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The Zacks Diversified Communication Services industry appears well-positioned to capitalize on the healthy demand trends driven by the rapid deployment of 5G and the transition to cloud and fiber network infrastructure upgrades. However, high capital expenditures for infrastructure upgrades, unpredictable raw material prices, geopolitical conflicts, and elevated inventory levels amid uncertain market conditions have dented the industry’s profitability.

Nevertheless, Deutsche Telekom AG (DTEGY - Free Report), Telefonica, S.A. (TEF - Free Report), and Telenor ASA (TELNY - Free Report) will likely benefit in the long run from the wide proliferation of IoT and transition to cloud and next-gen technologies driven by higher demand for scalable infrastructure for seamless connectivity.

The Industry's Description

The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline, and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television, and other value-added services.

In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation, and related managed services in state-of-the-art data center facilities.

Some industry participants also provide IP networks, private lines, network management, and hosting services, along with sales, installation, and maintenance of major branded IT and telephony equipment.

What's Shaping the Future of the Diversified Communication Services Industry?

Focus on Fiber Optic Densification: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the telecommunications industry's scalability, security, and universal mobility and propel the wide proliferation of IoT.

Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards, as well as wireline connections, is likely to act as a tailwind. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage.

Industry participants are facilitating their customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation through steady infrastructure investments.

Margin Erosion: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the vast proliferation of smartphones and increased deployment of 5G technology. This has forced industry participants to invest considerably in LTE (Long-Term Evolution), broadband, and fiber to provide additional capacity and ramp up the Internet and wireless networks.

Although these infrastructure investments are likely to be beneficial in the long run, short-term profitability has been compromised. High raw material prices due to elevated inventory levels, economic sanctions against the Putin regime, and intensifying war-mongering conditions in the Middle East have further affected the operation schedules of various firms. 

Integrated Services With Thrust on Low Latency Applications: The companies are focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data, and technology services to improve margins and business sustainability. The firms are tailoring their offerings to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements.

At the same time, these firms continue to focus on leveraging wireline momentum, expanding media coverage, improving customer service, and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. Also, these firms offer the flexibility to better manage data traffic by leveraging indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing.

In addition, industry participants are focusing on other revenue-generating opportunities in adjacent verticals such as consumer goods, precision agronomy, animal agriculture, and the digital health services market to optimize production capabilities through access to data and key insights.

The Zacks Industry Rank Indicates Bullish Prospects

The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #90, which places it in the top 37% 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 bullish 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 two to one. 

Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

The Industry Lags the S&P 500, Sector

The Zacks Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.

The industry has gained 3% over this period compared with the S&P 500’s and the sector’s growth of 10.8% and 14%, respectively.

One-Year Price Performance

Image Source: Zacks Investment Research

The Industry's Recent Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry has been trading at 11.97X compared with the S&P 500’s 17.01X. It has also been trading below the sector’s trailing 12-month EV/EBITDA of 15.26X.

Over the past five years, the industry has traded as high as 18X, as low as 9.54X, and with a median of 13.79X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

Image Source: Zacks Investment Research

3 Diversified Communication Services Stocks to Watch

Presented below is a brief overview of the previously-mentioned stocks.

Telenor

Headquartered in Fornebu, Norway, Telenor offers mobile communication, fixed-line communication, and broadcasting services worldwide. The company has completed a $15 billion merger to become a leading telecom services provider in Malaysia, which is likely to contribute significantly toward the growth of the country’s digital ecosystem and economy.

The Zacks Consensus Estimate for current-year earnings has been revised upward by 2.5% to 82 cents per share since June 2024. The stock has gained 34.9% in the past year. Telenor sports a Zacks Rank #1 (Strong Buy) rating.

Price and Consensus: Telenor

Image Source: Zacks Investment Research

Deutsche Telekom

Headquartered in Bonn, Germany, Deutsche Telekom is one of the largest telecommunications service providers in Europe. In addition to its strong position in the domestic market, the company is poised to benefit from the accretive post-merger integration of T-Mobile US Inc. and Sprite in the United States, in which it owns about 43% stake.

The removal of forced cable TV access in multiple dwelling units in Germany through telecom legislation is likely to help the company expand its broadband market. Moreover, an aggressive fiber rollout strategy across the country is expected to augment its domestic market hold.

It has a long-term earnings growth expectation of 11%. It has a VGM Score of A. The stock has gained 49.1% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 15.9% to $2.33 per share since June 2024. Deutsche Telekom carries a Zacks Rank #2 (Buy) rating.

Price and Consensus: Deutsche Telekom

Image Source: Zacks Investment Research

Telefonica

Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. In recent years, the company has invested heavily in the deployment and transformation of its network to provide excellent connectivity in terms of capacity, speed, coverage, and security.

The rollout of fiber and LTE is set to drive considerable growth. The company has launched 5G+ (5G SA) in Spain, Brazil, Germany and the U.K. and plans to increase the 5G SA coverage in core markets by 2025.

The stock has gained 20.6% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 14.3% to 40 cents per share since June 2024. This Zacks Rank #2 (Buy) rated stock has a VGM Score of A. The company delivered a trailing four-quarter earnings surprise of 18.3%, on average.  

Price and Consensus: Telefonica

Image Source: Zacks Investment Research 

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