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3 Stocks Likely to Ride High in the Ailing Wireless Industry

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The Zacks Wireless National industry appears to be plagued by high capital expenditures for infrastructure upgrades, margin erosion, inflationary pressures, supply-chain disruptions amid the Russia-Ukraine war and geo-political conflicts in Israel, soft China market conditions and high customer inventory levels. However, the industry is likely to benefit in the long run from an accelerated 5G rollout and increased fiber densification.

Amid this backdrop, T-Mobile US Inc. (TMUS - Free Report) , United States Cellular Corporation (USM - Free Report) and Gogo Inc. (GOGO - Free Report) are likely to gain from higher demand for scalable infrastructure for seamless connectivity with a wide proliferation of IoT, wireless traction and broadband momentum.

Industry Description

The Zacks Wireless National industry primarily comprises firms 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 networks, and 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 where required and are most effective — whether in the cloud, the network, or on their premises.

What's Shaping the Future of the Wireless National Industry?

Eroding Profits: Increased infrastructure spending for network upgrades has largely compromised short-term margins. Aggressive promotional expenses, lucrative discounts and the adoption of several low-priced service plans to attract and retain customers amid a challenging macroeconomic environment are eroding profits. A steady decline in linear TV subscribers and legacy services adds to the margin woes. Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade their network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture.

Evolving 5G Ecosystem & Fiber Densification: Most 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 upgrades. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. Further, leading firms within the industry have been deploying the C-Band spectrum to gain additional coverage. These mid-band airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed.

Inflated Raw Material Prices: The industry is facing a shortage of chips, which are the building blocks for various equipment used by telecom carriers. Uncertainty regarding chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and scarcity of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also expected to adversely impact the delivery schedule and escalate production costs. Moreover, high raw material prices due to the Israel-Hamas conflict, soft market conditions in China, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms.

Shift to Software-Centric Model: The industry participants are realigning their wireless network toward a software-centric model to cater to increasing business demands and customer needs through remote facilities. The industry players are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization. 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 the home.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #162, which places it in 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 dull 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.

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 S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.

The industry has lost 11% over this period against the S&P 500 and the sector’s growth of 6.4% and 22.9%, 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 7.55X compared with the S&P 500’s 12.32X. It is also below the sector’s trailing 12-month EV/EBITDA of 11.49X.

Over the past five years, the industry has traded as high as 10.91X and as low as 4.96X 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

T-Mobile: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider. The company offers services under the T-Mobile, Metro by T-Mobile and Sprint brands. The Zacks Consensus Estimate for current-year earnings has been revised 2.2% upward over the past year, while that for the next year is up 5.5% over the same time frame. T-Mobile is benefiting from industry-leading postpaid customer growth with a record-low churn rate. The company’s dedicated 5G spectrum asset with superior propagation and strong emphasis on customer experience is supporting the top line. Its Ultra Capacity 5G network is powered by the mid-band 2.5 GHz spectrum and covers more than 300 million people. T-Mobile carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: TMUS

US Cellular: Headquartered in Chicago, IL, U.S. Cellular is the fourth largest full-service wireless carrier in the United States. It provides a range of wireless products and services, and a high-quality network to increase the competitiveness of local businesses and improve the efficiency of government operations. U.S. Cellular is expanding its footprint while adopting unlimited plans to enhance average revenue per user. This Zacks Rank #2 (Buy) stock has a mid-band spectrum in almost all of its operating markets.

Price and Consensus: USM

Gogo: 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 divestiture of the commercial in-flight connectivity division, the company has restructured its business model to focus more on its core operations. The Zacks Consensus Estimate for current-year earnings has been revised 46.1% upward over the past year. The transformative sale agreement has unlocked new business opportunities for Gogo within the business aviation market and has improved its liquidity position. This Zacks Rank #2 stock delivered an earnings surprise of 29.1%, on average, in the trailing four quarters.

Price and Consensus: GOGO

See More Zacks Research for These Tickers

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United States Cellular Corporation (USM) - free report >>

T-Mobile US, Inc. (TMUS) - free report >>

Gogo Inc. (GOGO) - free report >>

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