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Can Wireless Operators Maintain Q4 Postpaid Gain in 2018?

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U.S. telecommunications industry had a disappointing 2017. However, the situation started showing signs of improvement from fourth-quarter 2017 given that most of the major telecommunications stocks have been performing well. Importantly, all four national wireless carriers have gained postpaid subscribers in the last reported quarter.

T-Mobile US Inc. (TMUS - Free Report) , Verizon Communications Inc. (VZ - Free Report) , AT&T Inc. (T - Free Report) and Sprint Corp. (S - Free Report) have gained a net 891,000, 431,000, 329,000 and 184,000 postpaid customers, respectively. In addition, Comcast Corp. (CMCSA - Free Report) , the newly entrant cable MSO (multi service operator) in the wireless space also gained about 180,000 postpaid subscribers. Notably, Comcast operates as an MVNO (mobile virtual network operator) of Verizon. Each of these stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Postpaid customers are those who are billed monthly and considered more profitable to telecom operators. Interestingly, all five major wireless operators have gained considerable postpaid customers despite cut-throat pricing competition in the industry resulting in unlimited data plans with several sweeteners.

We believe this trend is likely to continue in 2018. Here we will discuss the reasons.

Upcoming 5G Wireless Network

Fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution towards 5G wireless networks will result in higher capital spending for the U.S. wireless carriers. Per a report by research firm iGR, U.S. telecom operators will spend around $104 billion between 2015 and 2025 to upgrade their existing 4G networks to the upcoming 5G standards and thereafter, execute full installation of 5G wireless services.

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.

Robust U.S. Macro Economy

Strong GDP growth supported by encouraging labor market, retail sales and industrial production data has accelerated economic activities. Consumer spending has increased, driven by encouraging economic conditions and strong government outlays. On average, the U.S. economy grew 1.5% and 2.3% in 2016 and 2017, respectively. Importantly, the first GDP estimation for the fourth quarter of 2017 is 2.6%, higher than the year’s average. In 2018, the U.S. economy is likely to grow higher than the last two years. This implies higher disposable income in the hands of general mass to spend.

Growth-Induced Polices

President Donald Trump’s proposed policy changes have made the overall economic outlook fairly bullish. The two pro-growth agendas of Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the U.S. economy.  The proposal to reduce corporate taxes from the current 35% to 20% is likely to bring corporate tax rate at its historic low in 78 years.

Large telecom operators book much of their revenues in the homeland. Therefore, a significant reduction in corporate tax rate faced by telecom carriers would be immediately accretive to cash flow. Moreover, the tax proposal offers to provide incentives to companies to repatriate accumulated profits from overseas with an even lower tax rate. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment. 

Product Differentiation

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.

The telecommunications industry is witnessing rapid technological improvements. 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.

Wireless Carriers Offering Online TV Streaming Service

Internet TV streaming service is gradually gaining market traction in the United States. The growing deployment of 4G LTE mobile network and significant adoption of portable mobile devices are the primary reasons propelling the popularity of Internet TV streaming. The millennials have a strong appetite for new technologies, as they are no longer interested in incurring huge bill for a fat pay-TV bundle. Skinny TV bundle in cost-effective manner is the next-generation favorite.

Presently, the web-based digital media market is growing by leaps and bounds. Digital media brands are becoming immensely popular with the younger generation. With demand for smartphones and tablets on the rise, target customers are increasingly watching videos online, and preferring them over costlier legacy pay-TV connections.

Bottom Line

Telecommunications is one of the few industries to have witnessed 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.

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