How to invest in telecommunications

Party like it’s 1999?

BT and Vodafone have ditched the volatile mantle investors associate with the dotcom mania of the late 90s and settled into the kind of revenue-earning FTSE staples our home market is renowned for. Investing in these companies depends on your prospects for long-term viability in a rapidly accelerating world relative to their short-term debt obligations.

But that’s not all this sector has to offer. Look beyond these household names and you’ll find some exciting growth opportunities there too.

One of the UK’s worst-kept secrets in the telecommunications industry is Gamma Communications. Gamma fits perfectly into the areas of telecommunications where there is the greatest growth potential, offering instant messaging, video conferencing, cloud communications and other rising trends to businesses of all sizes. It is in fact one of the few UK stocks to offer investors direct access to the cloud computing market.

It has been on a frantic upward trajectory in recent years. Revenues have grown 86% over the past year and are expected to grow a further 7.5% annually. Annual earnings per share have grown by a remarkable 40% over the past three years. The company is also expanding its presence in continental Europe with the aim of replicating its remarkable British success abroad.

All this growth is supported by solid fundamentals. The company boasts a strong balance sheet and even offers a regular dividend, but only at a low yield of 0.9%.

There are growth opportunities to be found elsewhere. Founded in 1936, Spirent Communications is not a high-octane start-up like the one that prevailed in 2000, but it is a potential beneficiary of the shift to 5G connectivity.

Spirent specializes in the production of 5G equipment used in telecommunications networks. The company outlined its plans to “maintain and grow our leadership position in 5G and capitalize on the accelerating opportunity” in its latest set of annual results.

However, the competition there is fierce and Spirent will need to maintain its position at the front of the pack to maintain a significant market share. If he can do that, it could certainly prove to be a profitable venture for investors.

Of course, we’ve been here before. The dotcom bubble has left investors wary of telecom companies that have over-promised and under-delivered. But for savvy investors, whether they’re looking for safe bets or looking to capitalize on a wave of technological advancement, there’s good reason to keep an open mind.

Five-year performance

(%) As of July 23

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021
BT -16.7 -24.0 -8.8 -35.5 63.9
Vodafone 1.9 -16.1 -22.3 4.2 -1.8

Past performance is not a reliable indicator of future returns

Source: FE, total returns in GBP as of 23.7.21

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell such securities and is included for illustrative purposes only. When considering investing in stocks, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. This information does not constitute a personal recommendation for any particular investment. If you are unsure of the suitability of an investment, you should consult a Fidelity advisor or a licensed financial advisor of your choice.