Will The Bull Run Continue For US Wireless Equipment Makers?

U.S. stock markets have remained highly volatile in 2018 so far. Inflationary expectations, concern of higher interest rate, imposition of tariffs resulting in a looming trade war along with several geopolitical conflicts in the Middle East and Asia are main factors behind the market instability.

However, the wireless equipment manufacturing industry continued its bull run even under these foreboding circumstances, surprising many investors.

Year to date, the wireless equipment industry gained 5.6%, slightly below 5.8% growth offered by the Computer and Technology sector, of which wireless equipment industry is part of. Moreover, growth of wireless equipment industry is far ahead of the 1.3% gain registered by the benchmark S&P 500 index. Notably, in the last one month, the wireless equipment industry gained 8.5%.

Strong Wireless Infrastructure Market

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. This in turn has provided a boost to the demand for telecom infrastructure developers, particularly wireless gear manufacturers.

The LTE network has the highest penetration rate of 90.5% in the North American region. By the end of 2020, C-RAN, small cells, DAS and carrier Wi-Fi, together with their fronthaul and backhaul segments, will account for more than 45% of total wireless infrastructure spending.

5G and IoT: Future Drivers

Fifth-generation (5G) superfast wireless networks will provide the primary impetus to the telecom industry. In September 2017, Moody's Investors Service stated in a report that the evolution toward 5G wireless networks will result in higher capital spending for the U.S. wireless carriers.

In this regard, Internet of Things (IoT) has the potential to emerge the numero uno factor for future growth in the space. Statista’s 2018 report on global telecom estimates that global telecom services revenues will reach around $1.5 trillion in 2019.

Pro-Growth Measures

The two pro-growth agendas of President Trump, namely, significant cut in corporate tax and deregulation are major catalysts to the Telecom industry. The corporate tax rate was recently lowered from 35% to 21%., marking the rate’s lowest in 78 years. Trump’s tax proposal will result in a huge windfall for telecom operators. The carriers can utilize this money for 5G network R&D and its deployment. This will naturally bolster demand for wireless equipment.

The telecom regulatory body, Federal Communications Commission (FCC), which was revamped by Trump, repealed the Net Neutrality laws in December 2017. Telecom industry will immensely benefit from this decision and will ramp up their project investment. Higher telecom expenditure will eventually benefit wireless equipment manufacturers.

U.S. Tariffs on Chinese Imports

On March 2018, the U.S. government imposed 25% tariffs targeting 1,300 Chinese imports for a total worth of $50 billion. Information technology, telecommunications and consumer electronics are the major Chinese industries which have faced the brunt of U.S. tariffs.

U.S. companies that rely on Chinese imports are unhappy about the move as it will raise prices of telecom equipment and several electronics products for the IT sector. However, a hike in product prices will certainly help U.S. wireless equipment manufacturers.

Trump administration is deeply concerned about China’s drive to unseat United States as the primary developer and supplier of products in the fields of high-tech artificial intelligence, semiconductors, quantum computing and various other digital technology driven sectors.

Companies that are likely to gain most from the U.S. tariffs are Motorola Solutions Inc. (NYSE:MSI) , Ubiquiti Networks Inc. (NASDAQ:UBNT) , Comtech Telecommunications Corp. (NASDAQ:CMTL) , Harris Corp. (NYSE:HRS) and InterDigital Inc. (NASDAQ:IDCC) . Comtech, Harris and InterDigital carry a Zacks Rank #3 (Hold). Motorola and Ubiquiti Networks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The chart below shows price performance of the wireless equipment industry and S&P 500 year to date.

Bottom Line

The U.S. wireless equipment industry has lately emerged as an intensely contested space where success thrives largely on technical superiority, quality of services and scalability. In order to stay abreast of competition, existing players need to be constantly on their toes, introducing innovative products to gain from the industry’s growing momentum.

Massive government spending like U.S. broadband infrastructure development program and similar structural subsidies in China and India, have been a boon to telecom equipment makers.

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