In the second quarter of 2023, telecommunications stocks saw good demand trends with an acceleration in the pace of 5G deployment and increased fiber densification. Despite supply chain issues related to continued chip shortages and a challenging macroeconomic environment, the industry appears to be benefiting from increased demand for scalable infrastructure for seamless connectivity amid a wide proliferation of IoT devices.
A steady pace of 5G rollout and investments by major carriers to increase their fiber footprint in rural areas to bridge the digital divide seemed to inspire confidence in the industry. Telcos have facilitated a seamless transition from an economy-of-scale network operating model to demand-driven operations by providing easy programmability and flexible automation.
Factors at play
The deployment of 5G is gaining momentum: With the exponential growth of mobile broadband traffic and home Internet solutions, the demand for advanced network architecture has multiplied. This has forced service providers to upgrade their networks and support increased home data traffic. To maintain higher performance standards, there is a continuous need for network tuning and optimization, which creates demand for advanced wireless products and services. Additionally, a faster pace of 5G deployment is expected to increase the scalability, security, and universal mobility of the telecom industry and propel the broad proliferation of IoT.
Densification of fibers: The expansion of fiber networks by carriers to support their 4G LTE and 5G wireless standards, as well as wired connections, are acting like tailwinds. The fiber optic cable network is vital for backhaul and 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 complement macro networks to provide widespread coverage.
Price of inflated equipment: The industry is continually facing an acute shortage of chips, which are the building blocks of various equipment used by telecom operators. Additionally, high commodity prices due to inflation, the protracted war between Russia and Ukraine and the resulting economic sanctions against the Putin regime have affected the operating schedule of various businesses. Although various measures have been taken to address the global shortage of semiconductor chips and find ways to increase domestic production, the imbalance between supply and demand has crippled operations and largely affected profitability due to rising equipment prices.
Network convergence: As carriers move towards converged or multipurpose network structures, combining voice, video and data communications in a single network, the industry is increasingly developing solutions to support the convergence of wired and wireless networks. Industry players have enabled enterprises to quickly adapt communication functionality to a wide range of applications and devices with easy-to-use software application programming interfaces. The great proliferation of cloud networking solutions further drives an increase in storage and computing on a virtual plane. As consumers and businesses use the network, the demand for quality network equipment is huge.
Focus on new technologies: Telecommunications companies enable customers to effectively manage exponential bandwidth costs through regular investments in cutting-edge technologies. These include the next-generation DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and PON (Passive Optical Network) platforms that allow service providers to deliver the highest bandwidth to subscribers over any physical connection. Additionally, some companies offer a variety of routes to deliver services through a combination of network-based video transcoding, packaging, storage, and compression technologies needed to deliver new IP video formats and home gateways to connected devices inside and outside the home.
How to choose ?
A slew of telecom stocks are expected to post profits in the coming weeks. Strong earnings performance from the telecom sector could lay the groundwork for future investment and R&D in the 5G-enabled network and devices for superior 5G capabilities as the industry seeks to capitalize on the inherent growth potential.
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Potential winners
AT&T Inc. T: Based in Dallas, TX, AT&T is the second largest wireless service provider in North America and one of the world’s leading communications service operators. Through its subsidiaries and affiliates, the company offers a wide range of communications and business solutions that include wireless, local, long distance, data/broadband and Internet, video, managed network, wholesale and cloud services.
AT&T is taking advantage of the 5G boom. In order to have a seamless transition between Wi-Fi, Long-Term Evolution (LTE) and 5G services, it intends to roll out a national standards-based mobile 5G network. Its 5G service involves the use of millimeter wave spectrum for deployment in dense pockets, while in suburban and rural areas it intends to deploy 5G on the mid and low frequency bands. AT&T currently has a #3 Zacks Rank and +2.08% Earnings ESP. The company is due to release its results before the July 26 opening bell.
AT&T Inc. award and EPS surprise
AT&T Inc. price-eps-surprise | Quote AT&T Inc.
T-Mobile US, Inc. TMUS: Based in Bellevue, WA, T-Mobile is a national wireless service provider. The company offers mobile voice, messaging and data services in the postpaid, prepaid and wholesale markets. T-Mobile is widely rolling out 5G and 4G LTE (Long-Term Evolution) networks. It also provides wireless devices, such as smartphones, tablets and other mobile communication devices and accessories manufactured by various vendors.
T-Mobile’s business is largely driven by its “Un-carrier value proposition,” which aims to improve customer satisfaction by providing the latest products at cheaper rates and simple terms and conditions. Its Ultra Capacity 5G network is powered by the 2.5 GHz mid-range spectrum. T-Mobile plans to reach 300 million people by 2023. The stock currently has an earnings ESP of +3.94% and a Zacks rank of #2. You can see the full list of today’s Zacks #1 Rank stocks here. The company is due to release its results on July 27.
T-Mobile US, Inc. Price and EPS Surprise
T-Mobile US, Inc. price-eps-surprise | Quote from T-Mobile US, Inc.
Motorola Solutions, Inc. MSI: Based in Chicago, Illinois, Motorola is a leading manufacturer of communications equipment. It develops and services two-way analog and digital radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions for a wide range of enterprise markets.
As a leading provider of mission-critical communications products and services worldwide, Motorola has ensured a stable revenue stream from this niche market. The communications equipment manufacturer intends to strengthen its position in the field of public safety by concluding strategic alliances with other players in the ecosystem. This Zacks Rank #2 stock has a profit ESP of +0.07%. The company is due to release its results on August 3.
Motorola Solutions, Inc. Price and EPS Surprise
Motorola Solutions, Inc. price-eps-surprise | Quote from Motorola Solutions, Inc.
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