3 Communication Stocks Likely to Weather Industry Headwinds

The Zacks Diversified Communication Services industry appears mired in shrinking profit margins due to high capital expenditures for 5G infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions amid geopolitical tensions, latent tariff-war threats, intense market volatility and high customer inventory levels. However, the industry is likely to benefit in the long run from an accelerated 5G rollout and increased fiber densification.  

Amid such uncertain market conditions, Telefónica, S.A. TEF, Rogers Communications Inc. RCI and Lumen Technologies, Inc. LUMN should benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT and transition to cloud network.

Industry Description

The Zacks Diversified Communication Services industry comprises firms that provide a wide array of communication services, including wireless, wireline and Internet, to business enterprises and consumers. These companies offer mobile and wireline telephone services, high-speed Internet, direct-to-home satellite television and other value-added services. In addition to providing integrated information and communications technology services to businesses and governments, some of these companies operate as local exchange carriers or full-service providers of data center colocation and related managed services in state-of-the-art data center facilities. Some industry participants also provide IP networks, private lines, network management and hosting services, along with sales, installation and maintenance of major branded IT and telephony equipment.

What's Shaping the Future of the Diversified Communication Services Industry?

Soaring Raw Material Prices: Although the supply chain woes have declined progressively, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by telecom carriers. Moreover, high raw material prices due to inflation and economic sanctions against the Putin regime have affected the operation schedules of several firms. High tariffs for imported goods by the Trump administration and reciprocal tariffs by countries across the globe have further increased production costs. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices.

Short-Term Margins Compromised: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the wide proliferation of smartphones and increased deployment of 5G technology. This has forced the industry participants to invest considerably in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming themselves from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. Although these investments are likely to be beneficial in the long run, short-term profitability has largely been compromised.

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, local-line access for traditional telephony services continues to decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion of overall network access services year over year, hurting revenues of local and long-distance operations. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These adverse impacts have become more pronounced with the prolonged Russia-Ukraine war and Middle East tensions.

Customized Services to Mitigate Risks: To improve profitability, the companies are increasingly focusing on providing support services to various small and mid-sized businesses (SMBs) with an integrated portfolio of voice, data and technology services. The firms are tailoring their services to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements. At the same time, the industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios by offering free services to low-income families and seamless wireless connectivity to the masses.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #163, which places it in the bottom 33% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. 

Before we present a few diversified communication stocks that are well-positioned to outperform the market based on a relatively modest earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500, Sector

The Zacks Diversified Communication Services industry has lagged the S&P 500 composite and the broader Zacks Utilities sector over the past year due to macroeconomic headwinds.

The industry has jumped 5.8% over this period compared with the S&P 500’s and the sector’s growth of 16.1% and 16.8%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 13.37X compared with the S&P 500’s 18.65X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 15.91X.

Over the past five years, the industry has traded as high as 18.38X, as low as 8.93X and at the median of 12.15X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Diversified Communication Services Stocks to Bet on

Telefonica: Based in Madrid, Spain, Telefonica provides mobile and fixed communication services in Europe and Latin America. The company has launched 5G+ (5G SA) in Spain, Brazil, Germany and the U.K. In March 2025, Telefonica’s accelerated 5G rollout achieved a significant milestone, with coverage expansion across all four key markets - Spain (94%), Germany (98%), Brazil (66%) and the U.K. (80%). The 5G SA core is now fully deployed across all major markets, and the 5G SA network is live in 500 U.K. locations, making it the country’s largest with more than 70% population coverage. Telefonica’s network upgrades have been designed to improve capacity, speed, coverage and security. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 42.4% and 64.5%, respectively, to 47 cents and 51 cents per share since December 2024. It has a VGM Score of B. Telefonica carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Price and Consensus: TEF

Rogers: Toronto, Canada-based Rogers provides cable television, high-speed Internet access and video retailing through its wholly-owned subsidiary, Rogers Cable and Telecom. The company also offers wireless voice, data, and messaging services through its wholly-owned subsidiary, Rogers Wireless. Rogers’ new satellite-to-mobile service marks a major leap in expanding its national connectivity footprint, delivering coverage up to three times wider than its competitors. This breakthrough initiative extends reliable mobile access to remote and underserved regions across Canada, addressing a long-standing market gap. The stock has gained 8.7% in the past year. Rogers carries a Zacks Rank #3 (Hold).  

Lumen: Based in Monroe, LA, Lumen is an international facilities-based technology and communications company that operates one of the most interconnected networks globally. The company’s terrestrial and subsea fiber optic long-haul network throughout North America, Europe, Latin America and the Asia Pacific region connects to metropolitan fiber networks that it operates. Lumen remains focused on “cloudifying” telecom and driving the adoption of its network-as-a-service or NaaS solutions like Lumen Ethernet On-Demand and Lumen IP-VPN On-Demand. Lumen’s strong network capabilities, integrated hosting and network solutions are likely to promote growth in the cloud business. Its managed and cloud services are key differentiators from other players in the market. The Zacks Consensus Estimate for current-year earnings has been revised upward by 39.4% since December 2024. This Zacks Rank #2 stock has gained 18.6% in the past year. It has a VGM Score of A. 

Price and Consensus: LUMN

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Telefonica SA (TEF): Free Stock Analysis Report
 
Rogers Communication, Inc. (RCI): Free Stock Analysis Report
 
Lumen Technologies, Inc. (LUMN): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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