The Zacks Diversified Communication Services industry is combating shrinking profit margins due to high capital expenditures for 5G infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions amid geopolitical tensions, latent tariff-war threats, intense market volatility 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 such uncertain market conditions, Deutsche Telekom AG (DTEGY Quick QuoteDTEGY - Free Report) , Telecom Italia S.p.A. (TIIAY Quick QuoteTIIAY - Free Report) and Liberty Global Ltd. (LBTYA Quick QuoteLBTYA - Free Report) should benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud.

Industry Description

The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.

What's Shaping the Future of the Diversified Communication Services Industry?

Inflated Raw Material Prices: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, inflation and economic sanctions against the Putin regime have affected the operation schedules of several firms. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and affected profitability due to inflated equipment prices.

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion of overall network access services year over year, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion.

Integrated Tailormade Services: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.

Waning Profitability: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. At the same time, the industry participants continue to focus on leveraging wireline momentum, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely been compromised.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #195, which places it in the bottom 20% 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 bleak near-term 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 diversified communication stocks that are well-positioned to outperform the market based on a relatively modest 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 Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.

The industry has jumped 11.4% over this period compared with the S&P 500’s and the sector’s growth of 31.4% and 16%, 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 8.57X compared with the S&P 500’s 18.55X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 15.72X.

Over the past five years, the industry has traded as high as 10.5X, as low as 6.03X and at the median of 7.56X, as the chart below shows.

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

3 Diversified Communication Services Stocks to Watch

Deutsche Telekom: Headquartered in Bonn, Germany, Deutsche Telekom is one of the largest telecommunications service providers in Europe. In addition to its strong position in the domestic market, the company is poised to benefit from the accretive post-merger integration of T-Mobile US Inc. and Sprint in the United States, in which it owns about 53% stake. The removal of forced cable TV access in multiple dwelling units in Germany through telecom legislation is likely to help the company expand its broadband market. Moreover, an aggressive fiber rollout strategy across the country is expected to augment its domestic market hold. It has a long-term earnings growth expectation of 15.5%. It has a VGM Score of A. Deutsche Telekom 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: DTEGY

Telecom Italia: Headquartered in Rome, Italy, Telecom Italia offers mobile communication, fixed-line communication and broadcasting services worldwide. The company also has a controlling interest in TIM Brazil. The stabilization in domestic business, underpinned by cost-reduction initiatives and rational market pricing, is the primary growth driver for Telecom Italia. The stock has gained 86.8% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 52.2% to 35 cents per share since May 2025, while that for the next fiscal is up 34.9% to 58 cents per share. It has a VGM Score of A and a long-term earnings growth expectation of 53.4%. The stock carries a Zacks Rank #2 (Buy).   

Price and Consensus: TIIAY

Liberty Global: Based in Hamilton, Liberty Global is an international provider of broadband Internet, video, fixed-line telephony and mobile communications services to residential customers and businesses in Europe through three strategic platforms: Liberty Telecom, Liberty Growth and Liberty Services. The company is demonstrating improved operational momentum across its core markets, indicating a recovery in underlying business fundamentals and sustainable growth. The Zacks Consensus Estimate for current-year earnings has been revised upward by 17.9% since May 2025. This Zacks Rank #2 stock has gained 23.4% in the past year.  

Price and Consensus: LBTYA