The 10 Best Telecom Companies to Invest In
In this article we will take a look at the 10 best telecom companies to invest in. You can skip our industry analysis and see the 5 best telecom companies to invest in here.
Telecom industry is going through rough times these days because of the heavy ongoing investments into 5G infrastructure as well as tough competition for growth in existing business. The two biggest players in the telecom industry, AT&T (T) and Verizon (VZ), are facing a decline in their shares due to a combination of external factors and internal challenges. External factors, such as rising interest rates and the discovery of an old lead-sheathed telephone cable network, have injected uncertainty into their potential liability for toxic assets. However, much of their struggles stem from internal issues, particularly the difficulty of being mature firms in a saturated market with a substantial debt burden. Their core business of selling mobile and broadband subscriptions is stagnating, with Verizon reporting less than 1% growth in its revenues in the second quarter, and AT&T's equivalent figure rising by just 2.4%. The telecom giants are grappling with increased competition, exemplified by the 2020 merger between T-Mobile and Sprint, creating a formidable 5G competitor offering faster mobile connections at lower prices. Additionally, a partnership between Dish Network (DISH) and Amazon (AMZN) to provide mobile services for $25 a month to Amazon Prime members further intensifies the competitive landscape.
The future of the telecom industry is still very promising. First of all, there is still a lot of growth potential regarding 5G adaptation and utilization. Widespread dependence on existing 4G infrastructure hampers the true potential of 5G technology. Many services currently rely on 4G (LTE) foundations, hindering the realization of 5G's advanced capabilities. Expected 5G developments are anticipated to usher in a transformative shift, unlocking innovative digital services, promising faster connectivity, and enhancing stability and security in telecommunications. As the industry advances, the full spectrum of 5G's capabilities is set to materialize, heralding a new era of connectivity and the telecom stocks will benefit from this growth opportunity.
Secondly, telecom companies are increasingly integrating cloud models to enhance scalability. This allows for the rapid deployment and trial of new services without incurring substantial infrastructure expenses. The shift to the cloud is particularly beneficial as telecom companies seek to monetize 5G services efficiently. These initiatives will have a positive impact on the telecom companies’ margins.
Lastly, AI is extensively utilized by telecom companies to streamline customer services, manage communication traffic, and enhance overall efficiency. Virtual assistants and chatbots play a role in improving responses to technical support and network maintenance requests. Machine learning, integrated with AI, aids in detecting and preventing unauthorized activities. For example, Altice (ATUS) recently reported in its Q3 earnings call a 51% increase in chatbot support volume which extremely enhances its customer experience. AI provides an opportunity to not only reduce cost but also improve customer satisfaction. Again, Altice reported that 1.3M fewer inbound calls over the last 12 months because of AI technology.
One underlying trend in the telecom industry is the convergence of wireless, broadband and cable subindustries into a single giant industry where wireless, broadband and cable companies have to compete against all the other telecom companies for growth. As a result of this, there will be winners and losers, and the survivors will probably thrive and deliver market beating returns.
A modern telecom center with a visually impressive array of satellite dishes.
Methodology
Initially we shortlisted the 47 telecom stocks using the holdings of iShares U.S. Telecommunications (IYZ) and SPDR S&P Telecom ETF (XTL). Then we ranked these 47 stocks by using Insider Monkey’s hedge fund sentiment database. As a result, our article lists the 10 best telecom stocks to buy according to the collective wisdom of hedge funds. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why you should pay very close attention to this often-ignored indicator.
Here are the 10 best telecom stocks to invest in according to hedge funds:
10. FRONTIER COMMUNICATIONS PARENT INC
Number of HFs: 40
Frontier Communications Parent, Inc. (NASDAQ:FYBR) is a telecommunications company based in Norwalk, Connecticut. Analyst sentiment toward the company has shown a divergence, with JPMorgan rating the shares as Overweight in September, while Morgan Stanley rated them as Underweight during the same month. As of Q3 2023, among the 910 hedge funds surveyed by Insider Monkey, 40 had a stake in Frontier Communications Parent, Inc. (NASDAQ:FYBR). The largest shareholder among these hedge funds is Cerberus Capital Management, led by Stephen Feinberg.
Ares management, a large shareholder and an insider of the company, has been buying FYBR shares since early August at prices ranging from $15 to $18 more recently. They own 38.9M shares as of 10/18/2023.
9. MOTOROLA SOLUTIONS INC
Number of HFs: 45
MSI ranks 9th on our list of the best telecom companies to invest in. Motorola Solutions Inc. (NASDAQ:MSI) is an American multinational company headquartered in Chicago, Illinois, USA. The company is a separate entity from Motorola Mobility, which focuses on consumer electronics and was acquired by Lenovo in 2014.
Wedgewood Partners said the following about Motorola Solutions, Inc. (NYSE:MSI) in its Q3 2023 investor letter:
“Motorola Solutions, Inc. (NYSE:MSI) contributed to performance during the quarter. Revenue grew a healthy +12%, while the Company’s adjusted operating profit jumped +29% on better pricing and easing supply chain costs. The Company’s backlog grew +6% as the funding environment for its customers, particularly in public safety, remains strong. We expect Motorola’s core public safety customers to continue adopting and upgrading their LMR (land mobile radio) infrastructure, while expanding into software and service solutions that drive higher productivity in the face of chronic labor shortages.”
