From Seoul to Geneva and Chicago, network operators worldwide began launching the first commercially-available 5G mobile networks in 2019, promising faster speed, greater capacity, and lower latency. While the rollout will take years before it becomes nearly ubiquitous, the new mobile standard could have a transformational impact on industries that provide 5G connectivity, supply 5G-related hardware, or build devices and services that fully leverage its new capabilities.

Given mounting excitement around this leap in wireless technology, there is growing interest in identifying the companies best positioned to benefit from the rise of 5G. Yet while 5G’s impact will be felt across multiple segments, helping to reinforce the disruptive nature of this theme, it also muddies the picture for which companies are the most sensitive to its rise. To better understand which segments may be the biggest beneficiaries of the 5G rollout, we examined the historical evolution of 4G for clues.

A brief background on 4Gⁱ

The first 4G services came online in the early 2010s, first in Scandinavia and then trickling to the United States, Asia and the rest of the world. 4G became a foundational technology on which the smartphone revolution was built, leading to the ‘there’s an app for that’ mentality that powered photo sharing, video streaming, social media, e-commerce and other mobile applications to become a part of our daily routine.

4G was ultimately a monumental leap in terms of network capabilities but required substantial investment to realize. Estimates suggest that between 2012 and 2018, mobile operators globally spent well over $1 trillion in capital expenditures to upgrade their networks.¹ By 2017 when 4G networks had achieved some degree of scale, mobile technologies and services accounted for 4.5% of global GDP, or $3.6 trillion in economic value added, illustrating the incredible contribution of the 4G value chain to the global economy.² This share is expected to grow even larger in the years ahead as 5G emerges.

The segments at play

4G’s rise has undoubtedly had a lasting impact on the various industries and technologies involved, from network builders to the creators of end-user applications and devices. Recognizing that no segment is 100% linked to 4G, we examine the performance of various 4G-related segments from 2012-2019 to see how they fared in this era of increasing network connectivity, including:

• Wireless telecoms: are the primary builders of networks, including each successive generation (eg, 3G, 4G, 5G). These service providers spend billions of dollars in capital expenditures to upgrade and virtualize their network infrastructure to meet new global industry standards.
• Communications equipment providers: are the suppliers of network infrastructure hardware, enabling the creation of networks capable of processing speeds outlined by global standards. These companies are often the direct recipients of wireless telecom capital expenditures.
• Mobile phones: were the first smart devices, early precursors to the impending era of the Internet of Things (IoT). Prior to 4G, mobile phones only offered voice calling, text messages and eventually, low-quality video. With the advent of 4G, mobile phones became the portal for consumers to access social media, internet browsing, and real-time video streaming.
• Semiconductors: create the computing chips that enable the connectivity of devices, phones and increasingly the rest of the IoT. Chipmakers are crucial for certain applications such as mobile graphic processing units (GPUs) evident in the rise of social media, mobile gaming, and video calling. Semiconductors are now being used to support emerging applications like augmented and virtual reality (AR/VR), robotics and more in the next wave of connected devices.
• Social media: refers to end-user applications and websites that enable social networking and content sharing. Social media was among the innovations that first put the ‘smart’ in smartphone. With greater functionality enabled by 4G, the industry transformed from being primarily desktop-based to one that is now mobile-first.

A look at the rise of 4G and segment performance

To better understand market dynamics over the course of 4G’s global rollout, we explore differences in total returns, annual returns and correlations among the key segments identified above from the beginning of 2012 to the end of Q1 of 2019. By 2012, several commercial 4G services had been launched, including in the US and Europe; however, 4G connections still accounted for less than 1% of total connections globally.³ Over the course of the next few years, 4G would grow rapidly, reaching 29% of total connections by 2017 with an expected 53% penetration rate by 2025. Accordingly, we evaluate the market performance of the 4G value chain from the very early days of global adoption to the initial launches of 5G commercial services in 2019.

