3 Communication Stocks Likely to Benefit From Industry Tailwinds

The Zacks Diversified Communication Services industry appears well-positioned to capitalize on the healthy demand trends driven by the fast-track 5G deployment and the transition to cloud and fiber network infrastructure. However, high capital expenditures for infrastructure upgrades, volatility in raw material prices, geopolitical conflicts and elevated inventory levels amid uncertain market conditions have dented the industry’s profitability.  

Telefonica Brasil S.A. VIV, Lumen Technologies, Inc. LUMN and VEON Ltd. VEON will likely benefit from the widespread adoption of IoT, the emergence of cloud and next-gen technologies, and extensive fiber densification driven by higher demand for scalable infrastructure for seamless connectivity.

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?

Thrust on Indigenous Networks: The companies are increasingly focusing on offering an integrated portfolio of voice, data, technology and support services to various small and mid-sized businesses (SMBs) to improve margins and business sustainability. The firms are tailoring their offerings to suit individual business needs and are facilitating SMBs to better adapt themselves to necessary technology advancements. At the same time, the firms continue to focus on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. Also, these firms offer the flexibility to better manage data traffic through indigenous software-defined networks to enable low-latency, high-bandwidth applications for faster access to data processing. In addition, the industry participants are focusing on other revenue-generating opportunities in adjacent verticals such as consumer goods, precision agronomy, animal agriculture and the digital health services market to optimize production capabilities through access to data and key insights.

Depleting Margins: Video and other bandwidth-intensive applications have witnessed exponential growth owing to the vast proliferation of smartphones and increased deployment of the superfast 5G technology. This has forced industry participants to invest considerably in LTE (Long-Term Evolution), broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. The 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 infrastructure investments are likely to be beneficial in the long run, short-term profitability has been compromised. High raw material prices due to elevated inventory levels, economic sanctions against the Putin regime and intensifying war-mongering conditions in the Middle East have further affected the operation schedules of various firms. 

Focus on Demand-Driven Operations: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the telecommunications industry's scalability, security and universal mobility and propel the wide proliferation of IoT. Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards, and wireline connections, is likely to act as a tailwind. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. The industry participants are facilitating their customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation through steady infrastructure investments.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Diversified Communication Services industry is housed within the broader Zacks Utilities sector. It carries a Zacks Industry Rank #46, which places it in the top 19% 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 bright 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 two to one. 

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 Outperforms S&P 500, Lags Sector

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

The industry has gained 21.2% over this period compared with the S&P 500’s and the sector’s growth of 17.6% and 26.2%, 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 8.96X compared with the S&P 500’s 17.46X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 13.21X.

Over the past five years, the industry has traded as high as 10.5X and as low as 6.03X, with a median of 7.56X, as the chart below shows.

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

3 Diversified Communication Services Stocks to Watch

Telefonica Brasil: Based in Sao Paulo, Brazil, Telefonica Brasil is the subsidiary of Spain-based telecom giant Telefonica SA. The company has been actively investing in technology upgrades and broadband network expansion to retain competitiveness in the rapidly changing market. Its unique value proposition, coupled with excellent customer experience, should help it register net additions in postpaid. Telefonica Brasil has a long-term earnings growth expectation of 21.5% and delivered a trailing four-quarter earnings surprise of 7.7%, on average. It has a VGM Score of B. The stock has gained 80.1% in the past year. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 8.9% and 22.2%, respectively, over the past year, to 86 cents and 88 cents per share. Telefonica Brasil sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: VIV

Lumen: Based in Monroe, LA, Lumen is a global communications firm, offering clients wide-ranging integrated products and services necessary to keep up with the rapidly-evolving digital world. The company’s terrestrial and subsea fiber optic long-haul network throughout North America, Europe, Latin America and the Asia Pacific 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 and 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 and next-year earnings has been revised upward by 90.5% and 83%, respectively, over the past year. This Zacks Rank #1 firm has gained 67.7% in the past year. It has a VGM Score of A and delivered a trailing four-quarter earnings surprise of 96.9%, on average. 

VEON: Headquartered in Amsterdam, the Netherlands, VEON offers voice, data and other telecommunication services through a range of wireless, fixed and broadband Internet services across Russia, Pakistan, Algeria, Uzbekistan, Ukraine, Bangladesh, Kazakhstan, Kyrgyzstan and Georgia. The Zacks Consensus Estimate for current-year earnings has been revised upward by 25.1% since June 2025. Continued investments in digital capabilities and services remain a key strategy for the company as it aims to transform lifestyles through technology-driven services in some of the world's fastest-growing emerging markets. The company carries a Zacks Rank #2 (Buy) and has gained 21% in the past year.    

Price and Consensus: VEON

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Telefonica Brasil S.A. (VIV): Free Stock Analysis Report
 
VEON Ltd. (VEON): 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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