The big three wireless service providers — Verizon Communications, AT&T and T-Mobile US — look better to investors these days than a lot of growth stocks. And with a possible U.S. recession looming, VZ stock, T stock and TMUS stock may continue to outperform the S&P 500. At least that's the spin coming from some Wall Street analysts.
"Disappointing overall corporate earnings growth and rising recession fears could help support a continued rotation into the telco sector as something of a safe haven," Morgan Stanley analyst Simon Flannery said in a report.
T-Mobile stock has gained 18% in 2022 and AT&T stock is up 10.7%. Verizon stock has dipped 1.8%. Meanwhile, the S&P 500 has retreated more than 20%.
Both VZ stock and T stock offer sizable dividends. Analysts expect a buyback for TMUS stock to start in late 2022 or 2023.
VZ Stock, Telecom Stocks Get 5G Lift
While rising interest rates are a worry for tech stocks because they reduce free cash flow, the telecom stocks can rely on "mostly contractually based revenue streams and more recession-resistant, end-user demand," UBS analyst John Hodulik said in a report.
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But revenue growth is not a reason to buy the telecom stocks.
Analysts polled by FactSet estimate that 2022 revenue for T-Mobile stock will climb 1.5% while Verizon sales will edge up 2.4%. Following the spinoff of WarnerMedia, revenue for AT&T will tumble in 2022. In fiscal 2023, analysts estimate that its revenue will fall nearly 5%.
Still, in the long run, all three wireless service providers could get a boost from 5G networks. Using 5G promotions, the telecom companies aim to upgrade consumers to unlimited data plans. And, new revenue streams may emerge from private 5G services to business customers.
Meanwhile, both Verizon and T-Mobile are ramping up 5G broadband services to homes. Analysts say additions of 5G residential broadband customers could be a bright spot in second-quarter earnings reports.
VZ Stock News: Wireless Rate Hikes
Also, AT&T and Verizon hiked some fees in the June quarter, citing inflationary pressures. The price hikes could provide a short-term revenue boost, analysts say.
"Despite the challenging wireless industry dynamics, wireless stocks have outperformed the broader market," Cowen analyst Gregory Williams said in a report. "All three carriers raised prices/fees over the past month as wireless service is a utility-like necessity, with criticality higher than ever, making wireless a less bad industry as investors consider the weakening consumer."
AT&T will report second-quarter earnings on July 21. Verizon will follow on July 22.
At Wells Fargo, analyst Eric Luebchow says current market conditions favor telecom stocks.
"We don't think the sky is falling on the wireless carriers — there are some definite challenges ahead, but the Big 3 should be far more durable and resilient during these economic times than many other more cyclical names," he said in a report.
Dish, Cable Competition Ramps Up
However, the big three wireless service providers face new threats. Satellite broadcaster Dish Network is building out a 5G wireless network from scratch.
Also, cable TV companies such as Comcast continue to bundle wireless services with their broadband products.
AT&T and Verizon offer sizable dividends owing to the free cash flow they generate. AT&T, though, cut its dividend by 46% to $1.11 per share because of the WarnerMedia spinoff.
At Raymond James, analyst Frank Louthan says AT&T stock still provides a safe haven to investors.
"We believe simple recurring revenue names with solid dividends like AT&T are better performers in a difficult tape, and with macro issues impacting the market, we believe AT&T can outperform," he said in a report.
AT&T ranks first out of eight stocks in IBD's Telecom Services-Integrated industry group. T stock has an IBD Composite Rating of 79 out of 99. VZ stock is second with a CR of 73.
Cell Tower Operators' Outlook
While wireless service providers have outperformed the S&P 500, cellphone tower operators aren't in the same boat. Shares of American Tower have retreated 11% in 2022 while Crown Castle is down 17%. SBA Communications has tumbled 16%.
Wireless phone companies rent tower space to house radio antennas. Phone companies normally sign leases of 15 to 20 years with tower firms. Most towers house radio antennas from multiple carriers.
Some analysts expect upside from 5G network buildouts for the tower firms. 5G networks are connecting to fiber-optic communications infrastructure in urban areas.
"Our view is that 2023 should still be a stronger leasing year vs. 2022, though 2023 could represent the peak gross leasing year," KeyBanc Capital Markets analyst Brandon Nispel said in a report. "Carriers are competing on network quality, which suggests leasing is likely to remain higher for longer as carriers compete throughout the duration of the 5G cycle."
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Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.