• Performance dispersion is significant. Over the course of seven-plus years, total returns across each segment differed remarkably. Semiconductors led the group, generating nearly five times the returns of the lowest performing sector, wireless telecoms. Even the return difference between semiconductors and the median performer, communications equipment, was nearly 100%.
• End-user applications appear to be a common thread among the best performing sectors. Semiconductors and social media outperformed the other 4G segments by a wide margin. Social media companies provide the software and applications that capture widespread consumer interest, while semiconductor manufacturers create the 4G chips that enable the requisite speeds and processing capabilities on end-user devices.
• Defensive segments stay defensive. Telecoms, generally regarded as defensive stocks, were the worst performing segment. The rise of 4G occurred during the decade of global growth following the financial crisis, so telecoms’ relative underperformance is perhaps unsurprising, or in-line with historical patterns during expansionary periods. Nevertheless, given that much of the interest surrounding 5G focuses on these network builders, it is important to consider their growth profile. Wireless telecoms must carefully balance the increasing total cost of ownership of their networks from successive upgrades, installations and data growth, with tempered expectations of user growth in a relatively saturated market.

• Segment returns vary widely from year-to-year. Segments that led or lagged the pack in a given year often saw a reversal of relative performance the next. Both communications equipment and social media segments, for example, frequently flipped between the first and last spots from year to year, demonstrating that high long-term growth is often coupled with heightened short-term volatility.
• Even segments that perform best over the entire period do not always move together. Semiconductors and social media had the greatest total returns over the entire period, but in some years, they moved in opposite directions. In 2014, for instance, they ranked first (29.4%) and last (-14.4%) respectively for annual returns, diverging by quite a large margin.
• Mobile phone providers and wireless telecoms saw consistently lower growth. Not only did the two segments post the lowest total returns over the entire period, neither segment ever captured the number one spot for annual performance. Importantly, companies in both sectors are now looking to enter different parts of the value chain, like software and services or digital content, in search of more elusive of growth.

• Market movement of even interrelated segments is still diverse. A correlation analysis suggests that not all members of the 4G ecosystem dance to the same beat. Wireless telecommunications companies appear to have the lowest correlations with all other group members, the highest at just 0.53. More surprisingly perhaps, correlations among remaining segments are still relatively low, especially social media, which did not have a correlation higher than 0.65. The highest correlation identified was among semiconductors and mobile phone providers at 0.83, though total returns over the period varied drastically.

Lessons learned on the eve of 5G

When considering the investment opportunities associated with the ongoing rollout of 5G networks, we believe there are several key lessons learned from the era of 4G:

• Focus on the emerging applications and demand drivers of 5G. The big winners from 4G were not so much the builders of network infrastructure, but instead the emerging technologies that leveraged 4G’s capabilities to build revolutionary hardware and services. Indeed, the connected devices and applications that will make up the IoT, which sits at the center of many disruptive technologies, are perhaps the closest analogues to social media in the 4G era. Such nascent technologies include: AR/VR, robotics, autonomous vehicles (AVs), industrial IoT and smart home devices, just to name a few. These are the new ‘things’ or end-user devices enabled by 5G that are being added to the network.  Semiconductors will continue to play a critical role in empowering this next generation of connected devices to effectively utilize 5G speeds and capacity, just as they were during previous generations.
• Industries adapt to changing market dynamics. Wireless telecoms, mobile phone makers and other hardware companies, including several communications equipment providers, have increasingly shifted to services over the course of 4G’s maturation. Mobile phones, for instance, are an increasingly saturated market, even in developing economies. Similarly, many telecommunications companies have pivoted into digital content and streaming services to gain new revenue sources from consumers, and increasingly, emphasize their software capabilities for their enterprise business. Yet these industry transformations have been years in the making, and companies have spent large sums on acquisitions to fuel these strategic pivots with still undetermined results. As 5G begins to mature, we may expect entirely new industries to appear given continued demand for emerging technologies. Businesses in more mature industries may enter adjacent markets to attempt to capture new sources of growth but remain susceptible to capex related risks.
• Diversification is important. Given the large discrepancies in performance and market movements, diversification across various segments remains a worthwhile strategy. Low correlations and the wide range of returns across sectors suggest investors could benefit from owning multiple parts of the value chain. This remains true when considering performance over the entire period, as well as year-to-year. Nevertheless, slight tilts in segment exposures can have massive implications for total returns, and investors should consider whether relevant holdings were standout beneficiaries of the 4G era, or laggards.

Related ETFs

• SNSR: The Global X Internet of Things ETF enables investors to access a potential high growth theme through companies at the leading edge of IoT, an approach which transcends classic sector, industry and geographic regions to target this emerging theme. In a single trade, SNSR delivers access to dozens of companies with high exposure to emerging IoT technology.

Related Themes

• Robotics, AI, Big Data, Cloud Computing, Social Media, Autonomous Vehicles