Mobile communications are a modern staple. Throughout the pandemic, telecom stocks have displayed utility-like stability as hundreds of millions of consumers around the globe rely on their mobile phone provider for voice, text, and internet connectivity. They typically aren't the highest-growth businesses around, but telecom stocks are nevertheless a great component of any investor's portfolio.
The industry is on the move because of 5G, cloud computing, and the remote-work movement they're enabling. To that end, Zoom Video Communications (ZM -2.30%), RingCentral (RNG -4.66%), and T-Mobile (TMUS -0.39%) are worth a buy right now. Here's why.
Video is the hot telecom service of the 2020s
Nicholas Rossolillo (Zoom Video Communications): Ok, so this one technically doesn't qualify as a telecom stock per se. But it is (and has been) one of the telecom industry status quo's biggest disruptors, so it deserves talking about on this list. Zoom was a high-growth business before 2020, but the pandemic turned the cloud-based software communications outfit into a household name practically overnight.
Zoom of course isn't alone in the video-calling department. Heavyweights like Microsoft (MSFT -1.05%) Teams have some competitive advantages with virtual work tools built in. Even Verizon (NYSE: VZ) bought its way into the space last spring with the acquisition of BlueJeans Network. But Zoom remains the leader here with its easy-to-use functionality, and has plenty of cash to build out its suite of services and deepen relationships with the millions of business users it has around the globe. At the end of January 2021, Zoom had over $4.24 billion in cash and equivalents and no debt -- an incredibly enviable balance sheet for a communications company.
But after a more than 300% return since the start of 2020 (which includes a nearly 50% drop from all-time highs notched last autumn), is Zoom stock really a good buy? I think so. In fact, at 36 times trailing 12-month sales, shares are actually cheaper than they were in 2019 before the pandemic. Plus, after adding tens of thousands of paying business customers last year (besides the millions of individual users it picked up), this is now a highly efficient and profitable software firm. Free cash flow profit margin is sitting at about 50% right now. And Zoom's run isn't over. It's forecasting another 42% increase in sales this next fiscal year on top of the 326% surge last year.
Telecommunications are rapidly changing, and video conferencing will be a permanent part of the business world going forward. Zoom may not be a conventional play, but it still has tremendous growth potential as it reshapes the telecom industry in the decade ahead.
The best telecom investment you never heard of
Anders Bylund (RingCentral): Cloud-based communications expert RingCentral is evolving into a giant of modern telecom functions. RingCentral's flavor of unified communications as a service (UCaaS) found serious market traction during the coronavirus lockdowns of 2020. That powerful market position should translate into long-lasting business growth.
The stock is trading nearly 30% below February's all-time highs, dragged down by the marketwide retreat from extreme growth stocks. But even the bears will admit that RingCentral's business is booming. The difference between the bulls and the bears in this case boils down to whether UCaaS is here to stay or not. In my view, the COVID-19 health crisis only accelerated an already thriving market. The pandemic opened the eyes of IT managers to new communication alternatives, and RingCentral looks like a winner with serious staying power in that space.
Growth investors should take a closer look at RingCentral while this generous discount lasts. Next week's first-quarter report could very well move this stock out of Wall Street's bargain bin.
The best network should win in the 5G era
Billy Duberstein (T-Mobile): "Uncarrier" telecom T-Mobile is my pick for the best telecom stock because it has the best 5G network -- a lead which appears sustainable. Pretty simple, right?
T-Mobile spent much of the 4G era with its network lagging behind that of its peers but with the lowest prices and great service. However, thanks to some savvy spectrum purchases and the acquisition of Sprint, the "new" T-Mobile now has a superior 5G spectrum portfolio and network. A recent Opensignal survey showed T-Mobile with a decisive lead in 5G download speeds, upload speeds, and availability and reach, and that lead is widening.
Yes, competitors AT&T (T -1.00%) and Verizon just paid a combined $69 billion for new C-band spectrum at the Federal Communications Commission (FCC) auction in December, filling in the "gap" in a bid to catch up to T-Mobile's head start. Mid-band is a key spectrum that offers a superior 5G speed and coverage trade-off. While T-Mobile currently has a huge mid-band spectrum advantage, the recent auction could lead some to think these two large competitors will catch up soon.
But it may not be so simple. The C-band spectrum from the December auction isn't available right away. Part will be made available in December of this year, and another part won't be cleared until 2023. Meanwhile, T-Mobile is rolling out mid-band right now, with the aim of covering 200 million Americans by year end. And even when AT&T and Verizon get the spectrum, T-Mobile will still have more total mid-band than either of its competitors.
Additionally, the recently purchased C-band spectrum doesn't propagate as far as T-Mobile's 2.5 GHz spectrum. That means AT&T and Verizon will have to deploy up to 50% more sites to reach the same number of people with fast 5G. Therefore, T-Mobile's management estimates its cost per gigabyte will be half that of Verizon and AT&T by 2024.
T-Mobile reports this week, following already-released results from competitors. Two weeks ago, AT&T showed better-than-expected wireless results as the result of heavy promotions; that could mean T-Mobile's results may underwhelm this time. Still, taking a longer view over the next five years, I'd expect the superior network to win out. Aggressive promotions aren't necessarily sustainable, especially when one has as large a debt load as AT&T has. So if T-Mobile's stock pulls back, it could be a great opportunity.
While T-Mobile has about 30% wireless market share overall, it only has a low-teens percentage of rural America and a sub-10% market share in enterprise wireless services. With its superior 5G network, I wouldn't be surprised to see the company make more inroads in these categories, especially in the enterprise market, which is growing faster than the consumer market. With 5G opening up lots of new business-use cases -- think increased automation, drones, augmented reality, etc. -- a superior network will be of utmost importance.
Then of course there's upside potential if 5G wireless can act as a wired home-broadband replacement. T-Mobile is also pursuing that right now, with plans to have seven to eight million home-broadband customers by 2025.
At the recent analyst day in March, T-Mobile raised its revenue, earnings before interest, taxes, depreciation, and amortization (EBITDA), and free cash flow guidance for 2023 and 2026, and increased its synergy target from the Sprint acquisition. The company now expects $13 billion to $14 billion in free cash flow by 2023 and over $18 billion in free cash flow by 2026. That compares with just a $167 billion market cap today, meaning the stock still looks cheap, despite its great run since the Sprint merger a year ago.