The telecommunications industry is 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.
A growing economy speeds up the 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 given a boost to the demand for telecom infrastructure developers, particularly wireless equipment manufacturers.
Wireless Is the Key
Wireless networks are key to the growth of the overall telecom industry. Wireless network standards are continuously evolving worldwide in order to provide faster speed. Long-Term Evolution (LTE), the most sought after super-fast (4G) wireless communications technology, is gaining rapid momentum. Following significant deployment of 4G LTE networks, LTE-A (Long-Term Evolution Advanced) wireless networks are gradually finding a solid foothold.
Per a report by research firm iGR, U.S. telecom operators will spend around $104 billion during 2015 - 2025 to upgrade their existing 4G networks to the upcoming 5G standards and thereafter, execute full installation of 5G wireless services. This bodes well for wireless equipment manufacturers with enormous opportunity to grow.
We expect wireless networks to provide the primary impetus to the telecom industry. In this regard, Internet of Things (IoT) has the potential to emerge the numero uno factor for future growth in the space. According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT will grow at 19.2% compound annual growth rate to nearly $1.7 trillion in 2020 from $698.6 billion in 2015. Exponential growth of Internet-connected devices will be a major boom for wireless equipment manufacturers.
Massive Spectrum Deployment by Carriers
As wireless networks run on radio frequency, spectrums (airwaves) have become the most sought-after commodity in the industry. T-Mobile US has aggressively started deploying 600 MHz low-band airwaves. In 2018, AT&T will deploy 60 MHz of fallow spectrum and 600 MHz low-band spectrum coupled with its ongoing network densification project.
Comcast, the new entrant in the wireless field, acquired 73 licenses in the band of 600 MHz auctioned by the FCC. We believe that in the future Comcast will deploy this spectrum for extensive wireless coverage.
The market for U.S. public safety network for first responders and civil protection services is becoming intensely competitive. AT&T will install its FirstNet project to build and manage the first nationwide broadband network dedicated to the country’s police, firefighters and emergency medical services.
The company is expected to spend around $40 billion over the life of the contract to build, deploy, operate and maintain the network. Moreover, Verizon has announced plans of dedicating network capacity to emergency services providers. The company will make Band 14 devices available and ensure full interoperability with any Band 14 radio access networks (RANs) deployed by FirstNet.
Strong Growth of Service Provider Routers
Massive growth in mobile device usage has heightened transportation of data traffic substantially. In order to manage this burgeoning demand for photo, video and online data services, telecom operators are required to install more routers to ensure smooth transfer of data packets.
Routers are telecom infrastructure devices used to deliver data packets from one network to another. These are located at gateways, places where two or more networks connect. Per the IDC estimate, in 2017, the aggregate market size of the service provider router and carrier Ethernet switch will surpass the 2016 figure of over $13 billion.
The success is primarily attributed to strong demand from cloud service providers and the digital transformation imperative. In the United States, the majority of demand for service provider router and carrier Ethernet switch are from large cloud service operators like Amazon Web Services of Amazon.com Inc., Microsoft Azure of Microsoft Corp. and Alphabet Inc.
Our Top Pick
The U.S. wireless equipment industry has lately emerged as an intensely contested space where success thrives largely on technical superiority, quality of services and scalability. In order to stay abreast of competition, existing players need to be constantly on their toes, introducing innovative products to gain from the industry’s growing momentum.
At this stage, we believe investors should choose stocks which promise strong near-term growth and carry a favorable Zacks Rank. Taking into account these factors, we present four such stocks for investors to consider:
Sonus Networks Inc. : Headquartered in Westford, MA, Sonus Networks 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.
Sonus has long-term (three-five years) earnings per share (EPS) growth estimate of 12%. The company currently holds a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Comtech Telecommunications Corp. (CMTL - Free Report) : Headquartered in Melville, NY, Comtech designs, develops, produces and markets innovative products, systems and services for advanced communications solutions. The company sells products to a diverse customer base in the global commercial and government communications markets.
Comtech has long-term (three-five years) EPS growth estimate of 5% and a dividend yield of 2.04%.The company currently holds a Zacks Rank #2 (Buy).
Harris Corp. (HRS - Free Report) : Based in Melbourne, FL, Harris has evolved from being a diversified electronics company to one that is focused on communications.The company is a global provider of communications equipment and services to government and commercial customers in more than 150 countries. Major operational areas are network broadcasting, network test and management equipment and software; mobile radio networks; and air traffic control systems.
Harris has long-term (three-five years) EPS growth estimate of 7% and a dividend yield of 1.64%. The company holds a Zacks Rank #2.
Motorola Solutions Inc. (MSI - Free Report) : Based in Schaumburg, IL, Motorola Solutions is a leading communications equipment manufacturer, and has strong market positions in bar code scanning, wireless infrastructure gear and government communications.
Motorola Solutions has long-term (three-five years) EPS growth estimate of 4.4% and a dividend yield of 2.06%. The company holds a Zacks Rank #2.
The chart below shows that all the above-mentioned stocks have outperformed the industry year-to-date.
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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