The Zacks Wireless Non-US industry appears mired in high capital expenditures for infrastructure upgrades, margin erosion, supply-chain disruptions and volatility in raw material prices owing to geopolitical conflicts, wars and high customer inventory levels. However, healthy demand trends stemming from the increasing propensity to stay connected in this digital age should benefit the industry in the long run.

KT Corporation KT, Turkcell Iletisim Hizmetleri A.S. TKC and PLDT Inc. PHI are likely to capitalize on the rising demand for scalable infrastructure for seamless connectivity of wireless and fiber networks, with the wide proliferation of IoT and fast-track 5G deployment.

Industry Description

The Zacks Wireless Non-US industry comprises mobile telecommunications and broadband service providers based on foreign shores. These companies primarily offer voice services, including local, domestic and international calls, roaming services and prepaid and postpaid. The firms provide value-added services, such as the IoT, comprising logistics and fleet management and automotive and health solutions. They also offer content streaming, interactive applications, wireless security services and mobile payment solutions. Some industry players sell mobile handsets and accessories through dealer networks and offer co-billing services to other telecommunications service providers. The firms provide IT solutions, cable and satellite pay television subscriptions, as well as data services and hosting services to residential and corporate clients.

What's Shaping the Future of Wireless Non-US Industry?

Waning Demand for Legacy Services: Increased infrastructure spending for network upgrades has largely compromised short-term margins. Aggressive promotional expenses, lucrative discounts and the adoption of several low-priced service plans to attract and retain customers are eroding profits. A steady decline in linear TV subscribers and legacy services due to a challenging macroeconomic environment and high inflation adds to the margin woes. Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade their network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture. 

Network Convergence: The convergence of network technologies requires considerable investments from traditional carriers (telecom and cable) and cloud service providers. With the exponential growth of mobile broadband traffic and home Internet solutions, user demand for coverage speed and quality has increased manifold. This has resulted in a massive demand for advanced networking architecture, forcing service providers to upgrade their networks to support the surge in home data traffic. The industry participants continue to invest in networks to increase coverage and implement new technologies to optimize network capabilities. Further, there is a continuous need for network tuning and optimization to maintain superior performance standards, creating demand for state-of-the-art wireless products and services. Moreover, telecom services show a weak correlation to macroeconomic factors as these are considered necessities. This, in turn, has led the carriers to focus more on network upgrades to cater to the evolving customer needs.

Short-Term Profitability at Stake: High raw material prices due to the Middle-East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. Wireless operators face challenges due to the disruptive rise of over-the-top service providers in this dynamic industry. Price-sensitive competition for customer retention in the core business is expected to intensify in the coming days. Aggressive competition is likely to limit the ability to attract and retain customers and affect operating and financial results.

Story Continues

Zacks Industry Rank Indicates Bearish Trends

The Zacks Wireless Non-US industry is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #142, which places it in the bottom 42% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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 non-US wireless stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags Sector, S&P 500

The Zacks Wireless Non-US industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite in the past year.

The industry has lost 9.9% over this period against the S&P 500’s and sector’s rise of 17.1% and 15.1%, respectively.

One-Year Price Performance

Industry's Current Valuation

The Price/Book ratio is commonly used for valuing wireless stocks. The industry currently has a trailing 12-month P/B of 0.81X compared with the S&P 500’s 7.82X. It is also trading below the sector’s trailing 12-month P/B of 10.03X.

Over the past five years, the industry has traded as high as 3.66X and as low as 0.32X, with a median of 0.8X, as the chart below shows.

Enterprise Value-to-EBITDA Ratio (Past Five Years)

3 Non-US Wireless Stocks to Bet on

KT: Headquartered in Seongnam, South Korea, the company is the largest integrated telecom and digital platform service provider in the Southeast Asian country. It offers mobile, broadband, B2B communications and fixed-line telephony, with an industry-leading market presence in broadband and fixed-line services. KT provides a plethora of digital transformation services and boasts a well-balanced portfolio of diverse subsidiaries focusing on media/content, financial services, real estate developments and commerce industries. KT is leading the fourth industrial revolution with high-speed wireless networks and new ICT technology. It is increasingly focusing on digital health, artificial intelligence (AI), Big Data, cloud and robotics as its next leading businesses. The stock has gained 19.2% in the past year. With a VGM Score of A, the company has a long-term earnings growth expectation of 17.6%. KT currently sports a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here. 

Price and Consensus: KT

Turkcell: Headquartered in Istanbul, Turkey, Turkcell offers digital services in Turkey, Belarus, the Turkish Republic of Northern Cyprus and the Netherlands. It operates across a wide range of businesses, ranging from mobile and broadband services to digital payment systems, mobile messaging applications, digital music platforms, data centers and cloud technologies. The company has invested more than $27 billion over the past three decades to transform Turkey into a global data hub. It remains committed to expanding its end-to-end fiber service to more subscribers by focusing on sustainable growth. It has a VGM Score of A. Turkcell carries a Zacks Rank #2 (Buy).

Price and Consensus: TKC

PLDT: Headquartered in Makati City, the Philippines, PLDT is the leading telecommunications provider in the Southeast Asian country. It has a strategic partnership with Rocket Internet SE, a Europe-based Internet company, to develop online and mobile payment solutions. PLDT operates the country's most extensive international submarine cable network and has activated the U.S.-Transpacific Jupiter cable system to strengthen its extensive fiber network. The company is set to expand further with the completion of two more major international cable systems, namely Asia Direct Cable and the APRICOT cable system. It has a VGM Score of A. This Zacks Rank #2 stock has a long-term earnings growth expectation of 7.5%. 

Price and Consensus: PHI

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This article originally published on Zacks Investment Research (zacks.com).

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