For Immediate Release

Chicago, IL – May 15, 2015 – Today, Zacks Equity Research discusses the Telecom (Part 2), including Verizon Communications Inc. (VZ), BCE Inc. (BCE), Comcast Corp. (CMCSA) and United States Cellular Corp. ( USM).

Industry: Telecom (Part 2)

Link: https://www.zacks.com/commentary/45963/can-telecoms-continue-the-favorable-momentum

Telecommunications is one of the few industries to have seen rapid technological improvement even during the Great Recession. Owing to the significance of telecommunications as an infrastructure product, we expect the overall economic dynamics to shift in the industry’s favor.

Unprecedented growth in high-speed mobile Internet traffic, in particular of wireless data and video, has transformed the industry into the most evolving, inventive and keenly contested space. All new network standards aim at providing faster data connectivity, quick video streaming with high resolution and rich multimedia applications. While issues like competitive pressures and regulatory challenges will likely remain headwinds, we expect the industry’s growth trajectory to continue in the near to medium term.

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. In this regard the latest innovation of Internet of Thing (IoT) may become the most important component for the telecom industry’s future growth.

The IoT is the network of physical objects embedded with electronics, software, sensors and connectivity to enable it to achieve greater value and service by exchanging data with other connected devices. Machine-to-machine (M2M) communications is a major example. IoT needs superfast wireless links to run effectively which will in turn provide massive growth for the telecom industry.

Meanwhile, 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 on 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 an increasing number of large and mid-sized business enterprises are adopting this technology. Also, as operators direct their investments toward LTE access, the introduction of advanced services such as voice-over-LTE (VoLTE) has gradually gained more importance.

Opportunities

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

Immune to External Disturbances: A major characteristic of the telecommunications industry is that it is immune to any international geo-political disturbances even if the disturbance generates economic fluctuations. Thus, the ongoing sovereign debt crisis in Europe, a potential slowdown in China or any non-U.S. economic volatility will not have any immediate impact on the industry. 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.

Signs of the above-mentioned positives can be seen in Verizon Communications Inc. (VZ), BCE Inc. (BCE), Comcast Corp. (CMCSA) and United States Cellular Corp. ( USM). Currently, all these stocks carry a Zacks Rank #2 (Buy).

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VERIZON COMM (VZ): Free Stock Analysis Report
 
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