The U.S. telecommunications industry is presently well poised, with momentum expected to sustain through 2016. Moody’s Investors Service forecasts that 2016 industry revenues, including equipment sales, will grow around 3% to 4% and wireless EBITDA (earnings before interest, taxes, depreciation and amortization) margins will expand about 1%.
Telecommunications was one of the few industries that underwent rapid technological improvement even during the recession. Communications and the need to remain connected are very human. An era of digitization and technology has been built essentially on this human need.
Rising demand for technologically superior products has given a silver lining to the telecom industry in an otherwise tough environment. As demand rose significantly, telecom equipment manufacturers received more and more orders from telecom carriers.
Wireless Is the Key
Wireless networks are the key for future growth of the overall telecom industry. Wireless network standards are continuously evolving worldwide in order to provide faster speed. Long-Term Evolution (LTE), the most sought after super-fast (4G) wireless communications technology, is gaining rapid momentum. Following significant deployment of 4G LTE networks, LTE-A (Long-Term Evolution Advanced) wireless networks are gradually finding a solid foothold.
The latest version of LTE-A network, which is popularly known as LTE-Advanced Pro (3GPP Release 13) will be a major step toward the smooth transition from 4G to the upcoming 5G network standard. As per a report by research firm iGR, U.S. telecom operators will spend around $104 billion during 2015-25 to upgrade their existing 4G networks to 5G standards and thereafter, execute full installation of 5G wireless services. This bodes well for wireless infrastructure developers (equipment manufacturers) with enormous opportunity for growth.
As wireless networks run on radio frequency, spectrums (airwaves) have naturally become the most sought after commodity in the industry. U.S. telecom regulator – Federal Communications Commission (FCC) — had concluded an Advanced Wireless Servies-3 (AWS-3) spectrum auction in Jan 2015, accumulating a record-breaking $44.89 billion. The FCC kicked off the 600 MHz low-band airwaves auction, popularly known as — Incentive Auction – on Mar 29, 2016, which is expected to be a runaway hit.
We expect wireless networks to provide the primary impetus to the telecom industry. In this regard, Internet of Things (IoT) holds the potential to emerge as the numero uno factor for future growth in the space. According to a report by research firm International Data Corporation (IDC), worldwide spending on IoT will grow at a 19.2% compound annual growth rate to nearly $1.7 trillion in 2020 from $698.6 billion in 2015. Exponential growth of Internet-connected devices will be a major boom for wireless infrastructure gear makers.
Our Top Pick
The U.S. wireless equipment industry has lately emerged as an intensely contested space where success thrives largely on technical superiority, quality of services and scalability. In order to stay abreast of competition, existing players need to be constantly on their toes, introducing innovative products to gain from the industry’s growing momentum. At this stage, we believe investors should choose stocks which promise strong near-term growth and carry a favorable Zacks Rank. Taking into account these factors, we present three such stocks for investors to consider:
Motorola Solutions Inc. (MSI – Analyst Report): Based in Schaumburg, IL, Motorola Solutions is a leading communications equipment manufacturer, and has strong market positions in bar code scanning, wireless infrastructure gear, and government communications. The company currently holds a Zacks Rank #1 (Strong Buy).
Motorola Solutions continues to boost its public safety LTE portfolio by investing heavily in Android and new devices like TC55 and LEX 700 and the newly launched LEX L10. In order to boost its public safety software portfolio, Motorola Solutions completed the purchase of U.K.-based communications operator Airwave Solutions Ltd. The acquisition is projected to boost full year revenues by approximately $450 million. At present, the Zacks Consensus Estimate for 2016 reflects earnings growth of 32.8% and revenue growth of 4.3% year over year.
Ubiquiti Networks Inc. (UBNT – Analyst Report): Headquartered in San Jose, CA, Ubiquiti Networks along with its subsidiaries offers wireless solutions for service providers and enterprises. Its service-provider product platforms provide carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, while enterprise product platforms offer wireless LAN infrastructure, video surveillance products and machine-to-machine communication components. The company currently holds a Zacks Rank #2 (Buy).
Ubiquiti has an excellent global business model that is highly flexible and adaptable to any kind of change in the markets. At present, the Zacks Consensus Estimate for 2016 reflects earnings growth of 8.2% and revenue growth of 8.4% year over year.
Sonus Networks Inc. (SONS – Snapshot Report): Headquartered in Westford, MA, Sonus Networks is a leading provider of voice infrastructure products for the new public network. Sonus’ solutions enable service providers to deploy an integrated network capable of carrying both voice and data traffic, and to deliver a range of innovative, new services. The company currently holds a Zacks Rank #2 (Buy).
Sonus Networks serves a broad-range of telecom service providers including long distance carriers, local exchange carriers, Internet service providers, wireless operators, cable operators, telephone companies, and carriers that provide services to other carriers through direct sales and indirect channels. Currently, the Zacks Consensus Estimate for 2016 reflects a whopping 68.8% year-over-year earnings improvement and 8.4% revenue growth.
Substantial technology invention and innovation have resulted in significant competition within the wireless telecom equipment industry. Product life-cycle and upgrade-cycle have gone down drastically with several firms coming out with new versions of products and services, back to back, within very short spans of time. We believe that under this competitive scenario, companies with strong product portfolio and solid order backlog, along with visible near-term growth prospects, provide respectable risk/reward profiles.