This theme may not be new, but the coming 5G network revolution is ever more of a reality each month. Unlike some trends of the past, this is going to take years of investments and may offer some companies clear revenue and earnings visibility for years. The benefit of targeting 5G is that investors don’t have to think of “just China” because this opportunity will span the United States, North America, Europe and Asia.
The big build-outs from AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ) are known to be in the tens of billions of dollars. Another boost here is that the T-Mobile US Inc. (NASDAQ: TMUS) acquisition of Sprint Corp. (NYSE: S), if it is ever allowed to close, has many stipulations for creating a better network that has have 5G written all over it.
The 5G race is really the fifth generation of high-speed networks, and there is still an ongoing debate about whether 5G will be fast enough to live up to its hype. If not, the 5G argument will move to “beyond 5G” and will encompass smaller and larger cells used in the networks to encompass smartphones, other wireless devices and the Internet of Things. The launches made already will continue to see many improvements, and there are many more cities and neighborhoods that are in high need of faster access.
24/7 Wall St. has tracked the would-be winners in the 5G race for some time. Some of these winners have suffered after earnings and guidance, due to woes from the ongoing trade war with China or to currency woes hurting the bottom line. Yet, the trade war issues will pass one day and the 5G build-out here in the United States is still in its very early stages.
There are six identifiable winners in this review, but the reality is that there are many moving parts, and many other players have the potential to score as much or more from the coming 5G wave.
Ciena: Margin Pressure May Be Overrated
Ciena Corp. (NASDAQ: CIEN) was trading like a big loser, with a 7% drop to $38.31 on Thursday, after having been up almost 10% at one point. The issue wasn’t earnings, as this was the fifth consecutive “beat” against estimates, but on margin guidance ahead. Gross margin is projected to be 42.0% to 43.0% rather than 44.5% to 45.0% that was expected. Ciena also did not commit to the mid-40s percentage range on margins either. Ciena did give revenue guidance of $945 million to $975 million, better than the $956 million that was expected. This drop was an unusual one for Ciena, and while big declines often are followed by additional weakness in the days and weeks ahead, the guidance may not be a figure set in stone — it may have been a sandbagged number.
Nomura/Instinet has a Buy rating and a $52 target price on the shares, and the firm sees Ciena ending its year strongly as both its revenue and earnings guidance were singled out as appearing overly cautious. If Ciena can get its margins back up, which Nomura thinks is likely in 2020, each percentage point gain in operating margin adds roughly $0.20 to the annual earnings per share.
Cisco: Beyond China and Emerging Markets
Cisco Systems Inc. (NASDAQ: CSCO) is another company that will win in the 5G build-out, and it has been continually migrating to a services and software subscription model from its old glory-days when it just sold the communications infrastructure equipment. Cisco stock took an unusual dive in August, falling from $50.61 to $46.25 a share overnight, when it disclosed on its earnings call that it was effectively ineligible to bid on new Chinese business (Huawei retaliation). Cisco shares were last seen down about 20% from its highs ahead of a fresh rally in the market, and the consensus target price of $58.91 is still above Cisco’s 52-week high.
After the Cisco post-earnings drop, Merrill Lynch reiterated its Buy rating and $62 price objective. The firm specified that it remained positive on Cisco’s robust campus switching demand and said that the 5G upgrade cycle could reverse some of the weakness in the shares. The firm sees its service provider trends improving once carriers are allocated spectrum and start deploying their 5G networks, and it said that Cisco’s orders were up 13% in the public sector and up 7% in the commercial segment. Almost all the weakness was attributed to China and other key emerging market softness.
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