5G INVESTMENT IMPLICATIONS

INVESTMENT STRATEGY GROUP

Fall 2020

5G INVESTMENT IMPLICATIONS

I N V E S T M E N T S T R AT E G Y G R O U P

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MICHAEL HALLORAN Equity Strategist

Designations: Chartered Financial Analyst® (CFA®)

Phone: 412.562.8062

Email: mhalloran@janney.com

Mike Halloran is an Equity Strategist with more than 20 years of experience as a strategist, mutual fund analyst and investment banker. He analyzes all asset classes with particular emphasis on equity research.

Mike received his M.B.A. from Carnegie Mellon University and is a former aerospace research engineer with engineering degrees from the University of Florida and University of Pittsburgh.

The fifth generation of mobile communication networks, or 5G, is bringing faster and more reliable cellular and internet connections—similar to previous generations. We are now seeing these advanced networks being widely deployed here in the U.S. by the major telecom providers. Phone and other equipment manufacturers are also currently developing products to take advantage of 5G technology. 5G is set to play a major role in advancing future productivity (the critical driver of higher living standards). This piece discusses 5G’s potential and reviews the beneficiaries of the technology.

ADVANTAGES OF 5G TECHNOLOGY

Data transfer speeds are projected to be about 10 times higher with 5G than is possible with 4G. That means significantly faster transmission of images and videos. With 4G/LTE (Long-Term Evolution), downloading a high-definition movie might take about 10 minutes. With 5G, it can take less than a second.

Latency time, the brief lag in time from when data is sent to when it is received, will be reduced with 5G. While this helps watching high-speed virtual reality video with no delays or glitches, this real-time connection has important implications for industrial automation. 5G cell towers will also have greater capacity that will enable more devices to communicate at the same time.

The combination of speed, responsiveness, ultra-reliability, and greater connectivity will help unlock the full capabilities of other important productivity-enhancing

technologies, including artificial intelligence and cloud computing. This will have many benefits for consumers and businesses as described below.

MAJOR CONSUMER BENEFITS

Today, consumers still power the internet. Online video accounts for some 70% of the world’s internet traffic, with only small differences across regions. This share is expected to grow in the coming years. By some estimates, the world will consume 20 times more data in 2030 than it does today, with much of this growth driven by new users, more time spent watching video, and higher-definition content.

1. Smartphones5G smartphones are now being introduced and consumers will benefit from faster data transfer speeds, better reliability, and lower latency. Smartphones that are already indispensable will become even more so.

A PROGRESSION TO 5G TECHNOLOGY

1980s

1GMobile

connectivity & analogue calling

1990s

2GBasic digital

calling & texting

2000s

3GIntroduction

of broadband & smartphones

2010s

4GFaster

broadband & internet

2020s

5GEnhancing broadband & wireless

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2. Streaming and Entertainment5G’s major advantages over previous technologies, including speed, capacity, and low latency, promise to dramatically enhance streaming and entertainment. In addition to better quality and considerably faster streaming, 5G promises revolutionary immersive experiences, including multisensory digital content thanks to increased capacity that will support technologies like virtual reality, augmented reality and 3D.

3. Connected VehiclesThe unprecedented speed, connectivity, and reliability will help make autonomous, or self-driving, cars and other vehicles a reality. 5G networks will allow faster-than-ever communication and data processing between vehicles, networks, infrastructure and even pedestrians. 5G networks will facilitate communication between everything on the road—from lampposts to gas stations—in the interest of safety and traffic management.

INTERNET OF THINGS (IoT)

The Internet of Things (IoT) is the concept of basically connecting any device with an on and off switch to the internet (and/or to each other) and turning them into smart devices. This includes everything from cellphones to thermostats and other household appliances and machines.

Broadband internet is widely available, the cost of technology and connecting is falling, more devices are being created with sensors and Wi-Fi capabilities, and smartphone penetration is ubiquitous. All of this has created a fertile environment for the IoT.

