Back to top

Image: Bigstock

3 Wireless Stocks Set to Transcend Acute Chip Shortage

Read MoreHide Full Article

The Zacks Wireless National industry appears to be mired in volatility in raw material prices 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, United States Cellular Corporation (USM - Free Report) , Cambium Networks Corporation (CMBM - Free Report) and Gogo Inc. (GOGO - 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, multiprotocol label switching networking, data center and managed services, 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.

Few firms within the industry offer targeted advertising services, leveraging data insights to reach specific audiences in trusted, premium content environments. Some provide film, television, streaming content, cable networks and publishing operations with significant media assets in their portfolio. Few industry participants further offer wireless devices, such as smartphones, tablets and other mobile communication devices and accessories manufactured by various suppliers. Some notable firms within the industry are AT&T Inc. (T - Free Report) , T-Mobile US, Inc. (TMUS - Free Report) and Verizon Communications Inc. (VZ - Free Report) .

 

What's Shaping the Future of Wireless National Industry

Chip Shortfall Affecting Profitability: The industry is currently facing acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. Although President Biden has inked an executive order to launch a 100-day review process of the supply chain mechanism 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.  

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 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 as majority of the population is forced to work from home to avoid being exposed to the deadly virus.

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, which has a short range and requires a high density of sites to achieve coverage. Consequently, it is deemed to be a prized asset for carriers that lack considerable mid-band spectrum holdings. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage, speeds and devices.

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 #166, which places it at the bottom 35% 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 due to COVID-19 woes, despite underlying solid growth potential.

The industry has gained 10.1% over this period compared with the S&P 500 composite and the sector’s rise of 48% and 62.9%, 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 6.6X compared with the S&P 500’s 18.5X. It is also below the sector’s trailing-12-month EV/EBITDA of 16.61X.

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 6.68X, as the chart below shows.

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



3 Wireless National Stocks Moving Ahead of the Pack

United States Cellular Corporation: Based in Chicago, IL, U.S. Cellular is a leading wireless carrier in the United States in terms of customer count. 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 59.6% upward over the past year, while that for the next year is up 50% over the same time frame. It delivered a positive earnings surprise of 136.1%, on average, in the trailing four quarters and has gained 28.2% in the past year. The company continues enhancing its advanced wireless services and connected solutions to better cater to consumer, business and government customer. U.S. Cellular recently purchased 254 licenses for an estimated amount of $1.46 billion in the FCC’s C-Band auction. It is deploying 5G on 600 MHz spectrum and plans to expand gradually within the mid- and high-band spectrum. The stock carries a Zacks Rank #3 (Hold) and has a VGM Score of B.


Price and Consensus: USM



Cambium Networks Corporation (CMBM - Free Report) : Based in Rolling Meadows, IL, Cambium offers maximum performance with minimal spectrum with an integrated network architecture spanning fixed wireless and Wi-Fi. The company is well positioned to benefit from a proprietary software and product ramp up, likely facilitating it to deliver a compelling combination of price, performance, and spectrum efficiency. The stock has gained a stellar 930.1% in the past year and has long-term earnings growth expectation of 20%. The Zacks Consensus Estimate for current-year earnings has been revised 101.6% upward over the past year, while that for the next year is up 64.5% over the same time frame. It delivered a positive earnings surprise of 128%, on average, in the trailing four quarters. With rapid transition to Wi-Fi 6 solutions, Cambium witnessed major improvements in enterprise Wi-Fi solutions driven by improved field deployments. Its upcoming 5G 28 GHz millimeter wave products are expected to be launched in 2021, which will likely spur its business operations in the global market. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: CMBM



Gogo, Inc.: Founded in 1991 and headquartered in Chicago, IL, Gogo is a premier global provider of network and broadband connectivity products and services for the business aviation market. With the divesture of the commercial in-flight connectivity division, the company has restructured its business model for more focus on its core operations. The stock has gained 471.6% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 92% upward over the past year, while that for the next year is up 628.6% over the same time frame. The transformative sale agreement has unlocked new business opportunities for Gogo within the business aviation market and has improved its liquidity position. The stock carries a Zacks Rank #3.

Price and Consensus: GOGO



Breakout Biotech Stocks with Triple-Digit Profit Potential

The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.

Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.

See these 7 breakthrough stocks now>>