Telecom stocks took a beating in the back half of 2021. Heading into 2022, investors wonder which of the two main players in the telecom sector — cable stocks or phone companies — will bounce back quicker.
Some analysts say it’s cable stocks. They prefer such providers as Comcast (CMCSA) and Charter Communications (CHTR) over phone companies AT&T (T), T-Mobile US (TMUS) and Verizon Communications (VZ). Also known as telcos, the latter three are the biggest providers of wireless phone services.
“There’s a false equivalence being drawn between the competitive impacts that the telcos will have on the cable operators as the telcos build fiber, and the competitive impacts that the cable operators will have on the telcos as the cable operators push wireless,” analyst Craig Moffett of MoffettNathanson said in an email. MoffettNathanson is part of SVB Financial Group.
Moffett added: “On almost every dimension, from time to market to the profitability of various cross-subsidy strategies, the circumstances favor cable over the telcos.”
Cable TV firms have morphed themselves and worked their way into becoming part of the overall telecom sector. As they face slowing demand for high-speed internet services next year, they’re ramping up wireless phone services. Plus, they shrewdly got into the wireless business by renting network capacity from Verizon.
Telecom Stocks Underperform S&P 500
For them, the pain hasn’t been as severe. Comcast stock has retreated 8% in 2021 while Charter stock is down 1.5%. Meanwhile, AT&T stock has dropped 16%, though it’s up a bit from a recent 10-year low. T-Mobile stock has shed 12% while Verizon stock is off 9%. The S&P 500 has gained 24% in 2021.
The wireless industry faces slowing growth for high spending “postpaid” subscribers in 2022. The big question is which carriers will take or give up market share in a slowing market. Cable TV firms have surprised by getting roughly 30% of postpaid subscribers in recent financial quarters.
“The S&P telecom sector stands at multi-year lows on a variety of valuation measures, which is in contrast to solid earnings revisions patterns and only modest negative correlations to rising interest rates,” Morgan Stanley analyst Simon Flannery said in a note to clients.
Still, the sell-off in telecom stocks eased in mid-December even as the Nasdaq 100 continued to struggle. About three-fourths of companies in the Nasdaq 100 are technology stocks. Rising interest rates are a worry for tech stocks because they could reduce free cash flow.
What About Inflation Impact On Telecom Stocks?
There are other concerns. Unlike many industries, inflation won’t lead to higher consumer prices in the wireless industry.
Wireless firms continue to battle on price rather than network quality or other features, says Moffett. Further, price competition has intensified as Charter and Comcast introduce cheaper monthly plans. Comcast had 3.67 million mobile lines in service as of Sept. 30 while Charter had 3.18 million.
Cable TV firms bundle wireless and broadband services together in promotions. At KeyBanc Capital Markets, analyst Brandon Nispel says cable firms can utilize their high-margin broadband business to subsidize mobile in a way that results in lower wireless industry pricing.
“Cable valuations bottomed in 2018 and 2019/2020 were two of cable’s best years, leaving us to believe we’re nearer a bottom than most would expect,” he said in his note to clients.
Still, cable TV companies have their worries. Video subscribers continue to disconnect and switch to internet streaming services. But that trend has been built-in to cable stock valuations for years.
Cable Stocks: Broadband Business Key
The bigger worry for cable companies is the high-margin broadband business. AT&T and other telcos are suddenly investing in new fiber-optic connections to homes.
UBS estimates that telco fiber-optic services will reach 50% of U.S. households by the end of 2025, up from 30% currently.
Both Verizon and T-Mobile, meanwhile, are ramping up fixed wireless broadband services to homes delivered over new 5G networks. Verizon has said its fixed broadband service will reach 30 million homes by the end of 2023. T-Mobile aims to have 7-8 million fixed subscribers by 2025.
The good news for cable stocks, says Moffett, is that it’ll take years for their 5G and new telco fiber hook-ups to siphon off cable customers.
Over the past 25 years, one way for telecom stocks to address growing competition or slowing growth has been through mergers and acquisitions. Alas, that strategy has played itself out for the most part.
T-Mobile Stock Buyback A Catalyst?
Federal regulators approved T-Mobile’s acquisition of Sprint in April 2020 with conditions. Regulators aimed to create a fourth national wireless provider in Dish Network. But Dish’s build-out of a 5G network remains in the very early stages.
In any event, wireless consolidation is likely over. A merger between the two biggest cable TV firms, Comcast and Charter, isn’t in the cards, analysts say. Family-owned Cox Communications, the No. 3 cable TV firm, might still be gobbled up by either Comcast or Charter.
A merger between satellite TV operators DirectTV, now controlled by private equity firm TPG Capital, and Dish Network (DISH) might be doable, some analysts speculate. Both DirecTV and Dish have been losing video subscribers. But a DirecTV-Dish merger wouldn’t impact wireless or broadband competition.
As it stands, T-Mobile could be one of the best-positioned telecom stocks owing to the 5G-ready radio spectrum it acquired in the Sprint deal.
But T-Mobile stock has faltered in 2021 amid worries over slowing market share gains. A big catalyst for T-Mobile would be a stock repurchase announcement, analysts say.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
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