Telecommunications is a vital industry witnessing rapid technological improvement. Unprecedented growth in high-speed mobile Internet traffic, particularly with respect to wireless data and video, has transformed this industry into the most evolving, inventive and keenly contested space.
On the positive side, the new U.S. telecom regulatory body -- Federal Communications Commission (“FCC”) -- has given enough indications of its leniency compared with the Obama administration. It is also likely to roll back several stringent regulations of the previous regime. The FCC’s stance of being less restrictive will aid mergers and acquisitions, which are likely to spur growth in 2017. Moreover, the expected corporate tax reform will benefit telecom operators to extensively explore the booming businesses services market.
A growing economy speeds up demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans. The rising demand for technologically superior products has been a silver lining for the telecommunication industry in an otherwise tough environment. This in turn has boosted the demand for telecom equipment manufacturers.
In addition, a major characteristic of the telecommunications industry is that it is immune to international geo-political disturbances even when these lead to economic fluctuations. The need to remain connected is so very human, springing from our earliest tendencies to communicate with our fellow human beings. An era of digitization and technology is essentially built on this human craving. It is here that telecommunications come to the fore as a necessary utility. Consequently, any non-U.S. economic volatility is not expected to have an immediate impact on the industry.
Future Drivers of Telecom Industry
(1) 4G LTE Networks Thriving: According to a recent research report published by Ovum for industry association 5G Americas, 4G LTE connections have reached 2.37 billion globally at the end of second-quarter 2017. This indicates an improvement of a whopping 59% year over year. Per the report, LTE connections will reach 4.9 billion in 2022. At this rate, 4G LTE is set to outnumber 3G subscribers worldwide by 2020. By the end of 2021, global LTE market share will cross 53%.
(2) Upcoming 5G Wireless Networks: According to a study commissioned by Qualcomm, fifth-generation (5G) wireless technology could result in real global economic growth by $3 trillion cumulatively from 2020 to 2035. Several industry researchers hold that 5G network will provide a download speed of 1 Gbps (gigabit per second), which is 200 times the throughput of the currently available standard 4G LTE network.
(3) Internet of Things (IoT): Internet of Things, which enables any physical electronic device with a valid IP-address to transfer data seamlessly over a wireless network, is fast gaining market traction and bringing about fundamental changes in business models. Next-generation superfast wireless networks will provide the primary impetus to the telecom industry. In this context, IoT holds the potential to be the numero uno factor in driving growth in the space. Upcoming 5G mobile networks will be of utmost importance in the management of exponential growth in IoT.
(4) Fiber Optic Networks: The fiber optic network is increasingly becoming the most sought-after technology for secure and fast data transmission over long distances. Going forward, the wireline industry will largely evolve around the fiber-based superfast gigabit data transmission network. Fiber optic cable is a vital infrastructure to meet the surging need for cloud-based business data, along with more video streaming services by individuals. Moreover, fiber-optic cable network is vital for backhaul and last mile local loop, which are needed by wireless service providers for their upcoming 5G network.
At this stage, we believe investors should choose stocks which carry a favorable Zacks Rank to cash in on future growth.
Juniper Networks Inc. (JNPR - Free Report) is a provider of Internet infrastructure solutions that enable Internet service providers and other telecommunications service providers to meet the demands resulting from the rapid growth of the Internet. The company delivers next generation Internet backbone routers that are specifically designed for service provider networks. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
For 2017, the Zacks Consensus Estimate for EPS is pegged at $2.23, reflecting year-over-year growth of 6.9%. In the last 60 days, the Zacks Consensus EPS has gone up by 2 cents. Meanwhile, the consensus estimate for revenues is $5.23 billion, up 4.9% year over year.
InterDigital Inc. (IDCC - Free Report) develops and markets advanced digital wireless telecom systems using proprietary technologies for voice and data communications. It has developed an extensive patent portfolio related to those technologies. The company currently carries a Zacks Rank #1.
For 2017, the Zacks Consensus Estimate for EPS (earnings per share) is pegged at $3.67, indicating year-over-year decline of 54.9%. However, the Zacks Consensus Estimate for EPS has moved up significantly by 17 cents in the last 30 days. The Zacks consensus estimate for revenues is $414.7 million, down 37.7% year over year.
ADTRAN Inc. (ADTN - Free Report) is a leading global provider of networking & communications equipment. Its solutions enable voice, data, video, and Internet communications across copper, fiber, & wireless network infrastructures. The company carries a Zacks Rank #2 (Buy).
For 2017, the Zacks Consensus Estimate for EPS is pegged at 83 cents, reflecting year-over-year growth of 14.6%. In the last 60 days, the Zacks Consensus EPS has gone up by 12 cents. Meanwhile, the consensus estimate for revenues is $710 million, up 11.4% year over year.
Sonus Networks Inc. is a leading provider of voice infrastructure products for the new public network. Sonus' solutions enable service providers to deploy an integrated network capable of carrying both voice and data traffic, and to deliver a range of innovative, new services. The company currently carries a Zacks Rank #2.
For 2017, the Zacks Consensus Estimate for EPS is pegged at 25 cents, reflecting year-over-year decline of 25%. However, the Zacks Consensus EPS has gone up by 2 cents in the last 60 days. The consensus estimate for revenues is $249 million, down 1.4% year over year.
The charts below shows that all four above mentioned stocks have outperformed the industry in the last one month.
The Bottom Line
Telecommunications is one of the few industries to have seen rapid technological improvement even during the recession. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to shift in favor of the industry. At this stage, we believe that these four stocks with a favorable Zacks Rank are poised to capitalize on the growing opportunities.
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