicles on the road and by 2021 they are projected to make up more than one-third of all vehicles on the road.

When AT&T (T) recently reported its June quarter results on July 23, CEO John Stankey shared the company’s 5G network was now nationwide, Verizon (VZ) continues to expand its 5G coverage, and in the coming months, we will see more 5G smartphones debut. As we like to say at Tematica, we are just getting started and in many ways, so too is the RF semiconductor market.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Chris Versace

Christopher (Chris) Versace is the Chief Investment Officer and thematic strategist at Tematica Research. The proprietary thematic investing framework that he’s developed over the last decade leverages changing economic, demographic, psychographic and technology landscapes to identify pronounced, multi-year structural changes. This framework sits at the heart of Tematica’s investment themes and indices and builds on his more than 25 years analyzing industries, companies and their business models as well as financial statements. Versace is the co-author of “Cocktail Investing: Distilling Everyday Noise into Clear Investing Signals” and hosts the Thematic Signals podcast. He is also an Assistant Professor at NJCU School of Business, where he developed the NJCU New Jersey 50 Index.

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Lenore Elle Hawkins

Lenore Elle Hawkins serves as the Chief Macro Strategist for Tematica Research. With over 20 years of experience in finance, her focus is on macroeconomic influences that create investing headwinds or tailwinds. Lenore co-authored the book Cocktail Investing and in addition to her Tematica work, provides M&A consulting services for companies in Europe looking to expand globally. She holds a degree in Mathematics and Economics from Claremont McKenna College, an MBA in Finance from the Anderson School at UCLA and is a member of the Mont Pelerin Society.

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Mark Abssy

Mark Abssy is Head of Indexing at Tematica Research focused on index and Exchange Traded Product development. He has product development and management experience with Indexes, ETFs, ETNs, Mutual Funds and listed derivatives. In his 25 year career he has held product development and management positions at NYSE|ICE, ISE ETF Ventures, Morgan Stanley, Fidelity Investments and Loomis Sayles. He received a BSBA from Northeastern University with a focus in Finance and International Business.

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