The next big thing in telecommunication stocks will be the “fiber rollup.”
Local governments are looking to fiber cable to jump-start their economies. They’re lured by broadband subsidies in the American Rescue Plan. Entrepreneurs are anxious to build, and larger telecoms are anxious to buy.
This means the local service space is about to go through some changes. Speeds of 1 gigabit/second are about to become common. Existing telecoms, cable operators, and wireless companies are going to 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 get big by buying them. Investors who buy now would benefit down the road. Right now, most of the buyers are private venture-backed specialists like Grain Management. These companies will be the midwives between the new networks and bigger companies.
Once the private equity companies create viability, however, they could also create opportunities for existing players that need to get out of obsolete copper to have a future.
For investors, the best news is that you can get at the end of this gravy train now and, while you wait, pick up some fat capital gains, even dividends.
Alphabet (GOOG, GOOGL)
Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) has long been interested in local services through its “other bets” in Google Fiber and Google Fi.
I should know; the latter is my wireless provider. Google Fiber came close to being my wired provider a few years ago but backed off before completing their Atlanta build-out.
Now they could use today’s subsidized builds to expand their network. The company had nearly $134 billion in cash and securities at the end of March. Its “other bets,” which includes the 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 to be spun-out, reducing antitrust pressure. That would provide visibility on the whole sector, now mostly buried inside the books of private equity companies and local governments like Chattanooga.
Verizon (NYSE:VZ) has been in the local service business for nearly 150 years, but it could use some help getting out.
As NYNEX and Bell Atlantic, Verizon represented two of the seven spin-offs from the first AT&T, which dates from Alexander Graham Bell’s patents. It eventually turned some of its local service into a fiber system called Fios. But its cash cow is the wireless business, expanded nationwide through the purchase of Vodafone’s (NASDAQ:VOD) interest in it for $130 billion in 2014.
The result is an immense company. For the three months ending in March, Verizon earned $4.58 billion, $1.09 per share fully diluted, on revenue of $33.6 billion. It paid out a 64 cent dividend for $2.65 billion and still reduced its debt. Investors sold on the news because there’s still $140 billion of long-term debt on the books, and its cost should rise with interest rates.
Buying a local fiber provider, however, then spinning off Fios into it, would reduce the debt and leave a tastier morsel for investors to chew on. Meanwhile, that dividend yields a fat 5.1% to current shareholders. Buying Verizon today is a great way to speculate safely.
Frontier Communications (FYBR)
Frontier Communications (NASDAQ:FYBR) was originally a spin-off from Verizon, charged with managing unprofitable local phone services. It’s finding a second life as a local fiber play.
Frontier emerged from bankruptcy last year. It now says it plans to pass 10 million homes with fiber cable by the end of 2025. The company claims it is getting returns “in the mid-to-high teens” on its new fiber builds.
Demand for the service is exploding, Frontier says. The average customer uses nearly a terabyte of data each month. The average home on its network now has 22 devices, with gaming, videoconferencing and telemedicine all increasing.
While Frontier may look like it’s at the end of its run, then, it may be just beginning. Net income was up 8% year-over-year in the first quarter of 2022. The costs of its copper lines mask this progress on its balance sheet, which still shows almost $8 billion in debt served by $6.4 billion in revenue.
Frontier’s past makes this a speculation, but it could be a winning one.
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 company. Comcast stock is trading at just 13 times earnings, despite a 27 cent/share dividend yielding 2.7%. Morningstar considers it a top pick.
Comcast is really two businesses, the cable company and NBCUniversal. Cable represents 62% of the business, and broadband revenues now exceed those from cable TV. In total the company earned $3.9 billion, 78 cents/share, on revenue of $31 billion during the first quarter of 2022. Most of the new broadband subscribers on public networks are buying cable.
Analysts say Comcast is under growing pressure from new local fiber services, many municipally-owned. The answer may be to buy in, expanding Comcast’s footprint through acquisitions or partnerships. The company knows how to sign up customers and provide the service. All it really needs to grow is access to the lines.
Lumen Technologies (LUMN)
Like Verizon, Lumen (NYSE:LUMN) traces its history back to the old AT&T Bell System. In this case, it was once US West.
US West sold its wireless unit in 1997, and it’s now owned by Verizon. Instead it became a long distance internet player, buying Savvis in 2011.
As copper is upgraded to fiber, Lumen now wants to be in the forefront. It is available in 2.5 million locations with its Quantum Fiber service and wants to add almost 10 million more. It’s helped by having sold its copper business outside the old US West territory for $7.5 billion. It also sold its Latin America operations. Approval of those deals should bring in over $10 billion.
Lumen brought in almost $20 billion of revenue last year, with over 10% of that reported as net income. While you wait for its transformation you have a bargain stock, with a PE of 5.3 and a dividend now yielding over 9%.
On the date of publication, Dana Blankenhorn held a long position in GOOGL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.