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Are Telstra shares a buy after today’s 5G launch?

The telecoms sector is making headlines this week with takeover news and now the official launch of the highly anticipated 5G network from Telstra Corporation Ltd (ASX: TLS).

Our largest telco started selling 5G smartphones today, which boast download speeds that are 12 times faster than what the NBN can deliver on a good day (when the moons are aligned).

The launch news isn’t quite helping the Telstra share price though, with the stock only inching up 0.4% to $3.54 in morning trade when the S&P/ASX 200 (INDEXASX: XJO) index is 0.5% ahead.

That’s at least better than the TPG Telecom Ltd (ASX: TPM) share price, which has tumbled 1% to $6.44 and the Vocus Group Ltd (ASX: VOC) share price that has risen 0.3% to $4.56 after yesterday’s big gain on news that it received a takeover offer.

Will 5G speed up Telstra’s earnings growth?

The more important question for investors is whether it’s too late to chase the Telstra share price after its 24% gain since the start of this calendar year, given the promise of 5G and how the new mobile internet technology can turbocharge Telstra’s sagging earnings.

Telstra (and its peers) have been under earnings stress from the NBN. The telco’s broadband service is being replaced by the NBN, and while Telstra resells NBN services, it’s a lower margin game.

In the meantime, price competition in the mobile market is also squeezing its margin. Growth is illusive and worries about more dividend cuts haunted the stock last year.

Shortcomings of 5G

The new 5G service couldn’t come at a better time, but it’s no saviour. I have spoken to a few experts in the telecommunications and technology space and they think 5G won’t live up to the hype due to a few shortcomings.

The first is that 5G uses a higher frequency and that means shorter range. The capital expenditure for a full 5G rollout to the major cities and surrounding suburbs is expensive as it will require more towers than 4G. This also means it will take a longer time before consumers in the ‘burbs will get 5G.

The other issue is that 5G signal can’t penetrate buildings very well. This means repeaters will probably need to be installed by apartment residents and companies to get 5G even if they are in range.

The third issue is that 5G is a solution searching for a problem. Most consumers will find 4G speeds more than sufficient and may think twice about coughing up more for 5G just for bragging rights. The shortcomings listed above also means it may not be as relevant to the Internet of Things (IoT)—at least not for a long while.

Foolish takeaway

These shortcomings don’t mean there aren’t any applications that won’t benefit from 5G. The problem is that these data-hungry apps consume copious amount of data and 5G won’t be an all-you-can-eat buffet, at least not for a number of years.

I don’t mean to sound like a technology denier. I have little doubt that 5G will change the way we use mobile communications, but Telstra shareholders looking for a relatively short turnaround in earnings for the telco from 5G may need more patience.

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Motley Fool contributor Brendon Lau owns shares of TPG Telecom Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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