Insights

The 1 Thing You Should Know About 5G Stocks Before You Buy

The tech war between the U.S. and China is turning a growth market into a minefield. – China US tech

The world’s first 5G networks were deployed over a year ago, but Gartner only expects 10% of phones to support those speedier networks this year. A limited selection of 5G phones, smaller coverage areas, and higher monthly fees are all expected to throttle the near-term growth of this nascent market.

But after overcoming those initial growing pains, the firm expects 56% of all phones to support 5G networks by 2023. 5G networks will also link up other sectors — including healthcare, automated factories, smart homes, smart cities, defense systems, and driverless cars — to the Internet of Things via wireless chips.

Grand View Research expects the global 5G services market to grow at a compound annual growth rate of 43.9% between 2021 and 2027, making it a key growth market for many chipmakers, wireless carriers, and electronic device makers. I recently highlighted several top stocks to buy in this sector — including Ericsson (NASDAQ: ERIC), Qualcomm (NASDAQ: QCOM), and Skyworks Solutions.

But before pulling the trigger on any of these stocks, investors should be aware of one key issue: the escalating tech war between the U.S. and China and its impact on the 5G market.

Why are the U.S. and China clashing over 5G networks?

China is still highly dependent on American technologies. Intel‘s (NASDAQ: INTC) CPUs still power most of the country’s PCs and servers, Qualcomm‘s chipsets still power most of its smartphones, and Micron sells a large percentage of its memory chips in China.

In the past, many American companies signed joint venture agreements with Chinese companies to enter the market. The U.S. claims those deals forced some American companies to transfer their IP to their Chinese partners.

A visualization of network connections across a city.

Image source: Getty Images.

To curb their long-term dependence on American suppliers, many Chinese tech companies ramped up their development of homegrown components. Some of these companies, including Huawei, are led by people with close ties to the Chinese government. Others, like the country’s top chip foundry SMIC, receive direct investments from the Chinese government.

Chinese chipmakers have already launched their own CPUs, mobile chipsets, memory chips, and other core components in recent years. These chips generally aren’t as powerful as their American counterparts yet, but the gap is narrowing in several key sectors.

One such sector is the telecommunications equipment market. Huawei, which was founded over three decades ago, led the market last year with a 28% share, according to Dell’Oro Group. Huawei is helping wireless carriers roll out 5G networks worldwide, and it’s also one of the world’s top producers of 5G phones.

The U.S. claims Huawei’s 5G ambitions and its alleged ties to the Chinese government represent national security threats since China could gain access to protected networks and personal data. That’s why it’s trying to hamper Huawei’s progress with its inclusion in a trade blacklist, which prohibits American companies (or any company using American technologies) to sell products to the Chinese tech giant. Huawei has repeatedly declared that it’s a private company and that “no third parties,” including the Chinese government, hold any shares.

Why investors must watch this battle

This battle will impact investors in three key ways. First, Huawei’s two biggest rivals in the telecommunications equipment market — Ericsson and Nokia (NYSE: NOK) — could pick up more 5G contracts if more countries follow America’s lead and replace Huawei’s equipment. However, those gains could be offset by the loss of contracts in China, as seen in Nokia’s loss of China Mobile‘s 5G contract earlier this year.

Second, it represents a long-term threat for American chipmakers, including Intel and Qualcomm, which generate significant revenue in China. Intel recently shifted the production of its data center chips in China to bypass the trade blacklist, while Qualcomm recently petitioned the U.S. government to allow it to keep selling its chips to Huawei. If those temporary measures fail, both companies could lose a lot of orders.

Lastly, the growing rift between the U.S. and China highlights a major challenge for Chinese companies — like Huawei, ByteDance, and Tencent — as they expand overseas. So long as other governments distrust China, these companies could struggle to prove they aren’t controlled by, influenced by, or subservient to the Chinese government.

The key takeaways

The 5G market represents a lucrative growth opportunity for many companies and their investors. However, many companies could be caught in the crossfire of this trade battle between the U.S. and China, so investors should do their due diligence before assuming every related company will profit from the 5G rush.

This article was originally published on Fool.com.
All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com.
All figures quoted in US dollars unless otherwise stated.

More reading

Leo Sun owns shares of China Mobile and Tencent Holdings. The Motley Fool owns shares of and recommends Qualcomm, Skyworks Solutions, and Tencent Holdings. The Motley Fool recommends Gartner and Intel. The Motley Fool has a disclosure policy.

The Motley Fool Hong Kong Limited(www.fool.hk) 2020

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