8. LIBERTY BROADBAND CORP
Number of HFs: 52
LIBERTY BROADBAND CORP (NASDAQ: LBRDK), headquartered in Englewood, Colorado, operates in the media sector and holds a market capitalization of $12.3 billion. Over the course of this year, Liberty Broadband Corporation (NASDAQ: LBRDK) has generated a return of 10.14%, but its 12-month returns show a decrease of -2.23%. The stock closed at $83.3 per share on November 24, 2023.
In its Q3 2023 investor letter, the Weitz Conservative Allocation Fund provides insights on Liberty Broadband Corporation (NASDAQ: LBRDK):
"We swapped the Fund's Liberty Broadband Corporation (NASDAQ:LBRDK) shares back to Charter Communications, Inc. (Charter is by far Liberty Broadband's largest asset), and the combined position was the most notable quarterly contributor. Investor sentiment around broadband's competitive position became less negative, and the stocks rebounded nicely from what we considered oversold levels. "
7. AT&T INC
Number of HFs: 52
AT&T Inc. (NASDAQ:T) is a major multinational telecommunications conglomerate headquartered in Dallas, Texas. Established in 1885 as the American Telephone and Telegraph Company, AT&T has grown to become a leading global provider of telecommunications, media, and technology services. AT&T ranks 7th on our list of the best telecom companies to invest in.
Stephen Luczo, a member of the company’s board of directors, purchased 62,500 shares of the company at an average price of $15.5 a couple of weeks ago. Luczo currently owns 395.5K shares of AT&T.
Shares of AT&T have faced challenges in 2023 due to factors such as slowing subscriber growth, economic uncertainty, high debt levels, and concerns about overly optimistic free cash flow projections. However, recent positive developments, including accelerated postpaid phone subscriber gains, low churn rates, and an improved free cash flow outlook, have increased confidence in AT&T. The company now anticipates full-year free cash flow of $16.5 billion, up from the previous estimate of at least $16 billion. Despite a 20% rally since July, the stock is still perceived as undervalued by several hedge funds, presenting an attractive opportunity, especially considering the current low valuation. One of these funds is Miller Value Income Strategy Fund. Here is what they said about AT&T recently:
“At just over 6x earnings, the stock trades near its lowest price-to-earnings (P/E) multiple ever, also representing close to its largest-ever P/E discount to the stock market. The business converts most of its earnings to free cash flow, implying a forward free cash flow yield north of 15%. Just under half of free cash flow is going toward the dividend (7.5% yield), while much of the balance is going to debt paydown. In other words, if the stock does not fall below its lowest-ever valuation, investors clip a rock-solid 7.5% in cash, while owning a growing portion of a very steady business as management reduces debt outstanding. A discounted cash flow model will suggest that intrinsic value for shares begins with a “2,” suggesting the stock is undervalued on an absolute basis. The lack of volatility in the underlying fundamentals also makes it unique when compared to many other things we own, which reduces the probability of permanent capital impairment and argues for a significant weight in the portfolio.
AT&T looks particularly attractive when compared to some of the larger names dominating the S&P 500. Compare the stock to Apple, for instance, whose revenues and profits are likely to shrink this year, even as it trades at 29x this year’s earnings estimate. The ongoing return to rationality and capital accountability, along with extreme valuations in the megacap tech stocks, have us more excited about our portfolio’s prospects than we can remember for quite some time.”
6. VERIZON COMMUNICATIONS INC
Number of HFs: 61
Verizon Communications Inc. (NASDAQ: VZ), established on June 30, 2000, resulted from the merger of Bell Atlantic Corp. and GTE Corp., marking one of the most significant consolidations in U.S. business history.
Verizon shares lost nearly 28% of their value over the last couple of years. A key reason investors have been bearish on Verizon (NYSE: VZ) is because of its disappointing growth rate. However, the company is working on turning things around. It should soon unveil its latest plan to stimulate growth -- a streaming services partnership with Netflix and Warner Bros. Discovery.
It looks like these recent initiatives are having an impact on VZ’s stock price. Verizon shares returned nearly 11 percent last month as compared to AT&T’s 7 percent loss returns and T-Mobile’s 6 percent loss during the same period.
Ariel Global Fund said the following about Verizon Communications Inc. (NYSE:VZ) in its Q2 2023 investor letter a few months ago:
“Global communications and technology leader, Verizon Communications Inc. (NYSE:VZ), also weighed on performance in the period on mixed earnings results. Consolidated revenues came in slightly below expectations, EBITDA was in-line and management reiterated full year 2023 guidance. Although share price action has been weak, we find the company valuation to be compelling and the approximately 7% dividend yield to be both stable and secure. We view Verizon as one of the best positioned telecoms in the world. Looking forward, we expect the free cash flow to grow significantly in the years ahead as Verizon moves past the secular peak in 5G capital spending.”
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Disclosure: None. 10 Best Telecom Companies to Invest In is originally published at Insider Monkey.
