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Telecom Stock Roundup, part 2 - Industry Outlook

Telecom Carrier's Expansion Plans in Place: Care to Invest?

The U.S. telecommunications industry is currently evolving around five broad factors. These include: (i) the increasing traction of wireless networks in the telecom industry and the consequent popularity of spectrum (ii) the projection of aggressive high-speed fiber-based network expansion especially for video/TV offerings (iii) consolidation within the industry which is likely to continue mainly on airwaves shortage and attainment of economies of scale (iv) innovative product launches are expected in areas like m-Commerce, virtualization and cloud-based technology, high-speed metro Ethernet and (v) ample scope for expansion as nearly a fifth of rural American households lack broadband access, as per the Federal Communications Commission (FCC).

Momentum to Continue

The rising demand for technologically superior products has been the silver lining for the telecommunication industry in an otherwise tough environment. Uninterrupted advancement in telecom technologies helped telecom operators to adopt newer business models in order to boost revenues. These include new pricing plans, a shift from unlimited data usage to tier-based data usage plan, and higher upgrade fees for smartphones and tablets.

In fact, the average revenue per user (ARPU) for most telecom carriers has been on the rise over the last two years. It is also expected to grow over the long term on the back of massive growth in mobile data usage. In 2014, research firm GSMA Intelligence reported that LTE users consume an average of 1.5GB data per month, two-fold of the amount consumed by non-LTE users. Meanwhile, in developing countries, LTE users probably generate 20 times higher ARPU for carriers than non-LTE users, whereas in developed countries ARPU is likely to be 10%-40% higher from LTE users in comparison to non-LTE users.

New Growth Areas

We expect wireless networks to provide the primary impetus to the telecom industry. Wireless network standards are continuously evolving around the globe to offer faster speed. After significant growth of the next-generation 4G LTE network deployment, LTE-A (Long-Term Evolution Advanced) wireless network standard is gradually gaining a strong foothold. On the wireline front, large telecom operators are increasingly targeting small and mid-sized business customers with high-speed Internet access on their fiber-optic-based network at attractive prices.

In the meantime, growth of software-defined networking (SDN) and network function virtualization (NFV) have encouraged telecom operators to invest heavily in the communications infrastructure market. SDN provides customers increased bandwidth utilization, higher reliability and reduced capital spending. Meanwhile, NFV is designed to consolidate and deliver the networking components needed to support a fully virtualized infrastructure - including virtual servers, storage and even other networks. It utilizes standard IT virtualization technologies.

Furthermore, the cloud-managed WiFi market has become a major growth driver for telecom operators as increasing number of large and mid-sized business enterprises are adopting this technology. The machine-to-machine (M2M) wireless communications technology has been significantly driving mobile data revenues for wireless service providers. Also, as operators direct their investments toward LTE access, the introduction of advanced services such as voice-over-LTE (VoLTE) has gradually become more important.

Moreover, large telecom operators are yet again eyeing the small and mid-sized business (SMB) service market to reclaim their long-lost glory. In sync with this, AT&T Inc. ( T ) has announced a new high-speed asymmetric 25 Mbps service for $50 a month for all SMBs located within its fiber-based U-Verse footprint. Verizon Communications Inc. ( VZ ) has decided to offer a free SpeedMatch for SMBs who opt for the fiber-based FiOS service. Various industry researches estimate that the SMB segment may offer a market opportunity worth $20 -$30 billion in the long-run.

Opportunities

The telecommunications industry as a whole offers a number of positives which are difficult to disregard from the standpoint of investors.

  • Telecommunications Is a Necessary Utility : The need for telecom in both rural and urban areas, and its role in the infrastructure of both developed and developing markets, will continue to grow. In addition, economic stimulus plans in the U.S. and throughout the world should boost the performance of select service providers and equipment manufacturers.
  • Barrier to Entry : The lack of public airwaves (spectrum) in the telecommunications industry creates a high barrier to entry. The U.S. telecom market is controlled by just four national players, as regional low-cost operators are not eligible to compete with large carriers. Furthermore, it is not easy to establish a new telecom carrier since it will require government approval to transmit voice, data, and video on public airwaves. Spectrum licenses are limited and therefore quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which very few entities can afford. Thus, this barrier protects the profits of incumbents.
  • Strong Demand: A recovering 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. Moreover, the FCC projects mobile data demand to grow 25-50 folds over the next five years.

We remain optimistic on U.S. telecom giant Verizon Communications Inc., AT&T Inc. and T-Mobile US Inc. ( TMUS ) as well as on cable MSO Time Warner Cable Inc. ( TWC ). Currently, all these stocks carry a Zacks Rank #3 (Hold). However, Verizon, AT&T and T-Mobile US are significantly expanding their subscriber base for both wireless network and fiber-based video network. Similarly, Time Warner Cable is also significantly expanding its high-speed broadband subscriber base.

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VERIZON COMM (VZ): Free Stock Analysis Report

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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.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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