The next big thing in telecom stocks will be “fiber stacking”.
Local governments are turning to fiber optics to boost their economies. They are lured by the broadband subsidies of the US bailout. Entrepreneurs are eager to build and large telecommunications companies are eager to buy.
This means that the local service space is about to undergo some changes. 1 gigabit/second speeds are about to become mainstream. Existing telecommunications, cable and cell phone companies will face new competition.
But analysts don’t expect the new era to last long. These new builders exist to be bought. Networks that are now small could become big by buying them. Investors who buy now would benefit later. Currently, most buyers are private specialists backed by venture capital like Grain Management. These companies will be the midwives between the new networks and the big companies.
However, once private equity firms create viability, they could also create opportunities for existing players who need to get out of stale copper to have a future.
For investors, the best news is that you can now get to the bottom of that sauce and, while you wait, reap big capital gains and even dividends.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOGNASDAQ:GOOGL) has a long-standing interest in convenience services through its “other bets” in Google Fiber and Google Fi.
I should know; the latter is my wireless service provider. Google Fiber came close to being my cable provider a few years ago, but backed out before it finished building in Atlanta.
Now they could use today’s subsidized versions to expand their network. The company had nearly $134 billion in cash and securities at the end of March. Its “other bets,” which include local service, more than doubled year-over-year revenue to $440 million for the March quarter.
Buying local fiber services would give Google Fiber the size it needs to spin off, reducing antitrust pressure. This would give visibility to the entire industry, now buried on the books of private equity firms and local governments like Chattanooga.
Verizon (NYSE:VZ) has been in the local service business for almost 150 years, but he could use some help getting by.
Like NYNEX and Bell Atlantic, Verizon represented two of the seven spin-offs of the first AT&T, which dates from Alexander Graham Bell’s patents. It eventually turned part of its local service into a fiber system called Fios. But its cash cow is the wireless business, expanded nationwide through the purchase of by Vodafone (NASDAQ:VOD) interest for 130 billion dollars in 2014.
The result is a huge undertaking. For the three months ending March, Verizon earned $4.58 billion, $1.09 per fully diluted share, on revenue of $33.6 billion. It paid a dividend of 64 cents for $2.65 billion and still reduced its debt. Investors sold on the news because there is still $140 billion of long-term debt on the books, and its cost is expected to rise with interest rates.
However, buying a local fiber supplier and then integrating Fios would reduce debt and leave a tastier morsel for investors to chew on. Meanwhile, that dividend returns a hefty 5.1% to current shareholders. Buying Verizon today is a great way to speculate safely.
Border Communications (FYBR)
Border Communications (NASDAQ:FYBR) was originally a spin-off from Verizon, tasked with running unprofitable local phone services. It’s finding a second life as a theater piece of local fiber.
Frontier emerged from bankruptcy last year. It now says it plans to run 10 million homes with fiber optic cable by the end of 2025. The company says it’s getting ‘mid-teens’ feedback on its new builds in fiber.
Demand for the service is exploding, Frontier says. The average customer uses almost a terabyte of data every month. The average home on its network now has 22 devices, with gaming, video conferencing and telemedicine on the rise.
While Frontier may seem like it’s at the end of its run, it may just be getting started. Net income rose 8% year-over-year in the first quarter of 2022. The costs of its copper lines obscure this progress on its balance sheet, which still shows nearly $ 8 billion in debt served by 6, $4 billion in revenue.
Frontier’s past makes it speculation, but it could be a winner.
No one sells more local fiber service than Comcast (NASDAQ:CMCSA), through its Xfinity brand.
But investors don’t see the value because they still see a cable TV business. Comcast shares trade at just 13 times earnings, despite a dividend of 27 cents/share yielding 2.7%. the morning star consider it a first choice.
Comcast is really two companies, the cable company and NBCUniversal. Cable accounts for 62% of the business and broadband revenues now exceed those of cable television. In total, the company earned $3.9 billion, 78 cents/share, on revenue of $31 billion in the first quarter of 2022. Most new broadband subscribers on public networks buy cable.
Analysts say Comcast is under increasing pressure from new local fiber services, many of which are city-owned. The answer may be to buy, to expand Comcast’s footprint through acquisitions or partnerships. The company knows how to register customers and provide the service. All he really needs to thrive is access to the lines.
Lumen Technologies (LUMN)
Like Verizon, Lumen (NYSE:LUMN) traces its history to the former AT&T Bell System. In this case, it was formerly US West.
US West sold its wireless unit in 1997, and it is now owned by Verizon. Instead, it became a long-distance internet player, buying Savvis in 2011.
As copper moves to fiber, Lumen now wants to be at the forefront. It is available in 2.5 million locations with its Quantum Fiber service and wants to add nearly 10 million more. It is being helped by the sale of its copper operations outside the former US West Territory for $7.5 billion. It also sold its business in Latin America. Approval of these deals is expected to bring in more than $10 billion.
Lumen generated nearly $20 billion in revenue last year, more than 10% of which was reported as net income. While waiting for its transformation, you have a cheap stock, with a PE of 5.3 and a dividend that is now yielding more than 9%.
As of the date of publication, Dana Blankenhorn held a long position in GOOGL. The opinions expressed in this article are those of the author, subject to InvestorPlace.com Publication guidelines.