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3 Wireless Stocks Likely to Ride on Brisk 5G Deployments

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The Zacks Wireless National industry appears to be mired in raw material price volatility and supply-chain disruptions due to continued chip shortage and the Russia-Ukraine war that have affected the delivery schedule of most companies. Moreover, high capital expenditures for infrastructure upgrades for 5G deployment and margin erosion due to price wars have dented the industry’s profitability.

Nevertheless, Verizon Communications Inc. VZ, Cogent Communications Holdings, Inc. CCOI and Gogo Inc. GOGO are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid a wide proliferation of IoT and faster pace of 5G rollout.

Industry Description

The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication services and business solutions. These include wireless, wireline, local exchange, long-distance calls, data/broadband and Internet, video, managed networking, messaging, wholesale and cloud-based services to retail consumers. The firms within the industry also offer IP-based voice and data services, targeted advertising, television, streaming content, cable networks and publishing operations, multiprotocol label switching networking, fiber optic long-haul network, hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where it is required and is most effective — whether in the cloud, the network, or on their premises.

What's Shaping the Future of Wireless National Industry

Raw Material Volatility Affecting Operations: The industry is continuously facing an acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. Moreover, high raw material prices due to the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. Although various steps have been taken to address the global shortage of semiconductor chips and devise ways to increase domestic production, the demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. The government has also pledged bipartisan support to ramp up production capacity and reduce supply bottlenecks while eliminating dependence on countries like China. However, unless the policy guidelines assume a tangible effect, the industry firms are likely to face short-term challenges, affecting their cash flow.

Evolution to Software-Centric Model: Aggressive promotional expenses, lucrative discounts and adoption of several low-priced service plans to attract and retain customers are eroding profits. A steady decline in linear TV subscribers and legacy services are adding to the margin woes. Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture. This has realigned the companies’ wireless network toward a software-centric model to cater to the increasing business demands and customer needs through remote facilities. The companies are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization.

Fast-Track Deployment of 5G & Fiber Optic: Most industry participants are deploying the latest 4G LTE Advanced technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrades. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Further, leading firms within the industry have been deploying the C-Band spectrum to gain additional coverage. These mid-band airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed. However, increased infrastructure spending has largely compromised short-term margins. Unless the high investments generate healthy ROI in the long run, it is likely to weigh on the bottom line.

Holistic Business Model: The industry participants are taking a holistic approach to content delivery to help providers anticipate demand for more personalized, relevant and on-the-go experiences. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to offer new IP video formats, live TV, streaming services and home gateways to connected devices inside and outside home. In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to the business models.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #80, which places it at the top 32% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates encouraging prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate.

Before we present a few wireless national stocks that are well-positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Wireless National industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year largely due to supply-chain disruptions and a challenging macroeconomic environment, despite underlying solid growth potential.

The industry has lost 24.2% over this period against the S&P 500 composite and the sector’s fall of 1.9% and 15.7%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 6.54X compared with the S&P 500’s 13.48X. It is also below the sector’s trailing-12-month EV/EBITDA of 11.77X.

Over the past five years, the industry has traded as high as 12.03X and as low as 5.44X and at the median of 6.78X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Wireless National Stocks Likely to Move Ahead of the Pack

Verizon Communications Inc.: Based in NY, Verizon is one of the world’s leading communications service carriers. Verizon is witnessing significant 5G adoption and fixed wireless broadband momentum. The telecom giant plans to accelerate the availability of its 5G Ultra Wideband network, covering 175 million people by the end of 2022. The stock has a long-term earnings growth expectation of 3.6% and a VGM Score of B. The Zacks Consensus Estimate for current-year earnings has been revised 4% upward in the past year. It delivered an earnings surprise of 2.9%, on average, in the trailing four quarters. With one of the most efficient wireless networks in the United States, Verizon continues to deploy the latest 4G LTE Advanced technologies to deliver faster peak data speeds and capacity for customers, driven by customer-focused planning, disciplined engineering and constant strategic investment. Verizon has been aggressively forging ahead to expand its fiber optics networks to support 4G LTE and 5G wireless standards as well as wireline connections. The company remains focused on making necessary capital expenditures due to the continued expansion of 5G mmWave in new and existing markets, the densification of the 4G LTE wireless network to cater to huge traffic demands across multiple verticals and the continued deployment of the fiber infrastructure. The company’s growth strategy includes 5G mobility, nationwide broadband and mobile edge compute and business solutions. It expects these trends to drive 4% growth in service and other revenues in 2024 and beyond. Verizon carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: VZ

Cogent Communications Holdings, Inc.: Founded in 1999 and headquartered in Washington, DC, Cogent Communications Holdings, Inc. is a Tier 1 Internet Service Provider (ISP) that offers low-cost, high-speed Internet access, private network services and colocation center services with ultra-low latency data transmission. It addresses the dynamic needs of various small and medium-sized businesses, ISPs and other bandwidth-intensive organizations. Being a leading provider of high-speed Internet access, Cogent benefits from cost-effective operations. The company offers a streamlined set of products, which help eliminate redundant costs and give greater pricing flexibility. It incurs relatively lower costs compared with competitors owing to the usage of Internet routers without additional legacy equipment. Backed by efficient network expansion and integration execution, Cogent also offers high-quality Internet service due to the highly economical metro and intercity network infrastructure. Its seamless network delivers high throughput, which reduces the frequency of data packets dropped during transmission compared with traditional circuit-switched networks, thereby creating more reliable and robust network infrastructure. The stock carries a Zacks Rank #2 (Buy).

Price and Consensus: CCOI

Gogo, Inc.: Founded in 1991 and headquartered in Chicago, IL, Gogo is a premier global provider of network and broadband connectivity products and services for the business aviation market. With the divesture of the commercial in-flight connectivity division, the company has restructured its business model for more focus on its core operations. The stock has gained 471.6% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised 75.7% upward over the past year, while that for the next year is up 23.5% over the same time frame. The transformative sale agreement has unlocked new business opportunities for Gogo within the business aviation market and has improved its liquidity position. It delivered an earnings surprise of 65%, on average, in the trailing four quarters. The stock sports a Zacks Rank #1.

Price and Consensus: GOGO

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Verizon Communications Inc. (VZ) : Free Stock Analysis Report

Gogo Inc. (GOGO) : Free Stock Analysis Report

Cogent Communications Holdings, Inc. (CCOI) : Free Stock Analysis Report

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