Supriyo Bose
Companies in the Zacks Wireless Non-US industry appears to be facing supply chain disruptions and continued chip shortage despite accelerated investments in network infrastructure for the deployment of cutting-edge 5G technology. Also, a challenging macroeconomic environment and the prolonged Russia-Ukraine war have led to intense volatility in raw material prices.
Nevertheless, KT Corporation (KT Quick QuoteKT - Free Report) , PLDT Inc. (PHI Quick QuotePHI - Free Report) and Ceragon Networks Ltd. (CRNT Quick QuoteCRNT - Free Report) might benefit in the long run with significant long-term growth opportunities and rising demand for scalable infrastructure for seamless connectivity with the wide proliferation of IoT led by a faster pace of 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
Supply Chain Headwinds: With the exponential growth of mobile broadband traffic and home Internet solutions owing to the increasing work-from-home trend, 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. 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. However, uncertainty regarding the continued chip shortage and supply-chain disruptions extending beyond semiconductors have crippled the manufacturing operations of most firms, leading to curtailed production schedules. This has led to acute demand-supply imbalance, as the industry faces a dearth of essential fiber materials, shipping delays and shortages of containers and other raw materials, affecting the expansion and rollout of new broadband networks. Extended lead times for basic components have negatively impacted the delivery schedules and escalated costs. Moreover, raw material prices have risen significantly owing to economic uncertainty driven by the Russia-Ukraine war and coronavirus-led adversities, affecting the short-term profitability of most firms.
Margin Woes Led by Aggressive Price Competition: Telecom services show a weak correlation to macroeconomic factors as these are considered necessities. Wireless operators have been facing challenges due to the churn rate and 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. The companies follow an aggressive promotional strategy to increase penetration in the smartphone market. However, these efforts tend to affect profitability in the near term. Mobile phone operators also need to take measures to reduce costs and optimize business operations. Aggressive competition could limit their ability to attract and retain customers.
Demand for Superior Connectivity Gains Precedence: In addition to delivering mission-critical communication services, the companies are taking steps to accelerate subscriber additions and improve churn management. They aim to offer an exceptional wireless experience to consumers and business customers by providing superior network connectivity. The wireless carriers are expanding their footprint while adopting unlimited plans to enhance average revenue per user. They are progressing on strategic objectives, growing customer base by increasing handset connections and customer loyalty to boost revenues and profitability. Furthermore, the industry participants are taking a holistic approach to content delivery. They are offering various pathways for delivering services through a combination of network-based video transcoding and compression technologies to offer IP video formats, live TV and streaming services.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Wireless Non-US industry, which has 14 constituent companies, is housed within the broader Zacks Computer and Technology sector. It currently has a Zacks Industry Rank #155, which places it in the bottom 38% 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 grim 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 Outperforms Sector, Lags S&P 500
The Zacks Wireless Non-US industry has outperformed the broader Zacks Computer and Technology sector but lagged the S&P 500 composite in the past year.
The industry has lost 11.3% over this period compared with the S&P 500’s and sector’s decline of 1.4% and 22%, respectively.
One-Year Price Performance
Industry's Current Valuation
The Enterprise Value-to-EBITDA (EV/EBITDA) ratio is commonly used for valuing wireless stocks. The industry currently has a trailing 12-month EV/EBITDA of 2.44X compared with the S&P 500’s 13.17X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 9.98X.
Over the past five years, the industry has traded as high as 22.74X, as low as 2.37X, with a median of 7.61X, as the chart below shows.
Enterprise Value-to-EBITDA Ratio (Past Five Years)
3 Non-US Wireless Stocks to Watch
KT Corporation: Headquartered in Seongnam, South Korea, KT Corporation 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. It offers 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 Corporation is leading the fourth industrial revolution with high-speed wireless networks and new ICT technology. It is increasingly focusing on Digital Health, AI, Big Data, Cloud and Robot as its next leading businesses. The Zacks Consensus Estimate for its current-year earnings has been revised 35% upward over the past year. The stock has gained 1.8% in the past year and has a long-term earnings growth expectation of 7.7%. KT currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: KT
PLDT Inc.: Headquartered in Makati City, the Philippines, PLDT is the leading telecommunications provider in the Southeast Asian country. The company operates in three segments — Wireless, Fixed Line and Others. It has a strategic partnership with Rocket Internet SE, a European Internet company, to develop online and mobile payment solutions. PLDT operates the country's most extensive international submarine cable network and has activated the US-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 set to be completed in the next two years. The consensus estimate for its current-year earnings has been revised 2.5% upward over the past year. The stock has added 23.6% in the past year and has a long-term earnings growth expectation of 8.8%. PLDT carries a Zacks Rank #3.
Price and Consensus: PHI
Ceragon Networks Ltd.: Headquartered in Rosh HaAyin, Israel, Ceragon provides wireless backhaul and fronthaul solutions that enable cellular operators and other wireless service providers to increase operational efficiency. Its solutions use microwave and millimeter wave radio technology to transfer telecommunication traffic between base stations, small/distributed cells, and the core of the service provider's network. It offers highly reliable, fast-to-deploy, high-capacity wireless transport for 5G and 4G networks with minimal use of spectrum, power, real estate and labor resources. Ceragon delivers a complete portfolio of turnkey end-to-end AI-based managed and professional services that ensure efficient network rollout and optimization. The stock has a long-term earnings growth expectation of 15%. It carries a Zacks Rank #2.
Price and Consensus: CRNT
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