3 Stocks From the Thriving Communication Industry to Bet On

The Zacks Diversified Communication Services industry is likely to benefit from the diminishing supply chain adversities, increased fiber densification and accelerated 5G deployment across the globe. However, high capital expenditures for 5G 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, Swisscom AG SCMWY, Telefonica, S.A. TEF and Telenor ASA TELNY should benefit in the long run from a higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud networks and related next-gen technologies.

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?

Focus on Low Latency, High Bandwidth Applications: The industry participants are investing considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks to meet exponential video and data demand. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses. At the same time, the industry participants 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.

Diminishing ROI: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. At the same time, the industry participants 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. Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has largely 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.

Integrated Bouquet of Services: To improve profitability, 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. The firms are tailoring their services to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements.

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 #46, which places it in the top 18% 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, primarily due to macroeconomic headwinds.

The industry has lost 11.3% over this period against the S&P 500's growth of 27.4% and the sector's decline of 3.6%.
One-Year Price Performance

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 11.12X compared with the S&P 500's 20.33X. It is trading below the sector's trailing 12-month EV/EBITDA of 15.13X.

Over the past five years, the industry has traded as high as 18.45X, as low as 10.89X and at the median of 13.07X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Diversified Communication Services Stocks to Invest in

Swisscom: Headquartered in Bern, Switzerland, Swisscom offers mobile and fixed-network telecommunications services across the country and Italy. A wealthy domestic market with stable economic conditions, a relatively lax regulatory environment compared to the EU, a dominant market position and a strong leadership team are some of the key growth drivers of the company. With a complete spectrum of state-of-the-art data services, from leased lines to integrated solutions for corporate and residential customers, Swisscom's healthy growth momentum is likely to continue. The stock carries a Zacks Rank #2 (Buy).
Price and Consensus: SCMWY

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 (Long-Term Evolution) is set to drive considerable growth. Also, the company's 5G coverage has reached more than 2,800 towns and cities in the U.K. and about 116 cities in Brazil. The Zacks Consensus Estimate for current-year earnings has been revised upward by 9.7% since January 2024, while that for the next year is up 16.7% since July 2023. This Zacks Rank #2 stock has a VGM Score of A. The company delivered a trailing four-quarter earnings surprise of 46.3%, on average.
Price and Consensus: TEF

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 emerge as 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 85.9% since July 2023. Telenor has a VGM Score of B. This Zacks Rank #2 stock is up 8.5% over the past year.
Price and Consensus: TELNY

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