Good Times Ahead for Telecom

The telecommunications services industry is riding on the high-end smartphone and tablet vogue. Unprecedented growth in high-speed mobile Internet traffic, in particular toward wireless data and video, has transformed the industry in the most evolving, inventive and keenly contested space. Any new network standard aims at faster data connectivity, quick video streaming with high resolution and rich multimedia applications.

A recent report by Infonetics Research estimates telecom operators globally to generate approximately $2 trillion in revenues in 2013. This is slightly better than the $1.9 trillion revenues in 2012. More importantly, the report also stated that these telecom carriers are spending more on capital expenditures in order to update their networks with the latest technologies. In 2013, carriers' expenditures have risen 6% year over year and are expected to rise at a CAGR of 2% from 2012 to 2017, reaching a significant $355 billion by that time.

While the U.S. is expected to maintain its speed of telecom growth in the near term, most of the impetus will come from the emerging markets such as China, India, Brazil and Russia. Carrier expenditures have increased in Japan and even major telecom operators of the Western Europe, which is the economically most vulnerable region, have also raised their budget to some extent.

Infonetics further stated that the market size for Carrier routers and Carrier Ethernet switches grew 7% year over year to $3.6 billion in the third quarter of 2013. This market size is expected to reach $20 billion by 2017.

The GSM Association's research wing, GMSA Intelligence, recently revealed that there will be more than 1 billion LTE connections globally by 2017. Currently, there are approximately 176 million LTE connections worldwide. By 2017, there will be around 465 LTE networks across 128 countries.

GSMA Intelligence further reported that LTE users consume an average of 1.5GB data per month, twofold of what is consumed by non-LTE users. In the developing countries, LTE users can generate 20 times higher average revenue per user (ARPU) to carriers than non-LTE users, whereas in the developed countries, ARPU can be 10-40% higher for LTE users instead of non-LTE users.

We remain optimistic on U.S. telecom giant  Verizon Communications Inc. (VZ - Analyst Report) and AT&T Inc. (T - Analyst Report) as well as on cable MSOComcast Corp. (CMCSA - Analyst Report). Currently, all these stocks carry a Zacks Rank #3 (Hold). However, AT&T and Verizon are significantly expanding their subscriber base for both wireless network and fiber-based video network. Similarly, Comcast has also significantly expanded its high-speed broadband subscriber base.

The mobile chipset maker Qualcomm Inc. (QCOM - Analyst Report) currently has a Zacks Rank #2 (Buy) and the stock is likely to continue is strong performance. Additionally, all these four companies are regular dividend payers.