With Q3 in the rearview mirror, much has been said about the performance of the somewhat “newly” formed communication services sector. Looking back to the end of last September in 2018, the market witnessed one of the most impactful events – the reshuffling of the S&P 500 index, where the telecommunication sector along with many other stocks from the Technology and Consumer Discretionary sectors would combine to form what is known today as the Communication Services sector.
Such move had forever changed the trading landscape of the stock market in multiple facets. Much more than simply a renaming of the TMT sector, the market index saw a significant drop in the weight of the Technology sector that went from 26% to 21% while the Consumer Discretionary sector weight reduced by more than 2.5% to roughly 10%. Another disruptive implication was dividend yield – the once dividend rich TMT sector was left with a meager 1.7% dividend yield (down from 5.4%), remaining largely more exposed to growth factors than the old self.
Against the backdrop of this reshuffle, the Communication Services sector is up almost 20% for the past year outperforming the broader market S&P 500 index (+13.59%) by a large margin. This seemingly impressive growth is partially due to the inclusion of stocks such as Netflix, Google, Facebook that typically enjoy higher returns during market rallies. Though this will likely mean the newly formed sector would have a larger beta than before.
Albeit a slowdown in large M&A deals, 2019 saw the closure of the Sprint/T-Mobile merger – the third and fourth-largest carriers in the US –reshaping the competitive dynamics of the communications industry. While much talks have been directed at antitrust concerns, it was nonetheless deemed necessary for T-Mobile’s continued well-being as its rapid subscriber growth is going through the roof in tandem with mobile data traffic. Consequently, to address their pressing needs to increase data capacity and to better position themselves for the impending shift to 5G, the merger with Sprint can be seen as a strategic move for T-Mobile to bolster their spectrum holdings, particularly, in the mid-band area.
While it still seems somewhat early to get truly excited about 5G, carriers have been gearing up for upcoming 5G networks. Given that both mmWave (millimeter wave spectrum or high-band spectrum) and mid-band spectrum will be key to 5G deployment, wireless carriers are revving up their investment in acquiring wireless spectrum. Together, AT&T and T-Mobile spent around $1.8 billion on mmWave spectrum licenses in the 24GHz band, while Verizon spent about $505 million in the 28GHz auction. As the battlefield for radio spectrum auction heats up, the FCC will offer up 3,400 MHz of high-band spectrum in the upcoming December auction. Needless to say, all four carriers AT&T, Sprint, T-Mobile, and Verizon will participate to get ahead of the game.
The longer-term effect of investing heavily in the mmWave spectrum will be increased small cells deployment at a significantly larger scale. This is because these high-frequency airwaves support very short signal range despite providing ultra-fast speed and low latency. As a result of their poor travel capability, massive amounts of small cells will need to be deployed to enable data transmission through mmWaves. In addition to enhanced mobile broadband (eMBB), 5G will bring about a variety of revolutionary technologies including IoT, augmented and virtual reality, 8K real time video streaming, remote medical surgeries, and autonomous vehicles through the use of solutions such as MIMO (multiple input multiple output) and beamforming. Though substantial investments are needed to usher in this technological revolution, it is only a matter of time before the Communication Services sector reaps tremendous benefits and deliver strong ROI to patient investors.
2019 has been a year of lots of talks surrounding 5G deployments when it comes to communication services sector. With leading companies positioning themselves to capitalize on a variety of 5G applications worldwide, the embattled sector, marked by increasing competitions, will likely grab the headlines for the years to come.
By Minghua Xie – FRE Bulls&Bears Trading Group
