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4 Non-US Wireless Stocks That are Braving Industry Challenges

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Companies in the Zacks Wireless Non-US industry are finding it increasingly difficult to upgrade their connectivity infrastructures and focus on providing services that are high quality and affordable. The wireless operators are weighed down by the growing churn rate and dwindling revenues with the disruptive rise of over-the-top service providers. Also, the corporations face high depreciation charges due to a large fixed asset base.

Nevertheless, companies like SK Telecom Co., Ltd (SKM - Free Report) , PLDT Inc. (PHI - Free Report) , BlackBerry Limited (BB - Free Report) and Ceragon Networks Ltd. (CRNT - Free Report) are benefiting from the deployment of advanced 4G LTE and 5G technologies and proliferation of data traffic.

Industry Description

The Zacks Wireless Non-US industry comprises mobile telecommunications and allied service providers that are based on foreign shores. These companies primarily offer voice services, including local, domestic and international calls and roaming services, prepaid and postpaid, as well as value-added services. They also provide wireless Internet services, together with digital applications such as music, video and animation.

Some of the industry participants sell mobile handsets and accessories through dealer network and offer co-billing services to other telecommunications service providers. A few firms provide end-to-end software and services platforms for the Enterprise of Things, including computers, vehicles and similarly connected endpoints, within the enterprise.

What’s Shaping the Future of Wireless Non-US Industry

Aggressive Competition to Persist: Telecom services typically show a weak correlation to macroeconomic factors as these are deemed to be necessities. That said, the wireless operators have been facing grave challenges due to growing churn rate and declining average revenue per user, along with the disruptive rise of over-the-top service providers in this competitive and dynamic industry. Price-sensitive competition for customer retention in the core business is expected to become more intense in the coming days. The companies follow an aggressive promotional strategy to increase penetration in the smartphone market. However, these efforts tend to affect profitability in the near term. Also, mobile operators need to take measures to reduce costs and optimize business operations. Aggressive competition could limit their ability to attract and retain customers and may impair operating and financial results. Of late, the impact of the COVID-19 pandemic is causing short-term earnings dilution, largely due to supply-chain disruptions.

High-Cost Infrastructure Weighs on Margins: The telecommunications industry continues to undergo significant changes led by technological enhancements. However, one of the biggest challenges is the growing need for capital expenditure. Rising demand will put pressure on operators to invest more in scalable infrastructure and Internet-driven facilities that can support increased traffic and provide quality data services. With the availability of new technologies, the quality of services from telecom companies has improved but their profit margins have decreased. With millions of subscribers and a variety of new products, operational support services have become more complex. The cost of handling these operations requires resources that increase overheads. Providers need to upgrade their IT and connectivity infrastructures, as well as focus on providing data and voice services that are high quality, reliable and affordable. Security of the networks has become another priority for the companies. Massive capital outlay to expand network infrastructure for 5G mobile connectivity is limiting bottom-line growth.

Market Saturation Remains a Concern: The wireless telecommunication services market is divided into seven key regions — North America, Latin America, Eastern Europe, Western Europe, Japan, Asia-Pacific excluding Japan, and the Middle East and Africa. Markets in developed economies have almost reached saturation levels, preventing carriers from achieving the subscriber growth rates of their counterparts in emerging economies. Operators need to shift their focus from developed markets to emerging economies where there are greater opportunities for expansion of mobile network connections. Success in the wireless service business grossly depends on technical superiority, quality of services and scalability. In a saturated wireless market, spectrum crunch has become a major issue. Most of the carriers are finding it difficult to manage mobile data traffic, which is growing by leaps and bounds. The situation has become even more acute with the growing popularity of smart devices as well as the rising online mobile video streaming, cloud computing and video conferencing services.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Wireless Non-US industry, which has 18 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #197, which places it in the bottom 22% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates weak near-term prospects. Interestingly, 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 an outcome of a negative earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. The industry’s earnings estimates for the current year and the next have decreased 18.5% and 10.3%, respectively, over the past year.

Before we present a few non-US wireless stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Underperforms Sector, S&P 500

The Zacks Wireless Non-US industry has underperformed both the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.

The industry has lost 17.7% over this period against the S&P 500’s rise of 16.6% and the broader sector’s rally of 36.5%.

One-Year Price Performance

Industry’s Current Valuation

Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 5.44X compared with the S&P 500’s 16.1X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 15.24X.

Over the past five years, the industry has traded as high as 23.17X, as low as 4X with the median of 15.14X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

4 Non-US Wireless Stocks Trying to Survive Industry Challenges

SK Telecom: Headquartered in Seoul, SK Telecom provides wireless telecommunication services in South Korea. The company has collaborated with Amazon. Customers in Korea will be able to buy products from Amazon through SK Telecom’s e-commerce subsidiary, 11st. The move is likely to aid SK Telecom’s performance, going forward. The Zacks Consensus Estimate for its current-year earnings has been revised 2.3% upward over the past seven days. The stock has gained 21.4% in the past six months against the industry’s 1.2% decline. SK Telecom currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SKM

PLDT: Headquartered in Makati City, PLDT is the leading telecommunications provider in the Philippines. The company operates in three segments — Wireless, Fixed Line and Others. It has a strategic partnership with Rocket Internet SE, a European Internet company, to develop online and mobile payment solutions. The consensus estimate for its current-year earnings has been revised 4.2% upward over the past 30 days. The stock has added 20.2% in the past six months. PLDT carries a Zacks Rank #2.

Price and Consensus: PHI

BlackBerry Limited: Headquartered in Waterloo, Canada, BlackBerry provides intelligent security software and services to enterprises and governments worldwide. It continues to invest in product development and go-to-market strategy to drive long-term growth. The company is witnessing strong demand for its ‘Work from Anywhere’ solutions, which is a major driver for the Spark business. BlackBerry has secured more than 500 million endpoints, including above 175 million cars. QNX design wins and major cybersecurity partnerships bode well. The consensus estimate for its current-year earnings has been revised 116.7% upward over the past 60 days. The stock has returned 17% in the past six months. BlackBerry carries a Zacks Rank #2. The company has a long-term (three to five years) earnings growth expectation of 51.8% compared with 17.1% of the industry.

Price and Consensus: BB

Ceragon Networks: Headquartered in Tel Aviv, Israel, Ceragon provides wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services. Its solutions are deployed by more than 460 service providers and hundreds of private network owners in more than 130 countries. The trend toward OpenRAN is enhancing its position as a best-in-class vendor in the 5G environment. The consensus estimate for its current-year earnings has been revised 31.3% upward over the past 30 days. The stock has added 3% in the past six months. Ceragon carries a Zacks Rank #2.

Price and Consensus: CRNT

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In-Depth Zacks Research for the Tickers Above

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SK Telecom Co., Ltd. (SKM) - free report >>

PLDT Inc. (PHI) - free report >>

Ceragon Networks Ltd. (CRNT) - free report >>

BlackBerry Limited (BB) - free report >>

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