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5G is here. The new digital wireless technology first started to make waves in 2017, with connectivity tests in Argentina, Norway, and Poland. By late 2018, active 5G networks were starting to appear on a limited basis in various urban areas, and in 2019 the first nationwide networks went into operation in the US and China. As 2020 matures, industry analysts expect to see these networks expand, as providers move into the mid- and high-frequency bands.
The new network rollout brings with it a slew of opportunities, as does any new technology. Original equipment manufacturers will need new components. The new networks will require a denser network of towers and transmitters, which in turn will require their own hardware. Semiconductor chip makers especially are looking forward to increased sales as the new equipment brings with it needs for updated and upgraded chips.
But the chip makers, OEMs, and transmitter tower construction firms aren’t the only companies in line to gain from the 5G switchover. Semiconductor chips need to be quality controlled, and individual customers will need to update their modems and WiFi routers.
We’ve delved into TipRanks’ database and found three companies that inhabit these niches – two that make chip testing gear and one that develops network communications equipment. All three are poised to gain as ancillaries to the big winners in 5G. Let's take a closer look.
Cohu, Inc. (COHU)
Cohu, first on our list today, designs and manufactures semiconductor testing equipment for major chip makers around the world. The chip makers have been showing gains in recent months, as they see improve demand at least in part attributable to 5G ramp-up, and COHU shares have been joining in the industry’s upbeat outlook. The company’s stock is up an impressive 80% in the past six months.
The company showed a drastic improvement in its most recent earnings report, released earlier this month. The net loss shrank from $1.40 per share in Q3 to 42 cents in Q4. The improvement in earnings came even as net sales slipped by 16% to $142 million. Looking ahead, the Cohu expects to see 2020 start the year with first quarter earnings between $140 and $152 million, in line with the analyst forecast of $143.6 million.
The narrowed losses helped the company support its dividend payment of 6 cents per share. At an annualized payout of 24 cents, this gives the dividend a modest 1.04% yield. Cohu has a twenty-year history of maintaining its dividend payment, even though the current payout ratio, in the negative, implies that it is not sustainable.
5-star analyst Sidney Ho, of Deutsche Bank, writes of Cohu, “We believe the company is well positioned for a favorable set-up in CY20 and beyond as key end markets stabilize and Cohu benefits from secular growth trends such as 5G and data center growth. We believe there could be upside to 4Q19 and 1Q20 estimates as Cohu has started to see the initial 5G-enabled smartphone ramp in its test business and the auto market has shown signs of improvement.”
Ho reiterates the Buy rating he initiated on this stock last month, and sets his price target at $27, suggesting an upside of 20%. (To watch Ho’s track record, click here)
All in all, with 5 recent Buy ratings set, COHU gets a unanimous Strong Buy consensus view from Wall Street’s analysts. The stock is selling for$22.53, and the average price target of $29.20 indicates a 30% upside potential. (See Cohu stock analysis at TipRanks)
Onto Innovation (ONTO)
Our second stock, Onto, is another test equipment manufacturer. Specifically, Onto makes process and process control equipment for the semiconductor industry. Onto was formed this past October, as a result of the merger-of-equals between Rudolph Technologies and Nanometrics. Onto inherited Rudolph Technologies trading history, with the ticker ONTO.
The merger created the fourth largest American company in the semiconductor capital supply field, with a market cap of nearly $2 billion. The company holds a leading position in the chip makers’ supply chain, and as they expand 5G chip production, Onto stands to gain with them.
Onto’s Q4 earnings lived up to the hype of the merger, and of 5G. The company reported 41 cents EPS, beating out the 39-cent expectation by 5%. Revenues, at $120.6 million, beat the forecast by 3.2%, but gained an even more impressive 56% year-over-year. As with Cohu above, which inhabits a similar niche, Onto’s gains come as the chip industry begins to turn around after a difficult year.
Mark Miller, 5-star analyst with Benchmark, is impressed with Onto’s quick increases in earnings and revenues – and he attributes it to the expansion of 5G. Miller writes, “A secular recovery is underway in Semicap equipment sales, and this recovery coupled with the ramp of 5G phones with greater memory chip content is expected to drive growth latter this year and into 2021.”
Giving the stock a $50 price target, Miller suggests that it has room for a 31% upside. As such, Miller reiterated a Buy rating on ONTO shares. (To watch Miller’s track record, click here)
Overall, this stock has 3 recent reviews, and all are Buys, making the analyst consensus another unanimous Strong Buy. The $49 average price target implies an upside of 28% from the $38 current trading price. (See Onto Innovation's price targets and analyst ratings on TipRanks)
Casa Systems, Inc. (CASA)
Last up is Casa, a small-cap player in the telecom equipment industry. This $366 million company is a provider of cable, modem, optical, and WiFi networking products, and offers solutions for both fixed and mobile service providers.
Casa is at forefront of high-end 5G broadband access development, and is well positioned to expand its business – Casa has been working with Sprint on small cell systems since October of last year, and the T-Mobile-Sprint merger – which was cleared by a Federal judge earlier this month – promises to give Casa access to a much larger network. And that network will be in need of 5G modem solutions.
The company next reports earnings on February 20, and may benefit from having lowered the bar back in November. At that time, when the company dropped its FY2019 estimate to the $255 to $270 million range (from $320 to $350 million), the stock fell 38%. It has not regained those losses – but by now, the lower guidance is baked in and the expected 2-cent loss for Q4 represents a 5-cent sequential improvement from Q3.
Writing from Northland, 5-star analyst Tim Savageaux takes a bullish stance on CASA. He says of the stock’s general position, “The closing of the TMUS/S merger is one factor likely to accelerate 5G wireless builds in the US, joining an already aggressive push by VZ, which is in turn likely to drive stronger network investment among US Cable MSOs…”
Looking at CASA specifically, Savageaux adds, “[We see] a strong finish to the year in Cable network spending, as well as the potential for accelerated 5G spending post the clearance of the TMUS/ S merger yesterday. CASA announced a win with S for its Pebble in Q419, and also highlighted its 5G fixed wireless CPE capability…”
Savageaux upgraded his position on this stock, bumping it from Neutral to Buy, and giving CASA a $6 price target. His target implies an impressive upside here of 31%. (To watch Savageaux’s track record, click here)