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4 Telecom Stocks Likely to Outpace Q4 Earnings Estimates

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Supriyo Bose
·8 min read
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In the fourth quarter of 2020 telecom stocks witnessed a roller-coaster ride as the coronavirus pandemic continued to wreak havoc. Stringent lockdown restrictions virtually crippled business operations, affected sector profitability and triggered insecurity within the industry. The Sino-U.S. technology warfare further seemed to polarize the industry into two distinct halves, bringing an element of uncertainty within the telecom sector. Washington continued to pile up pressure on allied countries to deter the presence of China-based communication equipment manufacturers Huawei and ZTE in their 5G networks. The political slugfest for 5G supremacy in the backdrop dovetailed with the administrative efforts to set guardrails and legislation to safeguard domestic interests.

However, a steady pace of 5G deployments and investments by leading carriers to increase their fiber footprint in rural areas to bridge the digital divide seemed to infuse some confidence in the beleaguered sector. Telecom firms also stepped up efforts to provide the vital lifeline to countless humans. The pandemic further highlighted the need for high-speed, high-bandwidth and low-latency connections — the hallmarks of the 5G network — for digital sustainability. With digital sustainability being the norm of the day, telecom firms increasingly gained precedence as virtual communication replaced in-person exchanges with social distancing and the work-from-home option in vogue.

Factors at Play

5G Momentum Picks Up Steam

The 5G momentum picked up steam during the fourth quarter as more 5G handsets models were launched. In a concerted effort to thwart the increased 5G dominance of South Korea and China and bring the United States at the forefront of the 5G race, the FCC began auctioning some of the airwaves in the 3.7 gigahertz-to-4.2 gigahertz area of spectrum — widely known as the C-band. The much-anticipated Auction 107 is offering 280 megahertz of spectrum in the 3.7-3.98 GHz band that is likely to provide key mid-band spectrum for potential 5G deployments in the next few years. The C-Band offers significant bandwidth with better propagation characteristics compared with mmWave, which has a short range and requires a high density of sites to achieve coverage. Consequently, it is deemed to be a prized asset for carriers that lack considerable mid-band spectrum holdings.

About 57 bidders are participating in this FCC-run go-for-broke auction. At a time when the global economy is hard hit by the coronavirus pandemic, the significant interest in the auction signifies that bidders are willing to spend more money on 5G spectrum with solid ROI potential. The auction is widely expected to unlock superfast 5G networks across of the country, thereby generating healthy revenues that are likely to offset the high auctioning expenses.

Federal Support

The FCC has adopted a new set of rules for foreign companies seeking to operate in the U.S. telecom market. This is likely to improve the transparency and timeliness of the cross-agency review process for applications for licenses with definite timeframes for completion of the process. The changes formalize the long-standing review process, informally known as Team Telecom review, and require applicants to answer a standardized set of national security and law enforcement questions. In addition to a 120-day initial review period followed by a discretionary 90-day additional assessment, applicants are required to make particular certifications to help protect national security and law enforcement interests.

The Senate passed the Internet of Things Cybersecurity Improvement Act that is aimed to boost the cybersecurity of Internet-connected devices. The Act mandates all private sector entities supplying such devices to the federal government to conform to minimum security recommendations issued by the National Institute of Standards and Technology and notify the government about possible vulnerabilities of the devices against cyber-attacks. The House also unanimously passed the USA Telecommunications Act that apportioned $750 million for the deployment of 5G network across the country. With representatives from the FCC and other federal agencies, the advisory committee formed by the bill would advise on the grant funding in order to spur innovation within the domestic market and thwart the hegemony of China-based telecommunications companies.

Administrative Guardrails

The FCC discarded the petition of ZTE Corp. to reconsider the decision of designating it as a threat to national security interests and affirmed it as a potential risk to the U.S. communications network. The government also granted Chinese firm, ByteDance, which owns TikTok, certain extension to divest it as several issues still remained unresolved despite ongoing negotiations to iron out the fine prints of the deal. In addition, the Trump administration came down heavily on China-based firms that are allegedly owned or controlled by the military by issuing an executive order that prohibits any U.S. investment in these entities. The order banned trading with 35 China-based companies, including three telecom firms China Mobile, China Telecom, and China Unicom.

In order to thwart the hegemony of China’s hardware-based 5G model, leading U.S. telecom firms and other technology hotshots began pushing for a software-based approach to build an all-pervasive 5G network. This is likely to encourage the development of open radio access networks, or RAN, which power cellular technology. Several leading U.S. telecom carriers also turned to Indian handset manufacturers to lower their dependence on China as the technology cold war intensified. The shift in manufacturing base away from the communist nation is likely to be more pronounced in the near future with the backing from the federal government.

How to Pick?

A multitude of telecom stocks is likely to report earnings in the coming weeks. A solid earnings performance of the telecom sector could sow the seeds for future investments in network and 5G-enabled devices for superior 5G readiness, as the industry seeks to pick itself up after the virus-led mayhem.

Amid a diverse range of companies, choosing the right stock for your portfolio could appear to be a colossal task. While it is impossible to be sure about such outperformers, our proprietary methodology makes the process fairly simple.

Our research shows that for stocks with the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold), chances of a positive earnings surprise are as huge as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is an important ingredient of our proven model, which along with a top Zacks Rank creates the perfect combination to determine stocks with the best chances to pull off a positive surprise in the upcoming earnings announcements. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Potential Winners

Altice USA, Inc. ATUS: Headquartered in Long Island City, NY, Altice USA, Inc. is one of the largest broadband communications and video services providers in the United States.

This Zacks Rank #3 stock has an Earnings ESP of +3.11%. The company is scheduled to report results on Feb 10, after the closing bell.

Arista Networks, Inc. ANET: Santa Clara, CA-based Arista Networks, Inc. is engaged in providing cloud networking solutions for data centers and cloud computing environments.   

Arista currently has a Zacks Rank #3 and an Earnings ESP of +0.76%. The company is slated to report results after the closing bell on Feb 18.

T-Mobile US, Inc. TMUS: Headquartered in Bellevue, WA, T-Mobile is a national wireless service provider, offering mobile voice, messaging and data services in the postpaid, prepaid and wholesale markets.

The company is likely to report results on Feb 4, after market close. The stock currently has an Earnings ESP of +11.17% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

Telephone and Data Systems, Inc. TDS: Based in Chicago, IL, Telephone and Data Systems, Inc. is a diversified telecom service provider offering wireless and wireline services in 36 states.

This Zacks Rank #2 stock has an Earnings ESP of +309.09%. The company is likely to report results after the closing bell on Feb 18.

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