A growing U.S. economy speeds up the demand for real-time voice, data, and video manifold. The escalation in demand has encouraged telecom service providers to undertake large network extensions while upgrading plans.

The next-generation 5G Network will be a major driver for telecom operators going forward. Consequently, it will be lucrative to invest in telecom service provider stocks with a favorable Zacks Rank.

Advantage of 5G Wireless Network

The United States is progressing well to lead the world in 5G — the next generation of wireless connectivity — which will enable faster speeds and low latency wireless broadband services. Although 5G network is not likely to replace existing 4G standards on large scale before 2020, several telecom behemoths are expected to launch 5G smartphones in 2019.

5G is widely believed to be smarter, faster and more efficient than 4G. It promises mobile data speeds that far outstrip the fastest home broadband network currently available to consumers. Data transmission speed of 5G network can go up to 100 Gbps, which will be 1,000 times faster than 4G standard. As a result, an entire HD film can be downloaded in less than a second using 5G network.

The rising demand for technologically superior products has been a silver lining for the telecom space in an otherwise tough environment. In this respect, the superfast 5G mobile networks will be of utmost necessity in managing the exponential growth of internet-connected devices, popularly known as the Internet of Things (IoT).

5G Wireless and IoT Market Sizes

Per Reuters, global 5G wireless market size will reach $1,271 billion by 2025. The market will grow more than 49.1% over the period 2018-2025. DELOITTE Global has predicted that 25 telecom operators will launch 5G in 2019 and 26 others will follow suite in 2020. About 20 vendors will launch 5G-enabled smartphones in 2019 and over 1 million 5G handsets are likely to be shifted this year.

Moreover, research firm IDC predicted that technology spending on IoT will reach $1.2 trillion by 2022. Research firm Bain estimated that combined IoT market size will reach $520 billion in 2021 from $235 billion in 2017.

Consequently, IoT holds the potential to be the numero uno factor in driving future growth in the telecom space. Since 5G network will play the role of the backbone connectivity for the IoT, telecom sector will start benefiting since 2019 with the launch of this next-generation wireless network.

Barriers to Entry

Lack of public airwaves (spectrum) in the telecom industry creates a high barrier to entry. It is not easy for a new operator to establish itself in the market, as it requires government approval to transmit voice, data, and video on public airwaves.

Spectrum licenses are limited and quite expensive. Moreover, the deployment of network infrastructure requires significant capital expenditure, which only a few entities can afford. Consequently, this barrier protects the profits of incumbents in the telecom space.

Our Picks

At this stage, it will be a wise decision to invest in telecom service provider stocks with a favorable Zacks Rank. We have narrowed our search on four such stocks each carrying a Zacks Rank #2 (Buy). However, picking winning stocks may be difficult.

This is where our VGM Score comes in handy. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.

We have narrowed our search on four such stocks each carrying a Zacks Rank #2 (Buy) and VGM Score of either A or B.

The chart below shows price performance of our four picks in the last six months.

Charter Communications Inc. (CHTR - Free Report) provides cable, broadband, and wireless (mobile virtual private network) in the United States. The company is testing 5G networks in six large markets. It has expected earnings growth of 26.6% for current year. It has a VGM Score of B.

Telephone and Data Systems Inc. (TDS - Free Report) provides wireless, wireline, cable, and hosted and managed services in the United States. The company’s wireless division has acquired 188 5G licenses for $2 billion to drive its future growth. It has expected earnings growth of 6.8% for current year. It has a VGM Score of A.

LM Ericsson (ERIC - Free Report) provides advanced communications solutions for mobile and fixed networks, as well as consumer products. The company is a leading developer of 5G infrastructure network. It has expected earnings growth of 1,266.7% for current year. It has a VGM Score of A.

Ceragon Networks Ltd. (CRNT - Free Report) provides wireless backhaul solutions that enable cellular operators and other wireless service providers to deliver voice and data services worldwide. The company is a major solutions provider of 5G wireless backhaul network. It has expected earnings growth of 9.5 % for current year. It has a VGM Score of A.