The novel coronavirus pandemic has induced several changes in the way people work and communicate. Some of these changes, to the benefit of communications stocks, are likely to become a new normal even after the pandemic dies-out.
Similarly, Teams from Microsoft (NASDAQ:MSFT) is being used by 183,000 educational organizations in 175 countries for videoconferencing. Even at an individual level, there is an increase in voice and video chatting. With these changes, communication stocks have been in focus.
This column will discuss four communication stocks to buy with stocks from the technology as well as the telecommunication sector.
Let’s deep dive into the following communication stocks.
- Zoom Video Communications (NASDAQ:ZM)
- Facebook (NASDAQ:FB)
- AT&T (NYSE:T)
- Verizon Communications (NYSE:VZ)
Zoom Video Communications (ZM)
ZM stock has skyrocketed by 209% in the last six months. The rally is unabated as demand for video calling has increased exponentially.
Given the huge opportunity due to the pandemic, Zoom announced that the company has increased presence in 25 additional countries and territories. With this, Zoom is available in 40 countries and territories.
Aggressive regional expansion is likely to translate into strong revenue and earnings growth. The growth trajectory is already clear from the company’s first quarter results for 2021 with 169% revenue growth on a year-on-year basis.
The company’s revenue is significantly concentrated in the Americas. In the coming years, international revenue will surge. This explains the strong movement in ZM stock even after the big upside in the recent past.
Another factor that is taking the stock higher is the growth in free cash flows (FCF). For Q1 2021, the company reported FCF of $252 million. This already implies an annualized FCF of $1 billion. Given the growth outlook, I would not be surprised if FCF doubles relatively soon.
Clearly, the novel coronavirus pandemic has changed the way the world communicates. Zoom Video has a big addressable market for the coming years.
I would consider Facebook among the top communication stocks to buy. In a changing world, Facebook is likely to play an increasingly important role.
In a Harvard Business Review article on “Communicating Through the Coronavirus Crisis,” the author, Paul A. Argenti, points out that employee organization communication is critical in these times.
One way is to “Post information regularly in a highly visible location. This can be a physical location or virtual — email, the company intranet, or a Slack or Facebook channel.”
This is just one example of how Facebook is more relevant than ever before. It also serves as an important medium of interaction and communication among family and friends in times of social distancing.
It’s therefore not surprising that FB stock has moved higher by 52% in the last six months. From a financial perspective, Facebook has seen a steady increase in daily and active monthly users. The average revenue per user is significantly higher in U.S., Canada and Europe as compared to Asia Pacific. There will be gradual catching-up and will increase the company’s revenue and cash flows.
As a matter of fact, Facebook is already a cash flow machine. For the first half of 2020, the company delivered FCF of $7.8 billion. As cash flows remain robust, the company is well positioned for organic and inorganic growth.
Overall, FB stock is worth accumulating on any correction and I believe that the stock will remain in a long-term uptrend.
Zoom and Facebook are in the category of information technology companies in the communication sector. AT&T is my top pick among communication stocks to buy in the telecom sector.
I also like T stock considering the fact that it has been an under-performer. At a current price-to-earnings-ratio of 9.2, valuations are attractive. In addition, T stock has a healthy dividend pay-out of $2.08 and a dividend yield of about 7%.
In terms of business development, the first reason to like AT&T is the company’s launch of its 5G network. Since the first week of August 2020, the 5G network has been launched nationwide. With trends like work-from-home, the adoption of 5G is likely to be faster than before. The positive impact will be seen in the coming quarters.
It was also reported recently the AT&T is exploring the sale of DirecTV. A potential deal is likely at $20 billion. This will be good news for T stock as the proceeds can help in de-leveraging.
HBO Max is also another reason to like AT&T. Its worth noting that HBO Max already signed 4 million subscribers in the first month of launch. Furthermore, HBO and HBO Max have 36.3 million subscribers. The company is focusing on consumers adopting premium unlimited plans that have a higher ARPU. If there is success on this front, cash flow upside can be meaningful.
T stock therefore has several potential catalysts for the coming quarters. This makes the stock worth considering at current P/E valuations.
Verizon Communications (VZ)
VZ stock has delivered relatively muted gains of 9.7% in the last six months. However, I do believe that the stock is likely to gain positive momentum in the coming quarters. Besides the developments on the business front, I like VZ stock as it offers an attractive dividend yield of 4.16%.
Among positive developments, Verizon has been partnering with states for distance education. The company will be providing discounted service plans for 4G LTE Internet. Similar tie-ups amidst the pandemic will help in boosting cash flows.
Verizon also stands to benefit from 5G adoption in the United States. The company will leverage on its assets to drive growth. According to the company’s Q2 2020 conference call:
And if I look into the second half of 2020, we’re of course exciting for scaling the 5G to nationwide, scaling the Ultra-Wideband to over 60 cities, scaling the 5G Home to more than 10 cities, and of course start monetizing that.
Therefore, the earnings and cash flow outlook is robust for Verizon and I expect VZ stock to remain bullish.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.