The Zacks Diversified Communication Services industry is poised to benefit from healthy demand trends led by increased fiber densification and accelerated 5G deployment across the globe. However, high capital expenditures for infrastructure upgrades, unpredictable raw material prices, geopolitical conflicts and elevated inventory levels amid a challenging macroeconomic environment and uncertain market conditions have dented the industry’s profitability.
Nevertheless, Chunghwa Telecom Co., Ltd., Telefonica, S.A. and Telenor ASA should benefit in the long run from the wide proliferation of IoT and transition to cloud networks and next-gen technologies driven by higher demand for scalable infrastructure for seamless connectivity.
Industry Description
The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services.
In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.
What's Shaping the Future of the Diversified Communication Services Industry?
Customized Integrated Offering: The companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services to improve margins and business sustainability. The firms are tailoring their offerings to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements.
Short-Term Profitability Compromised: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the vast proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE (Long-Term Evolution), broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks.
Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has been compromised. High raw material prices due to elevated inventory levels, economic sanctions against the Putin regime and intensifying war-mongering conditions in the Middle East have further affected the operation schedules of various firms.
Low Latency, High Bandwidth Applications Gaining Precedence: The industry participants are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses. At the same time, the firms continue to focus on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers.
Also, these firms offer the flexibility to better manage data traffic by leveraging indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing. In addition, the industry participants are focusing on other revenue-generating opportunities in adjacent verticals such as consumer goods, precision agronomy, animal agriculture and the digital health services market to optimize production capabilities through access to data and key insights.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #99, which places it in the top 39% 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 bright near-term 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.
Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest 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 Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.
The industry has rallied 15.9% over this period compared with the S&P 500’s and the sector’s growth of 34.9% and 30.6%, respectively.
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 11.19X compared with the S&P 500’s 19.18X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 15.24X.
Over the past five years, the industry has traded as high as 18.45X, as low as 10.38X and at the median of 13.06X.
3 Diversified Communication Services Stocks to Watch
Chunghwa: Headquartered in Taipei City, Taiwan, Chunghwa is the largest carrier in Taiwan. It offers cutting-edge connectivity technologies, including fiber optics, low Earth orbit satellites, 5G/6G, generative artificial intelligence (AI) fields and quantum technologies for accelerating the development of various intelligent emerging applications and research and leading the way in the AI field and its applications.
Chunghwa aims to utilize the All-Photonics Network technology for the development of an innovative and sustainable society with a high-capacity, low-latency, low-power network environment. The stock has gained 9.7% over the past year. Chunghwa carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Telefonica: Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, Telefonica has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage and security.
The rollout of fiber and LTE is set to drive considerable growth. The company has launched 5G+ (5G SA) in Spain, Brazil, Germany and the United Kingdom and plans to increase the 5G SA coverage in core markets by 2025. The Zacks Consensus Estimate for current-year earnings has been revised upward by 6.3% since October 2023.
This Zacks Rank #3 (Hold) stock has a VGM Score of A. The company delivered a trailing four-quarter earnings surprise of 53.2%, on average. The stock has gained 21.5% over the past year.
Telenor: Headquartered in Fornebu, Norway, Telenor offers mobile communication, fixed-line communication and broadcasting services worldwide. The company has completed a $15-billion merger to become a leading telecom services provider in Malaysia that is likely to contribute significantly toward the growth of the country’s digital ecosystem and economy.
The Zacks Consensus Estimate for current-year earnings has been revised upward by 83.3% since October 2023. Telenor has a VGM Score of B. This Zacks Rank #2 stock is up 18.2% over the past year.
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