2018 outlook: telecommunication services

Cable companies stand to benefit from broadband growth.

  • Telecommunications Sector
  • Investing in Stocks
  • Telecommunications Sector
  • Investing in Stocks
  • Telecommunications Sector
  • Investing in Stocks
  • Telecommunications Sector
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Tremendous growth in broadband consumption continues unabated and remains a key trend for the telecommunication services sector. Globally, mobile-data traffic is growing by more than 50% per year and wireline traffic is increasing by about 20%.1 The biggest driver of this increase has been internet video, which is becoming mainstream. Telecom giant Verizon Wireless recently shared that its network carries as much traffic in one hour as it did in an entire week just 10 years ago—close to a 170-fold increase. But while usage continues to skyrocket, companies are still trying to figure out how to profit from this trend.

I estimate video to account for about two-thirds of the traffic on wireline networks, including cable, while less than half of traffic is coming through on wireless networks. Overall, as demand for broadband and higher-speed internet access rises, active investors have an opportunity to identify companies that can monetize this trend. As such, I am looking for ways to capitalize on increased adoption of broadband services and the proliferation of mobile data globally, which includes considering not only stocks that are within the telecommunication services sectors, but also those related to the telecom industry.

Cable companies represent one of the communications services segments that are benefiting from the uptick in broadband usage and growth. Certain cable companies have produced better growth simply due to their limited number of competitors and their ability to differentiate themselves. In most markets, there are just two competitors, which enables these companies to segment customers into different pricing tiers based on service level, and gives them the opportunity to capture market share.

As customers spend more time on the internet, they are demanding higher speeds. In most markets, cable companies are advertising the fastest internet speeds, and many households are switching to cable or are willing to pay for a higher-speed tier. Collectively, cable is capturing the entire broadband subscriber share (see chart). But despite having a superior product and a market that is increasingly coming to them, cable companies have less than 50% penetration of serviceable customers. As such, cable companies have a runway to win share and maintain pricing power, in offering high-speed internet service to sustainably grow revenue and free cash flow, especially since the barriers to entry are high and competition is weak.

Beyond market-share gains in broadband, cable companies may also have a better chance of capitalizing on growth in online video consumption with usage-based pricing. If done properly, usage-based pricing could more than offset headwinds from paid-TV cord-cutting—the consumer trend toward opting out of more expensive cable plans in favor of streaming services such as Netflix, Amazon Prime, and Hulu.

Online streaming services require high-speed internet, and cable faces little competition in this area. As more viewing migrates online, on-demand cable offerings could become the default aggregators of video content. This edge could offer cable companies yet another way to differentiate themselves and maintain flexibility in pricing, and the opportunity to harness long-term revenue growth and increase free cash flow, both drivers of valuation growth.

Next steps to consider

Research the Fidelity® Select Telecommunications Portfolio (FSTCX).

Get more investing ideas and sector insights.

Go back to the full 2018 sector outlook.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print
1. Source: Cisco, VNI Forecast Highlights Tool, as of Dec. 31, 2016.
Matthew Drukker is a portfolio manager and research analyst for Fidelity Investments. Mr. Drukker joined Fidelity in 2008 and is responsible for managing multiple sector and industry portfolios related to telecommunications and multimedia.
Views expressed are as of Dec. 1, 2017, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.
References to specific investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk.
This piece may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.
Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.
Past performance is no guarantee of future results.
Investing involves risk, including risk of loss.
Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.
The telecommunication services industries are subject to government regulation of rates of return and services that may be offered, and can be significantly affected by intense competition.
Third-party marks are the property of their respective owners; all other marks are the property of FMR LLC.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.

Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

818829.3.0
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.