The startling win of the Republican nominee Donald Trump as the next U.S. president may negatively impact the U.S. telecom industry, owing to his unpredictable nature and proposed anti-trade policies. In addition, stiff pricing competition in this industry is a genuine concern.
Will Geographical Expansion Stop?
Cutting across barriers has become common for telecom players. The objective is to offer better service and customer convenience. However, President-elect Trump has threatened to terminate the Obama administration's efforts to normalize US-Cuba relations.
In the last couple of years, all the four leading U.S, wireless operators namely, Verizon Communications Inc. (VZ), AT&T Inc. (T), Sprint Corp. (S) and T-Mobile US Inc. (TMUS) established business links with Cuba's Empresa de Telecomunicaciones de Cuba SA (ETECSA). Each of these four stocks currently carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .
Moreover, Trump's win might deal a major blow to Mexico as he believes that the nation has taken away jobs from Americans. He also plans renegotiations with the NAFTA and a wall along the U.S.-Mexico border to curb illegal immigration. AT&T has strong business interest in Mexico.
Moreover, during Trump's presidency trade barriers with China could be raised. Leading mobile chipset developer Qualcomm Inc. (QCOM) has strong business ties in China. His campaign promises also indicated a more restrictive trade stance with China. Severed trade ties will deal a blow to countries like South Korea, Indonesia and the Philippines.
Rapid technological invention and innovation have resulted in significant competition within the telecommunications industry. Product life-cycle and upgrade-cycle have gone down drastically with several firms coming up with new versions of products and services, back to back, within a short span of time. To combat competition, the players are thus increasingly looking at consolidation. This has resulted in several mergers and acquisitions in the telecom space.
In the meantime, the U.S. telecom market continues to witness intense pricing competition. The two industry behemoths, Verizon and AT&T, at present, command around 68% of the U.S. wireless market whereas Sprintand T-Mobile USjointly control the remaining 32%. These two relatively smaller firms are now bringing on board several low-priced value-added products to entice customers away from their larger peers. In the first nine-months of 2016, both Sprint and T-Mobile US added a substantial number to their customer base.
On the video services front, the pay-TV industry is facing severe competitive threats from low-cost online video streaming service providers. Cord-cutting is pretty regular in the country with over-the-top video operators offering smaller packages of channels, designed according to a customer's need, at dirt cheap prices. Established pay-TV operators are now opting for the more customer-friendly Internet TV service in order to counter the threat.
In general, the beleaguered telecommunications companies have high debt levels and large financial leverage ratios. Moreover, they are often unable to cope with recent market trends. Other risks that pose threats are as follows:
• Potential Business Slowdown: Sales fluctuations of carriers are expected to continue to weigh on capital spending decisions -- a major problem faced by equipment vendors. The companies are expected to retain focus on improving their balance sheets, financial discipline and free cash-flow generation.
• Product Overlapping: We may see more product sharing deals between telecom, cable TV and satellite TV operators as each of these players are vying to grab a sizeable share in each other's territory. Even pay-TV services, offerings to business enterprises, mobile backhaul and metro-Ethernet segments may observe more convergence. Mobile phone makers are now progressively offering tablets and chipset manufacturers are providing chips for personal computers as well as mobile devices - thus frequently interchanging their areas of operations.
• Intensified Competition: Technological upgrades and breakthroughs have resulted in cutthroat price competition. Product life-cycle and upgrade-cycle have been reduced drastically as several firms are coming up with new products and services within a short span of time. Increasing competition is compelling players to offer heterogeneous and bundled services to retain their position in the space.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.