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Fifth-generation wireless communications (5G) promised a flurry of economic benefits as companies used the technology to stoke innovation. Two years after Canadian carriers began rolling it out, some argue that the country isn’t capitalizing on it enough. Is it a viable investment opportunity?
In November, Vancouver management consulting company Deetken Insight predicted that 5G and related technologies could deliver 16 per cent of Canada’s gross domestic product growth by 2036. But Canada is lagging its peers, including the U.S., South Korea, and some European markets in adopting 5G, according to the Telus Communications Inc.-commissioned report.
“Canada has not embraced the full capabilities possible from 5G,” says Julian Whike, partner at Deetken.
“Building out the infrastructure is the next major challenge. Estimates suggest the total cost of ownership for Canadian 5G networks could be over 50 per cent more expensive than for 4G.”
5G’s growth will be slow, says Robert Spafford, vice president and portfolio manager at Cidel Asset Management Inc. in Toronto, but that shouldn’t deter investors from taking part.
“This is going to be a long-term investment in a leading-edge technology and so, like any investor, we’re looking for opportunities to participate in that growth,” he says.
Romit Fernandes, investment analyst at Cidel specializing in communication stocks, sees consumer-focused 5G services as a distraction from a more fruitful revenue stream. A simple speed bump in mobile phone speed might not appeal to that many people, especially in an economy in which discretionary consumer spending is under pressure and smartphone sales are already depressed.
“The avenue that you want to be focused on is the business-to-business domain,” Mr. Fernandes says. “That’s automation, health care, and autonomous vehicles. These technologies are a little bit down the road.”
Still, Gary Chow, portfolio manager at Sionna Investment Managers Inc. in Toronto, doesn’t believe the path to higher revenue is clear enough to align with his value-focused investment strategy.
“This so vague in how it materializes in terms of the technology, players, applications development, and deployment,” he says. That makes 5G investments difficult for him to value, especially when short-term market conditions are volatile.
“When markets quiet down, this could surface again.”
The road ahead
Mr. Whike of Deetken sees spectrum allocation as a major stumbling block. 5G communications rely on a variety of radio frequencies, each supporting unique usage profiles. The Canadian government has already auctioned off the 600 MHz band followed by the 3.5 GHz spectrum in August, but these are mostly suitable for consumer services.
“The actual magic happens in the millimetre wave range, which offers 10-gigabit speeds, and those auctions still haven’t taken place,” Mr. Fernandes says.
These services will take more advantage of 5G’s reduced latency and higher bandwidth, and he sees these appealing more to the B2B segment than consumers.
Cidel believes that carriers will have a bigger part to play in providing those value-added 5G services than they did with its predecessor, 4G. By concentrating on connectivity, they allowed software and service providers to offer high-margin services using 4G, leaving them with lower-margin connection revenue. This time, they won’t make the same mistake.
Mr. Fernandez points to Telus T-T, a stock that Cidel holds. That carrier has been courting business verticals with value-added services through its agriculture and health businesses.
The contribution to carrier revenue from these service arms will grow over time, helping to maintain attractive dividend yields in the carrier space, Mr. Spafford says.
Investing in the broader 5G ecosystem
5G infrastructure must also evolve to support some of its more ambitious value-added use cases.
Cidel sees investment opportunities in a broader ecosystem supporting that build-out. These include manufacturers of the equipment supporting the next-generation networks, along with those producing the semiconductors inside it.
The semiconductor market is fraught with risks that go beyond supply chain problems. Cidel has already sold off its holdings in Taiwan Semiconductor Manufacturing Co. Ltd. TSM-N because of geopolitical tensions between Taiwan and China.
In 2022, the U.S. moved to bolster domestic supply by investing in tax breaks via the CHIPS and Science Act. Cidel sees this as providing some respite in the long term. It holds stock in Brookfield Asset Management Inc. BAM-T. Its Brookfield Infrastructure Partners subsidiary partnered with Intel Corp. INTC-Q for a fabrication plant in Ohio in August.
The ecosystem surrounding 5G also extends to the hyper-scale cloud service providers – such as Microsoft Corp. MSFT-Q, Alphabet Inc. GOOG-Q, and Amazon.com Inc. AMZN-Q – that will once again capitalize on carrier infrastructure, Mr. Fernandes points out.
Data centre service providers will be investing in 5G-focused edge services – smaller pockets of computing services located closer to business clients’ locations.
Funds as an investment vehicle
A broad ecosystem of potential investments will have some retail investors looking for fund-based investment vehicles.
In February 2021, Chicago-based First Trust Advisors LP refocused its U.S. Energy Sector Index ETF to focus on 5G investments. Now called First Trust Indxx NextG ETF NXTG-T, it contains a basket of assets ranging from semiconductors to communications services and specialized real estate investment trusts.
Ryan Issakainen, senior vice president and exchange-traded fund strategist at First Trust, says the company was looking for a balance when putting together this medium-risk fund.
“We want to invest in some of those companies that are going to be a bit more stable and more mature and that are paying dividends,” he says, adding the fund offers higher dividend yields than the major indexes.
“But we also want to have exposure to some of the companies that do have the opportunity to provide some longer-term secular strong growth that we would expect over the next five or 10 years.”
First Trust is not focusing on the software companies that will ultimately ride the 5G wave in its NextG fund, instead offering a separate cloud-oriented fund.
BlackRock Inc.’s iShares Exponential Technologies Index ETF XEXP-T also covers multiple innovative technologies. It places approximately 15 per cent of its investments in 5G firms, with the rest targeting markets including robotics, next-generation transportation, and cybersecurity.
“The number of connected devices is expected to double in the coming decade,” says Jay Jacobs, head of U.S. thematic and active equity ETFs at BlackRock. “We expect 5G networks to enjoy accelerated investment to grow digital infrastructure accordingly.”
Overall, experts say 5G is a long-term proposition, and the most fruitful returns aren’t ready for harvest yet. Nevertheless, investors could get a decent yield from investments in the broad communications ecosystem by jumping in now.
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