The second quarter of 2020 witnessed intense market volatility as the coronavirus pandemic disrupted normal business operations and supply-chain mechanisms of various telecom companies. This, in turn, affected sector profitability and triggered insecurity within the industry. However, telecom firms relentlessly provided the vital lifeline to countless humans as virtual communication replaced in-person exchanges with social distancing and the work-from-home option in vogue. The firms worked in unison to effectively handle the upsurge in data traffic as digital sustainability became the norm of the day.
The government also continued its relentless pursuit to keep China-backed firms out of its telecom network in order to lend support to domestic telecommunication companies. The stonewalling effort gained steam in other allied countries as diplomatic channels managed to convince certain nations to reconsider granting access to China-based telecommunications equipment provider, Huawei, for 5G deployment. The political slugfest for 5G supremacy at the backdrop dovetailed with the administrative efforts to set guardrails and legislation to safeguard the interests of domestic firms and provide confidence to the industry.
Factors at Play
5G Deployments: Shaken Not Stirred
Despite disruptions due to the virus outbreak, leading U.S. telecom carriers were confident about continuing their 5G deployment process across the country. However, they acknowledged that the momentum was slightly hampered in some cities due to longer approval time for infrastructure setups, like small cells, as well as other necessary permits and changes. In addition, remote working procedures due to social-distancing measures and temporary closures of permitting offices somewhat delayed the process.
As the country aimed to speed up 5G deployment to make up for the opportunity costs, a bipartisan group of U.S. lawmakers introduced the “Utilizing Strategic Allied (USA) Telecommunications Act of 2020.” The bill seeks to set aside $750 million to accelerate 5G deployment while encouraging the use of open interfaced, standards-based, interoperable 5G networks. In addition to providing funds to deter the increasing dominance of China-based telecommunications equipment manufacturers, the legislation intends to encourage competition and help lower costs for trusted equipment over the long term.
Despite short-term headwinds from retail store closures and supply-chain disruptions, the industry appeared to be relatively better placed compared to other sectors, owing to a recurring subscription-based business model. The government funding also helped offset the decline in average revenue per user as telecom firms waived off late payment fees and data restrictions while offering various free services amid the coronavirus pandemic.
Democratic senators also introduced a legislation that entails U.S. citizens, who have suffered economic hardships due to the coronavirus pandemic, to have seamless access to the Internet. The bill aims to provide free or low-cost broadband services to economically backward communities or those who were furloughed due to the virus outbreak. The bill is likely to augment an existing FCC subsidy scheme to help Americans tide over the crisis. Furthermore, a bipartisan group of lawmakers introduced a bill to provide about $22.8 billion to semiconductor manufacturers for setting up factories in the United States. The strategic bill aims to spur the construction of ICs within the country to reduce dependence on offshore production facilities to prevent any supply-chain disruption in the future.
The Trump administration sought to revoke the licenses of China-based telecom firms operating in the United States, with FCC issuing showcase notices to four such entities, namely China Telecom, China Unicom, Pacific Networks and ComNet. The FCC also formally designated Huawei and ZTE as threats to U.S. national security, prohibiting domestic firms from tapping the $8.3-billion Universal Service Fund to purchase equipment from these firms.
In addition, President Trump extended the executive order signed last year till May 2021 to prevent U.S. firms from dealing with foreign communication equipment manufacturers that were deemed to be harmful to national security interests. The government extended the ‘Entity List’ beyond the realms of well-known Chinese firms, which already came under strict U.S. scrutiny to tuck in 33 new companies, including five biometric providers. The export restrictions were based on national security grounds and limited their access to U.S. components and technology without prior government approval. However, certain restrictions will be waived if Huawei contributed to the development of a global 5G standard in order to ensure there is ubiquity in 5G so that global standards are symmetrical.
How to Pick?
A multitude of telecom stocks is likely to report earnings in the coming weeks. A solid earnings performance of the telecom sector could sow the seeds for future investments in network and 5G-enabled devices for superior 5G readiness, as the industry seeks to find its feet after the virus-led mayhem.
Amid a diverse range of companies, picking the right stock for your portfolio could appear to be a colossal task. While it is impossible to be sure about such outperformers, our proprietary methodology makes the process fairly simple.
Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), chances of a positive earnings surprise are as huge as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is an important ingredient of our proven model, which along with a top Zacks Rank creates the perfect combination to determine stocks with the best chances to pull off a positive surprise in the upcoming earnings announcements. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
AT&T Inc. T: Based in Dallas, TX, AT&T is the second-largest wireless service provider in North America and one of the world’s leading communications service carriers.
This Zacks Rank #3 stock has an Earnings ESP of +0.50%. The company is scheduled to report results on Jul 23, before the opening bell.
NETGEAR, Inc. NTGR: Incorporated in January 1996 and headquartered in San Jose, CA, NETGEAR is a global telecommunications firm that offers innovative networking and Internet-connected products for seamless networking, broadband access and network connectivity.
NETGEAR currently has a Zacks Rank #3 and an Earnings ESP of +6.67%. The company is slated to report results after the closing bell on Jul 22.
T-Mobile US, Inc. TMUS: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider, offering mobile voice, messaging and data services in the postpaid, prepaid and wholesale markets.
The company is likely to report results on Jul 23, after market close. The stock currently has an Earnings ESP of +27.29% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Telephone and Data Systems, Inc. TDS: Based in Chicago, IL, Telephone and Data Systems, Inc. is a diversified telecom service provider offering wireless and wireline services in 36 states.
This Zacks Rank #3 stock has an Earnings ESP of +0.97%. The company is likely to report results after the closing bell on Aug 6.
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