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3 Wireless Stocks Likely to Beat Acute Chip Shortage Blues

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The Zacks Wireless National industry appears to be mired in raw material prices volatility and supply-chain disruptions due to chip shortage and the coronavirus-induced adversities that have affected the delivery schedule of most companies. Moreover, high capital expenditures for infrastructure upgrade and margin erosion due to price wars have dented the industry’s profitability.

Nevertheless, Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) and T-Mobile US, Inc. (TMUS - Free Report) are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid wide proliferation of IoT, driven by faster pace of 5G deployment.

Industry Description

The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication services and business solutions. These include wireless, wireline, local exchange, long-distance calls, data/broadband and Internet, video, managed networking, messaging, wholesale and cloud-based services to retail consumers. The firms within the industry also offer IP-based voice and data services, targeted advertising, television, streaming content, cable networks and publishing operations, multiprotocol label switching networking, fiber optic long-haul network, hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where it is required and is most effective — whether in the cloud, the network or on their premises.

What's Shaping the Future of Wireless National Industry

Chip Shortfall, Discounts Mar Profitability: The industry is currently facing acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. Although the Biden administration is trying to address the global shortage of semiconductor chips and devise ways to increase domestic production, demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. The government has also pledged bipartisan support for funds of $50 billion to ramp up production capacity and reduce supply bottlenecks while eliminating dependence on countries like China. However, unless the policy guidelines assume tangible effect, the industry firms are likely to face short-term challenges, affecting their cash flow. Aggressive promotional expenses, lucrative discounts and adoption of several low-priced service plans to attract and retain customers are further eroding profits. A steady decline in linear TV subscribers and legacy services are adding to the margin woes.

Evolution to Software-Centric Model: The firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. Consequently, the companies are making significant investments to upgrade network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture. This has realigned the companies’ wireless network toward a software-centric model to cater to the increasing business demands and customer needs through remote facilities. The companies are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization. Also, these firms are offering the flexibility to better manage data traffic by leveraging indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing. Utilizing machine learning techniques and edge computing, these networks are likely to transform the way data-intensive images and videos are transferred across the industry on a real-time basis. All these efforts have helped firms in the industry to cater to the upsurge in data demand, with digital sustainability becoming the norm of the day.

Fast-Track Deployment of 5G & Fiber Optic: Most of the industry participants are deploying the latest 4G LTE Advanced technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrade. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Further, leading firms within the industry have bid aggressively in the FCC-led C-Band auction for mid-band airwaves. The C-Band offers significant bandwidth with better propagation characteristics for optimum coverage in both rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed. However, increased infrastructure spending has largely compromised short-term margins and unless the high investments generate healthy ROI in the long run, it is likely to weigh on the bottom line.

Streaming Content Focus: The industry participants are taking a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and on-the-go experiences. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to offer new IP video formats, live TV, streaming services and home gateways to connected devices inside and outside home. In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to the business models.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #237, which places it at the bottom 7% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.

Before we present a few wireless national stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Wireless National industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year largely due to COVID-19 woes and supply-chain disruptions, despite underlying solid growth potential.

The industry has lost 0.7% over this period against the S&P 500 composite and the sector’s rise of 34.3% and 40.4%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 7.18X compared with the S&P 500’s 15.96X. It is also below the sector’s trailing-12-month EV/EBITDA of 15.81X.

Over the past five years, the industry has traded as high as 12.03X and as low as 5.44X and at the median of 6.69X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Wireless National Stocks Likely to Move Ahead of the Pack

Verizon Communications Inc.: Based in New York, Verizon is reportedly the largest wireless carrier in the North America, offering communication services in the form of local phone service, long distance, wireless and data services to millions of customers nationwide. The company has taken steps to accelerate subscriber additions and improve churn management, while adopting unlimited plans to enhance average revenue per user. The Zacks Consensus Estimate for current-year earnings has been revised 6.7% upward over the past year, and that for the next year is up 5.5% over the same time frame. It delivered an earnings surprise of 3.4%, on average, in the trailing four quarters and has a VGM Score of A. Verizon is likely to benefit from a disciplined network strategy, backed by customer-centric business model and diligent execution of operational plans. The company is continuing with the aggressive rollout of 5G Ultra Wideband service to expand its coverage to multiple cities across the country. In order to expand coverage and improve connectivity, Verizon has also acquired 161MHz of mid-band spectrum in the C-Band auction for a total consideration of $45.5 billion and reportedly secured 3,511 of the 5,684 licenses up for grabs. The stock carries a Zacks Rank #3 (Hold) and has long-term earnings growth expectation of 3.4%.

Price and Consensus: VZ



AT&T Inc.: Based in Dallas, TX, AT&T is the second largest wireless service provider in North America and one of the world’s leading communications service carriers. The company expects to continue investing in key areas and adjusting its business according to the evolving market scenario to fuel long-term growth, while maintaining a healthy dividend payment and actively pruning debt. The stock has long-term earnings growth expectation of 3.4% and a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 2.2% upward since March-end 2021. It delivered an earnings surprise of 6.8%, on average, in the trailing four quarters. An integrated fiber expansion strategy is expected to improve the broadband connectivity for both enterprise and consumer markets, while steady 5G deployments are likely to boost end-user experience. In order to expand coverage and improve connectivity, AT&T acquired 80MHz of mid-band spectrum in the C-Band auction for a total consideration of $27.4 billion. The company has also inked a definitive agreement with Discovery, Inc. to spin off its media assets and merge them with the complementary assets of the latter. The transaction is expected to enable the carrier to trim its huge debt burden and focus on core businesses to facilitate optimum utilization of resources for enhancing value. The company carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Price and Consensus: T



T-Mobile US, Inc.: Founded in 1994 and headquartered in Bellevue, WA, T-Mobile is a national wireless service provider. Its business largely depends on the “Un-carrier Value Proposition”, which aims to enhance customer satisfaction by means of providing latest products at cheaper rates and uncomplicated terms of conditions. The stock has gained 22.1% in the past year and delivered an earnings surprise of 87.2%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised 6.4% upward since June, and that for the next year is up 12.3% over the same time frame. The transformative merger agreement with Sprint has unlocked new business opportunities for T-Mobile and leverage a combined high- and low-band spectrum for a faster nationwide 5G rollout. The company is aggressively competing for customers at all price points with a combined network capacity of more than 14 times than on a standalone basis. The stock carries a Zacks Rank #3 and has a VGM Score of B.
Price and Consensus: TMUS



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