tiprankstipranks
Telecom Stocks Face Uncertainty as Amazon Targets Wireless Scene
Stock Analysis & Ideas

Telecom Stocks Face Uncertainty as Amazon Targets Wireless Scene

Story Highlights

The telecom scene seems to be losing its edge amid recent chatter over Amazon’s potential to get into wireless services. Though valuations have retreated, there are still big risks and secular headwinds to be aware of before considering buying the telecom stocks on weakness.

The U.S. telecom stocks fell under pressure earlier this month, thanks in part to Amazon’s (NASDAQ:AMZN) potential move to bring its disruptive impact to the wireless scene. Indeed, the most disruptive name in mega-cap tech is back at it, with the likes of Verizon (NYSE:VZ) and T-Mobile (NASDAQ:TMUS) that appear to have fallen within Amazon’s crosshairs.

According to a Bloomberg report, the e-commerce and cloud behemoth is reportedly working on adding wireless services at a reduced or complimentary perk for Prime members. Undoubtedly, including such services could act as another heavy weight on the shoulders of the already-ailing telecom companies while taking Prime subscription growth to the next level.

Prime has already been one of the best value subscriptions for Amazon’s avid users, and the perks seem to just keep piling up! Mobile connectivity could be the biggest perk yet, even if users need to pay a small nominal fee (around $10/month) to get it.

Whether Amazon’s foray into wireless upends the industry remains to be seen. Indeed, Amazon spokesperson Brad Mattinger denied his firm is negotiating with wireless carriers to bring the service to Prime.

New Tech Could Cause the “Commoditization of Data” to Accelerate

The Amazon wireless news seems to have really caused investors to sour on all things telecom. This raises the question — are wireless services a mere commodity that any tech-driven firm can offer?

As tech improves and the cost of data becomes cheaper, I do think the answer gravitates toward “yes.” It’s not just mega-cap tech titans that could devalue the cost of various telecom services. Satellite connectivity has advanced considerably in recent years. With Elon Musk‘s Starlink offering internet coverage via satellites in space, the so-called “space race” could take on a whole new meaning, and traditional telecom companies with tons invested in infrastructure could be the ones to be left behind.

Indeed, it’s too early in the game to conclude that telecom carriers are bound to falter in this new tech-driven era. Regardless, I do believe it’s a good idea for companies like Verizon or T-Mobile to consider spending more time and money thinking about how the Internet will be delivered in the distant future. Perhaps that future isn’t so distant if you’ve had a chance to test out Starlink’s impressive low-latency Internet!

The Wide Moat Protecting the Telecoms Could Erode Quickly From Here

It’s not so easy to start up your own telecom company. Considerable infrastructure costs have allowed many telecom firms to pay very generous dividends as wide economic moats protected cash flows from technological disruption. However, that era may be coming to an end if companies like Starlink look to change how and where we get our data. Further, wireless services may be viewed as just another service for the mega-cap tech companies to add to their arsenals to further bolster their service revenues.

Indeed, it certainly seems like mobile data could be the new streaming through the eyes of companies like Amazon or Apple (NASDAQ:AAPL), a firm that brought satellite internet connectivity via its Emergency SOS feature (which allows the newest version of iPhones to send emergency messages via communication satellites when there is no cell signal). While satellite internet is definitely novel, I’m not so sure shareholders of traditional telecom companies need to hit the SOS button quite yet.

Satellite connectivity could be the future, but it’s still in the early innings. Further, there are challenges that could prevent Amazon from bringing telecom services to Prime in the nearer term. The company needs to ink a deal with existing carriers, which could be no easy task, especially if carriers recognize what it could mean to do a deal with Amazon. Call it “a deal with the devil,” if you will.

The American telecom scene is competitive, but it could take many years before satellites and Prime perks drive down the price of data at an accelerated rate. As spatial computing (think VR and AR) become more commonplace, demand for fast, low-latency data could surge, and that’s a good thing for the telecom scene as a whole.

When it comes to Verizon stock, shares have arguably priced in the worst. The stock is coming off a fresh multi-year low at $34 and change. Yes, there are headwinds, potentially secular ones. But the ~7.0 times trailing price-to-earnings multiple just seems to factor in none of the positives and all of the negatives.

How Do Analysts View These Stocks?

Using TipRanks’ comparison tool pictured below, we can see that AMZN and TMUS are rated as Strong Buys on Wall Street, while VZ stock sports a Moderate Buy rating. TMUS has the highest upside potential, according to analysts, with 35.1% expected in the next 12 months. VZ and AMZN have upside potential of 25.6% and 8.8%, respectively.

The Takeaway

It’s a worrying time to be a telecom investor. Nevertheless, though the future is uncertain, I think most of the fear is already baked into telecom shares at this juncture. Satellite connectivity and Prime wireless are interesting but may be a long way off from becoming mainstream. In that regard, the telecoms still look more than investable as they sag on recent woes.

Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
RUT
Russell 2000
TNX
10-Yr-Bond
Bitcoin

Popular Articles