In the past five trading days, telecom stocks initially witnessed an uptrend as the Trump administration unveiled a slew of strategic steps to retain the United States’ leadership position in 5G. However, the initial optimism gradually fizzled out with the apprehension of a muted earnings season and uncertainty regarding the merger of T-Mobile US Inc. TMUS and Sprint Corporation S. With the industry at the threshold of a nationwide 5G launch, stiff resistance from the Department of Justice (“DOJ”) antitrust staff seems to have dented the competitive edge of the telecom sector in general and some of its leading firms in particular.
In order to augment rural connectivity speed, the Federal Communications Commission (“FCC”) has decided to invest $20.4 billion over the next decade to build high-speed broadband networks. The focused initiative, dubbed as the Rural Digital Opportunity Fund, is likely to benefit up to 4 million households and businesses in the rural areas. The FCC will take recourse to a reverse auction policy to provide funds to rural service providers under the Rural Digital Opportunity Fund and bridge the digital gap. The areas eligible for the new auction will include those without access to high-speed service, typically in the range of 25 Mbps downstream to 3 Mbps upstream.
Also, the FCC announced that the third round of 5G spectrum auction will take place on Dec 10 to make more spectrum available for super-fast 5G connectivity. It has already auctioned 1,550 megahertz of spectrum since November 2018 to boost 5G connectivity for commercial wireless providers. The latest auction will be the largest with 3,400-megahertz spectrum up for grabs in three different spectrum bands — 37 GHz, 39 GHz, and 47 GHz. As the telecom service providers gain prominence, steady investments are required to upgrade the networks with state-of-the-art technology. Dispelling widespread speculations that the government intends to nationalize this high priority networks, Trump asserted that the administration has no such plans and would rather encourage privatization for swift policy action.
However, as focus shifted to corporate earnings and declining estimates, the stocks witnessed a volte-face and nullified the earlier gains. Earnings growth projections for the first quarter of 2019 and for the second quarter are currently hovering in the negative territory, fuelling speculations of an impending recession. Although an economic downturn is likely to occur as part of a boom and bust cycle, given the fact that we are in the midst of the longest ever bull market, recessionary fears seem a bit exaggerated. The decline in earnings estimates is largely due to unfair year-over-year comparisons with the respective quarters of 2018, when corporate tax cuts significantly boosted earnings. Nevertheless, broad-based expectations of a soft earnings season seem to have dampened investor sentiments, triggering a downtrend.
On the other hand, uncertainty regarding U.S.-China trade negotiations persisted as the nine-month old trade war that disrupted supply chains and weighed on the world economy is yet to be fully resolved. Although both the warring countries have agreed upon the enforcement mechanisms, the finer details are reportedly still under deliberations. As the industry awaits an early resolution to the prolonged bilateral talks to better focus on the impending 5G boom, efforts are on to give a final push to a mutually acceptable trade deal that is easily enforceable. Further, the FCC plans to stonewall the entry of China Mobile into the U.S. market, stirring a fresh sticking point in the bilateral trade talks.
Among other developments, the DOJ has reportedly raised a red flag regarding the probable merger of the third- and the fourth-largest wireless providers in the United States under its current structure. The antitrust authorities are apparently concerned about the impact of the merger on pricing and job market, although a final decision is still awaited. As the 5G race appears to head for a photo finish with both the United States and China being on equal footing for 5G readiness, the industry could have been better off sans such uncertainty creeping within the ranks.
Regarding company-specific news, lawsuit settlement, divestment, earnings, spectrum buy and takeover talks primarily took the center stage over the past five trading days.
Recap of the Week’s Most Important Stories
1. Qualcomm Incorporated QCOM recently reached a surprise settlement with Apple Inc. to end the bitter patent battle that threatened to jeopardize their businesses.
Drawing curtains on prolonged patent litigations, the former allies turned antagonists decided to call a truce, with Apple paying an undisclosed amount to Qualcomm. The agreement also includes a six-year license agreement effective Apr 1, 2019 along with a two-year extension option and a multi-year chipset supply agreement. (Read more: Qualcomm-Apple Truce: Is There More Than What Meets the Eye?)
2. Corroborating industry grapevines, AT&T Inc. T has divested its 9.5% ownership stake in Hulu — an American entertainment firm that provides over-the-top streaming services — for $1.43 billion (1.09 billion pounds).
AT&T aims to utilize the sale proceeds to reduce its burgeoning debt burden that swelled to $176.5 billion at year-end 2018 primarily due to the acquisition of Time Warner assets. (Read more: AT&T Sells Hulu Stake: Is Debt or Imminent Streaming at Play?)
3. Ericsson ERIC reported solid first-quarter 2019 financial results, wherein both the top line and the bottom line increased year over year.
Non-IFRS earnings came in at SEK 0.80 (9 cents) per share compared with SEK 0.11 in the year-ago quarter. The bottom line beat the Zacks Consensus Estimate by 5 cents. Quarterly net sales increased 12.7% year over year to SEK 48,906 million ($5,329.9 million), primarily driven by sales growth in Networks business. (Read more: Ericsson Q1 Earnings Beat Estimates, Revenues Up Y/Y)
4. TELUS Corporation TU recently announced that it has secured new 600 MHz spectrum licenses in British Columbia, Alberta, Saskatchewan, Ontario and Quebec for a consideration of $931 million.
The deployment of this latest spectrum is crucial to TELUS’ 5G growth strategy coupled with better network quality, speed and coverage. The 600 MHz band can travel distances in rural areas and penetrate barriers to better reach in-building locations. (Read more: TELUS Rides on 5G Growth, Secures New Spectrum Licenses)
5. According to media speculations, Zayo Group Holdings, Inc. ZAYO appears to be pondering about its potential takeover by a private-equity consortium, which includes Digital Colony Partners, EQT and Stonepeak Infrastructure Partners.
Zayo’s extensive network footprint, diversified product portfolio and ability to penetrate in different markets are laudable. It has been attracting takeover interest from private equity funds since November 2018. (Read more: Zayo Shares Up on Takeover Speculations by P-E Consortium)
The following table shows the price movement of some of the major telecom stocks over the past week and during the past six months.
In the past five trading days, Qualcomm was the biggest gainer with its share price increasing 28.8% while Sprint was the largest decliner with its stock down 5.3%.
Over the past six months, SBA Communications has been the best performer with its stock appreciating 21.8% while Sprint declined the most with its shares falling 14.5%.
Over the past six months, the Zacks Telecommunications Services industry has declined 0.6% while the S&P 500 rallied 4.6%.
What’s Next in the Telecom Space?
In addition to product launches and deployment of 5G technologies, all eyes will remain glued to the impending earnings season and how the United States and China continue their negotiations for a long-term solution to the trade war.
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Zayo Group Holdings, Inc. (ZAYO) : Free Stock Analysis Report
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