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3 Telecom Giants Positioned To Drive The 5G Revolution

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The market has drifted into uncharted waters with the global pandemic creating an unprecedented level of ambiguity. High yielding stocks with the balance sheet health and/or cash-flows to maintain their dividend may be a safe place to put some of your cash to work. Today, I am going to take a look at the telecom industry, where the 5G rollout has put these stocks on the edge of a technological revolution.

The S&P 500 has had a wild 2 months with a 35% market crash followed swiftly by a 25%+ recovery, catalyzed by the unprecedented level of monetary support the Federal Reserve has provided. This support has ‘artificially’ propping up the asset markets. Now the market is bracing itself for a wave of uncertain Q1 earnings reports and more pandemic driven headlines that will fuel the market.

AT&T (T - Free Report)

AT&T kicked of the telecom earning season with its Q1 release on April 22nd, and at first glance, it did not look great. Revenues were down 4.6% year-over-year (YoY), and adjusted EBITDA fell 3.9% YoY. The good news is that its future growth drivers have remained stable with its mobile segment growing its EBITDA by 7% YoY, and its advertising platform, Xandr, seeing a 20% YoY increase in EBITDA. The division that got hit the hardest was its entertainment segments due to a decline in TV subscribers and movie releases, which was to be expected.

AT&T is on the verge of launching its direct-to-consumer streaming platform HBO Max which will encompass the decades of content from its newly acquired WarnerMedia segment. This streaming platform is anticipated to be a significant growth driver for this media giant moving forward as the world cuts its cable and transitions to streaming. HBO Max anticipated launch date is May 27th.

AT&T is slowly transitioning to 5G with 5G Evolution rolled out around the nation, but this is only a marginal improvement from 4G LTE. AT&T’s true 5G service is only available in select cities around the US.

T is down 23% so far this year as its mixed portfolio, and uncertainty about HBO Max weighs on investor sentiment. The stocks 7% yield provides me with some comfort in its long-term portfolio potential. I do not see AT&T as the 5G winner, but I think that HBO Max has the potential to become a leader in the streaming space.

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. Price, Consensus and EPS Surprise

AT&T Inc. price-consensus-eps-surprise-chart | AT&T Inc. Quote

Verizon (VZ - Free Report)

Verizon’s shares have outperformed the broader market, staying quite buoyant amid these highly uncertain times. Verizon’s market leadership in telecommunication and 5G technology has made this company a necessity as the pandemic forces the US online. VZ’s category leadership, low beta (low market risk), and 4.2% dividend yield makes this stock an excellent long-term investment amid uncertain times.

Verizon is anticipated to release its Q1 earnings before the bell tomorrow morning. According to Zacks Consensus estimates, EPS is expected to come in at $1.22 on $32.35 billion in sales, which would represent YoY growth on both metrics. 

Verizon said last month that it would be increasing its capital spending guidance for 2020 to accelerate its 5G rollout during this market disruptive time. Look for more color in the earnings call & report about its accelerated 5G timeline and anticipated performance moving forward.

Verizon Communications Inc. Price, Consensus and EPS Surprise

Verizon Communications Inc. Price, Consensus and EPS Surprise

Verizon Communications Inc. price-consensus-eps-surprise-chart | Verizon Communications Inc. Quote

T-Mobile US (TMUS - Free Report)

The merger between T-Mobile and Sprint was finalized on April 1st, making the combined company a telecom powerhouse with a secure grip on the number 3 spot amongst telecom behemoths.

According to a T-Mobile press release regarding the merge, “the enhanced scale and financial strength of the combined company will drive a planned investment of $40 billion into its network, business and more over the next three years. Synergies achieved from the integration have the potential to unlock massive scale and unleash at least $43 billion in value for shareholders.”

The combined business will be holding its first earnings call on May 6th. I would listen carefully to this call as it will likely provide color on the synergies that these two firms have already discovered and their 5G progress. Analysts are increasingly optimistic about the combined telecom giant, with 12 out of 14 sell-side analysts calling TMUS a buy today.

TMUS does not offer a dividend, but its growth potential should more than satisfy investors return requirements. TMUS has already rallied 15% so far this year, far outperforming its cohorts and the broader market as investors price in the budding synergies between these two telecom giants.

I expect these shares to experience a lot volatility in the short-term, but if it can deliver on its $43+ billion in synergy proposition, I think TMUS has a lot more growth in front of it.

T-Mobile US, Inc. Price, Consensus and EPS Surprise

T-Mobile US, Inc. Price, Consensus and EPS Surprise

T-Mobile US, Inc. price-consensus-eps-surprise-chart | T-Mobile US, Inc. Quote

Take Away

The telecom space is sitting on the edge of the 5G revolution that will propel a wave of technological advancements. AT&T and VZ provide investors with sustainable cash-flows and a robust dividend, while the growth proposition of TMUS offers investors an opportunity to get in on the ground floor (or close to it) of a blossoming telecom giant.

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