Telecoms: Enabling Technologies

08/01/2016 8:00 am EST


With so many people online and using mobile devices, the internet audience is stable and well-defined; the cutting-edge market of a few years ago has started to mature, suggests Jason Koepke, editor at Capitalist Times.

Don’t misconstrue our caveats to mean that differentiated growth opportunities don’t exist in the digital world; rather, investors must keep in mind that these markets have started to mature when assessing potential opportunities.

For example, two players already dominate the digital ad and mobile e-commerce industries. Alphabet (GOOGL) and Facebook (FB) captured three-quarters of the growth in US internet advertising last year.

Even in this mature market, both appear poised for significant growth, though their stock valuations reflect investors’ belief that these tech titans will capture that upside.

Rather, investors should focus on the glue that enables these technologies to work.

Regardless of how many devices and particular tech firm or handset manufacturer sell in a given year, everyone with a smartphone or tablet needs access to a wireless network to make calls and surf the internet.

AT&T (T) and Verizon Communications (VZ) continue to invest heavily in their networks and still generate excess cash flow to handle debt maturities, repurchase shares, pay generous dividends and fund acquisitions.

Superior network quality enables these players to attract and retain the highest-margin customers who privilege speed and reliability over price.

Shares of AT&T and Verizon have caught a bid over the past few months, as the uncertain economic outlook and the Federal Reserve’s limited scope to raise interest rates this year have increased the appeal of these telecom giants’ resilient cash flow and above-average dividends.

That said, investors generally don’t expect the same level of growth out of AT&T and Verizon as they do from high-flying tech stocks.

But over the long term, we expect the emergence of the Internet of Things to create another tailwind for these telecom giants.

Indeed, rather than choose specific manufacturing companies that will succeed in the Internet of Things, we prefer to bet on the network providers, as they stand to benefit from the growing number of connections and traffic on their systems.

A growing number of cars include connections to the cloud to download the latest traffic data, send back telematic information and download the latest updates to the vehicle’s software.

AT&T rates a buy below $37 per share, while Verizon rates a buy on pullbacks to less than $52.

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