The IoT has major applications for business. Many industrial operations are being optimized through better wireless connections. Everything from airplane jet engines to oil drilling rigs will see better efficiencies as a result of advanced communication capabilities, especially due to the lower latency of 5G which allows for rapid communication and decision making. Technicians with specialized skills can control machinery from anywhere in the world while reducing the risk of operating in hazardous environments.

Advanced communication capabilities are even more powerful when coupled with other advanced technologies, including cloud computing and artificial intelligence. Higher speed, capacity, and reliability are major 5G attributes that will enhance the capabilities of these other advanced technologies.

These technologies are enabling manufacturers to run highly precise operations using low latency through private 5G networks. Smart factories powered by 5G, analytics, artificial intelligence, and advanced robotics can run at maximum efficiency, optimizing and adjusting processes in real time—not only on select assembly lines, but across multiple plants.

A growing number of factories will incorporate features such as automated guided vehicles and computer-vision-

enhanced bin picking and quality control; these functions require the kind of speeds and ultra-low latency that advanced 5G networks provide.

MAJOR BUSINESS BENEFITS

Public Safety and Infrastructure: 5G will allow cities and other municipalities to operate more efficiently. Utility companies will be able to easily

track usage remotely, sensors can notify public works departments when drains flood or streetlights go out, and municipalities will be better able to quickly and inexpensively install surveillance cameras.

Health Care: The ultra-reliable low latency of 5G could fundamentally change health care. Low-latency networks and the proliferation of smart

devices will improve the monitoring of patients, especially at home in real time, which could be a major boon in the treatment of chronic diseases. Better data flow with 5G and other technologies (cloud and advanced analytics) throughout the entire medical system has the potential to smooth operations, coordinate care, and lead to better diagnoses and patient outcomes. Expect to see improvements in telemedicine, remote recovery, and physical therapy (via augmented reality), precision surgery, and even remote surgery in the coming years.

Evolutionary Not Revolutionary: The ultimate utilization of 5G (coupled with cloud computing, big data, and advanced analytics including artificial

intelligence) will enable major productivity gains in the coming years that are critical for raising living standards. However, it will take time for these benefits to be noticed as 5G networks get buildout (especially for rural areas) and as consumers and businesses adapt to 5G’s advanced capabilities. This implies the movement to 5G capabilities will be evolutionary rather than revolutionary—similar to the movement from 3G to 4G.

IoT BENEFITS

INDUSTRIES

Telecom Service Providers

Communication Equipment Providers

Software & Internet Services

Semiconductors

BUSINESSES

Public Safety & Infrastructure

Health Care

Evolutionary Not Revolutionary

INDUSTRIES THAT BENEFIT FROM 5G

Telecom service providers, tower companies, semiconductors, communication equipment providers, software and internet service firms are all beneficiaries of the movement to 5G and increased usage of other advanced technologies, including cloud computing, big data, and advanced analytics, including artificial intelligence.

Telecom Service Providers: While service providers must make significant investments into their networks for 5G, they benefit from the

increased usage and reliance on their service as customers move further to a wireless world.

Communication Equipment Providers: The wireless equipment market represents a total addressable market of over $100 billion and is

much larger if fixed wireline equipment is considered. The buildout of 5G networks includes a broad range of technologies across networking, security, collaboration, applications and the cloud. Advanced smartphones and other devices will remain in high demand. All of this presents major opportunities for best-in-class equipment firms.

Software and Internet Services: 5G adds to the secular growth characteristics that software

already exhibits. Software is a critical element for advanced communication systems and all the technology that is further enabled by it (discussed above).Cybersecurity is a constantly growing threat that requires ever-advanced software solutions to combat.

Semiconductors: Semiconductors are critical elements for everything wireless, including

communication infrastructure, handsets, IoT, and cloud computing. The combination of advanced communication systems, cloud computing, big data, and advanced analytics including artificial intelligence is driving significant demand for semiconductors. Consequently, the semiconductor industry is exhibiting secular growth characteristics and is becoming less cyclical.

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