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Future Growth of 5G Adoption

Grady Burkett, CFA

5G, the latest wireless networking standard, is being rolled out by wireless operators throughout developed countries. It’s another step in the wireless evolution that enables faster data speeds, more capacity and more thorough coverage. Wireless operators tend to talk about it in iterative steps, e.g., 3G, 4G, 5G, but it’s really an ongoing process of upgrading wireless networks.

In our international portfolio, we prefer to invest in the telecom operators that have strong fixed-line networks and strong wireless networks because an operator needs both physical assets to deliver a competitive 5G service well into the future. We currently own two telecom operators—Rogers Communications in Canada and BT Group, which is based in the UK. Both companies are large players with durable competitive advantages that we believe will be generating a lot of cash 20 years from now. Currently, both are trading at attractive discounts to our estimates of intrinsic value.

  • Rogers Communications is among the three largest communication services providers in Canada, with more than 33% of the Canadian wireless market, which equates to over 10 million subscribers. The company also provides network services to businesses and owns a collection of sports and media assets. Rogers is a leader in the industry, having launched Canada’s first and largest 5G network, maintains an investment grade balance sheet and generates substantial free cash flow.
  • BT Group is the only company in the UK that owns both fixed and mobile networks nationwide, providing it a structural advantage in offering bundled services. We initiated a position in BT Group back in 2018 when its share price was depressed following a temporary decline in cash flow as the company built out its fiber optic network services and made elevated pension contributions. Today, BT’s stock continues to trade at an attractive discount to our estimate of intrinsic value and we believe further 5G adoption enhances its long-term value.

In addition to the telecom industry, 5G adoption should enable all types of innovations that we don’t have available to us today. Some innovations we expect to evolve from this technology include autonomous cars, simpler access to health and education services, immersive reality games–the list goes on. Life in 20 years will look completely different than it does today, just like today looks vastly different than it did 20 years ago.

Take Meta (formerly Facebook), for example, which owns some of the most lucrative mobile apps in the world, including Facebook, Instagram and WhatsApp. The company is investing billions of dollars every year into virtual reality products, which will continue to improve as mobile networks improve. We also own shares of Chinese technology companies Alibaba and Tencent. In a similar vein, we believe their businesses will continue to advance as mobile networks improve, especially given the fact that they are making sizeable investments into some of the same areas that Meta is. Finally, the chip makers we’re invested in–Taiwan Semiconductor and Samsung–stand to benefit substantially from advancements in 5G, because memory and computer processors are key building blocks to all the services previously mentioned.

The adoption of 5G technology has accelerated faster than most previous technologies and has been adopted by more than 60 countries across the globe. As consumers’ demand for faster speeds and more bandwidth continues, so will the investment in 5G and technologies of the future. As investors in good companies that are selling at a discount to our estimate of intrinsic value, we believe we have identified several strong businesses that stand to benefit from the ongoing advances in wireless technology.

As of 31 Dec 2021, Diamond Hill owned shares of Rogers Communications, Inc., BT Group PLC, Meta Platforms, Inc., Alibaba Group Holding Ltd., Tencent Holdings Ltd., Taiwan Semiconductor Manufacturing Co. Ltd. and Samsung Electronics Co. Ltd.

The views expressed are those of the author as of January 2022 and are subject to change without notice. These opinions are not intended to be a forecast of future events, a guarantee of future results, or investment advice. Investing involves risk, including the possible loss of principal. Past performance is not a guarantee of future results.

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