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3 Telecom Stocks Likely to Surpass Q4 Earnings Estimates

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In the fourth quarter of 2021, telecom stocks witnessed a gradual revival as business operations returned to the pre-pandemic levels. Despite supply chain woes related to continued chip shortage and spread of the Omicron variant of the coronavirus, the industry seemed to benefit from higher demand for scalable infrastructure for seamless connectivity amid a wide proliferation of IoT devices. A steady pace of 5G deployment and investments by leading carriers to increase their fiber footprint in rural areas to bridge the digital divide seemed to infuse confidence in the sector. Telecom firms also stepped up efforts to provide the vital lifeline to countless humans as the work-from-home trend gained traction.

The passage of the $1.2 trillion infrastructure bill in the House further buoyed the growth momentum. The multi-billion infrastructure bill includes a $65 billion provision to significantly expand broadband access to Americans as the administration aims to fortify its technological prowess to thwart the dominance of countries like China. The plan envisions reaching the underserved areas of the country and prioritizing support for broadband networks affiliated with local governments, nonprofit organizations and cooperatives to encourage strong competition with privately-owned companies. The plan has also earmarked funds for the tribal areas that lack access to high-speed Internet. It is likely to lower the prices for Internet services by requiring funding recipients to offer a low-cost affordable plan and encourage price transparency.

Factors at Play

5G Momentum Picks Up Steam: The 5G momentum picked up steam during the fourth quarter as more 5G handsets models were launched and carriers began to fast-track the deployment of 5G network across the country. In a concerted effort to thwart the increased 5G dominance of South Korea and China and bring the United States at the forefront of the 5G race, the FCC auctioned some of the airwaves in the 3.45 GHz auction for $21.8 billion that makes available 100 megahertz of mid-band spectrum for commercial use across the country for fixed or mobile uses. The winning bidders reportedly won 4,041 of the 4,060 available generic blocks on offer. The mid-band offers significant bandwidth with better propagation characteristics than mmWave, which has a short range and requires a high density of sites to achieve coverage. Consequently, it is deemed a prized asset for carriers that lack considerable mid-band spectrum holdings.

Federal Support: The FCC has adopted a new set of rules for foreign companies seeking to operate in the U.S. telecom market with a certain level of foreign investment or control. The mandate requires companies with at least 5% foreign ownership interest to submit extensive personally identifiable information for all non-U.S. persons with access to submarine cable facilities when applying for FCC licenses. President Biden also continued his hard stance against Beijing and signed the Secure Equipment Act that empowers the FCC to prevent the use of any telecommunications equipment manufactured by China-backed entities in the domestic markets. The bill extended the purview of FCC control to private companies. It would not only deter it from approving new requests but also revoke the prior equipment approval on perceived risks to national security interests. This follows an earlier directive to bar China Telecom from operating in the United States over national security concerns and a consequent annulment of a petition in a U.S. appeals court by the Beijing firm to block the decision to prevent irreparable loss to businesses and customer relationships.

Administrative Guardrails: The FCC discarded the petition of ZTE to reconsider the decision of designating it as a threat to national security interests and affirmed it as a potential risk to the U.S. communications network. The FCC-sponsored reimbursement program for ‘rip and replace’ of telecommunications gear manufactured by Huawei and ZTE officially kickstarted during the quarter. Removing the low-cost gear is likely to affect some rural network service, hurt profitability and risk sustainability as most local operators are forced to reshuffle their existing infrastructure without focusing on infrastructure upgrades for 5G deployment to help realize the President’s broadband objective. Although the FCC is slated to initiate a $1.9 billion program to reimburse the carriers by seeking applications from Oct 29 through Jan 14, 2022, certain industry experts remain circumspect regarding the implementation of the infrastructure bill and whether it will effectively fulfill the President’s vision of “build back better” program.