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3 Wireless Stocks Likely to Thrive Despite Short-Term Challenges
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The Zacks Wireless National industry is facing high capital expenditures for infrastructure upgrades, supply-chain disruptions due to the Iran war and shipping restrictions in the Strait of Hormuz, oil price volatility and high customer inventory levels. However, the industry is likely to benefit in the long run from a fast-track 5G deployment and extensive fiber densification.
Amid this backdrop, T-Mobile US, Inc. (TMUS - Free Report) , Array Digital Infrastructure, Inc. (AD - Free Report) and Liberty Latin America Ltd. (LILA - Free Report) are likely to gain from higher demand for sustainable networks with a wide proliferation of the IoT, wireless traction and solid 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?
Soaring Raw Material Prices: High raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. Wireless operators have been facing challenges due to the disruptive rise of over-the-top service providers in this dynamic industry. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and affect operating and financial results.
Low Latency 5G & Fiber Ecosystem: 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. 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. With low latency and increased bandwidth, business enterprises are increasingly embracing the exciting possibilities offered by artificial intelligence and the IoT via the real-time transfer of mobile data. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed.
Depleting Profitability: 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 are eroding profits. A steady decline in linear TV subscribers and legacy services due to a challenging macroeconomic environment and high inflation adds to the margin woes. Consequently, the industry firms are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. 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, which is affecting their profitability.
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 #168, which places it in the bottom 31% 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 grim prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 underperformed the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has declined 10.3% over this period against the S&P 500 and the sector’s growth of 31.8% and 53.8%, 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 8.47X compared with the S&P 500’s 18.48X. It is also below the sector’s trailing 12-month EV/EBITDA of 21.45X.
Over the past five years, the industry has traded as high as 9.43X, as low as 6.41X and at the median of 7.6X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
3 Wireless National Stocks to Keep a Close Eye on
T-Mobile: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider. The company’s business model largely depends on its “Un-carrier Value Proposition,” which aims to enhance customer satisfaction by offering the latest products at cheaper rates and on uncomplicated terms and conditions. The company continues to boast a leadership position in the 5G market. Its 5G network covers 98% of Americans, or 330 million people in the country. The Ultra Capacity 5G delivers superfast speeds, powering 5G smartphones and enabling innovators to deliver transformational 5G experiences. The stock has a long-term earnings growth expectation of 15.9% and delivered an earnings surprise of 12.3%, on average, in the trailing four quarters. It has a VGM Score of B. T-Mobile currently 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
Array Digital: Headquartered in Chicago, IL, Array Digital (previously known as United States Cellular Corporation) is a leading full-service wireless carrier in the United States. The company provides a range of wireless products and services, and a high-quality network to increase the competitiveness of local businesses. The company is benefiting from solid user engagement in its fixed wireless business and an improvement in tower rental revenues. The geographical diversity and well-balanced presence across various major wireless carriers highlight the robustness of its tower rental portfolio. Management's efforts to enhance operational efficiency and drive cost optimization across its operations have significantly boosted profitability despite a challenging competitive environment. This Zacks Rank #3 firm delivered an earnings surprise of 70.8%, on average, in the trailing four quarters.
Price and Consensus: AD
Liberty Latin America: Based in Denver, CO, Liberty Latin America is a communications firm with operations in Chile, Puerto Rico, the Caribbean and other parts of Latin America. Liberty Latin America is poised to benefit from an end-to-end communications platform, leveraging the power of a sub-sea network, fixed-line networks & mobile platforms. With an expanded regional footprint and upgraded infrastructure facilities, it is likely to deliver enterprise-grade connectivity, data center, hosting and managed solutions and IT services. The stock has gained 68.8% over the past year. This Zacks Rank #3 firm has a VGM Score of A.
Price and Consensus: LILA
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3 Wireless Stocks Likely to Thrive Despite Short-Term Challenges
The Zacks Wireless National industry is facing high capital expenditures for infrastructure upgrades, supply-chain disruptions due to the Iran war and shipping restrictions in the Strait of Hormuz, oil price volatility and high customer inventory levels. However, the industry is likely to benefit in the long run from a fast-track 5G deployment and extensive fiber densification.
Amid this backdrop, T-Mobile US, Inc. (TMUS - Free Report) , Array Digital Infrastructure, Inc. (AD - Free Report) and Liberty Latin America Ltd. (LILA - Free Report) are likely to gain from higher demand for sustainable networks with a wide proliferation of the IoT, wireless traction and solid 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?
Soaring Raw Material Prices: High raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. Wireless operators have been facing challenges due to the disruptive rise of over-the-top service providers in this dynamic industry. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and affect operating and financial results.
Low Latency 5G & Fiber Ecosystem: 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. 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. With low latency and increased bandwidth, business enterprises are increasingly embracing the exciting possibilities offered by artificial intelligence and the IoT via the real-time transfer of mobile data. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed.
Depleting Profitability: 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 are eroding profits. A steady decline in linear TV subscribers and legacy services due to a challenging macroeconomic environment and high inflation adds to the margin woes. Consequently, the industry firms are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. 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, which is affecting their profitability.
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 #168, which places it in the bottom 31% 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 grim prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
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 underperformed the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has declined 10.3% over this period against the S&P 500 and the sector’s growth of 31.8% and 53.8%, 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 8.47X compared with the S&P 500’s 18.48X. It is also below the sector’s trailing 12-month EV/EBITDA of 21.45X.
Over the past five years, the industry has traded as high as 9.43X, as low as 6.41X and at the median of 7.6X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
3 Wireless National Stocks to Keep a Close Eye on
T-Mobile: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider. The company’s business model largely depends on its “Un-carrier Value Proposition,” which aims to enhance customer satisfaction by offering the latest products at cheaper rates and on uncomplicated terms and conditions. The company continues to boast a leadership position in the 5G market. Its 5G network covers 98% of Americans, or 330 million people in the country. The Ultra Capacity 5G delivers superfast speeds, powering 5G smartphones and enabling innovators to deliver transformational 5G experiences. The stock has a long-term earnings growth expectation of 15.9% and delivered an earnings surprise of 12.3%, on average, in the trailing four quarters. It has a VGM Score of B. T-Mobile currently 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
Array Digital: Headquartered in Chicago, IL, Array Digital (previously known as United States Cellular Corporation) is a leading full-service wireless carrier in the United States. The company provides a range of wireless products and services, and a high-quality network to increase the competitiveness of local businesses. The company is benefiting from solid user engagement in its fixed wireless business and an improvement in tower rental revenues. The geographical diversity and well-balanced presence across various major wireless carriers highlight the robustness of its tower rental portfolio. Management's efforts to enhance operational efficiency and drive cost optimization across its operations have significantly boosted profitability despite a challenging competitive environment. This Zacks Rank #3 firm delivered an earnings surprise of 70.8%, on average, in the trailing four quarters.
Price and Consensus: AD
Liberty Latin America: Based in Denver, CO, Liberty Latin America is a communications firm with operations in Chile, Puerto Rico, the Caribbean and other parts of Latin America. Liberty Latin America is poised to benefit from an end-to-end communications platform, leveraging the power of a sub-sea network, fixed-line networks & mobile platforms. With an expanded regional footprint and upgraded infrastructure facilities, it is likely to deliver enterprise-grade connectivity, data center, hosting and managed solutions and IT services. The stock has gained 68.8% over the past year. This Zacks Rank #3 firm has a VGM Score of A.
Price and Consensus: LILA