The multi-billion dollar wireless industry remains a good bet for investors despite the cutthroat nature of the market and the always-evolving technology, according to reports. However, the sector will continue to have its share of winners and losers.
According to a report from investment banking firm Lehman Brothers, the wireless industry is poised for further growth and consolidation. Wireless services-and the companies that offer them-represent a major opportunity for investors and Wall Street.
“Valuations continue to look attractive,” Lehman Brothers wrote in an industry update for investors. The firm makes a market in the securities of a variety of wireless companies and does investment-banking business with a variety of wireless companies. “We believe that rising wireless forecasts and additional M&A will drive valuations higher.”
Lehman Brothers pointed out that wireless is now one of the most coveted portions of the telecommunications market. Wireless services are becoming a standard offering for most telecommunications companies, and those that don’t offer it will likely figure out a way to get into the market.
“Wireless remains the fastest-growing area of telecom services, and growth is not projected to slow in the near to medium term,” the firm wrote. “The fourth quarter of 2004 was a record quarter for subscriber growth at the Big 5 (wireless carriers), and we see upside to our 2005 net add forecast of 19 million. Based on this outlook, we expect that telecom service providers will seek to increase their exposure to this fast-growing sector.”
Other research firms agreed.
“Due to improvements in the quality, affordability and availability of wireless services, the technology has overtaken traditional wireline voice services as the preferred means of communication,” said Todd Rosenbluth, an integrated telecommunications services equity analyst with Standard & Poor’s and author of the firm’s report on the wireline industry. “Traditional voice revenues for the telecom wireline carriers may be sluggish, however, we see continued customer growth in their wireless, DSL and long-distance customer bases due to bundling efforts.”
Wireless is indeed a major area of the overall telecommunications market. According to market research from the Telecommunications Industry Association, U.S. spending on wireless communications will grow by 9.3 percent this year to a total of $158.6 billion. The group said the industry’s compound annual growth rate will remain above 10 percent for the next few years, enlarging the market to $212.5 billion by 2008.
Interestingly, these forecasts come at a time when the U.S. wireless market appears to be slowing after several years of massive growth. Most firms predict the mobile-phone market will slow to single-digit growth rates this year after rapid development. And TIA predicts the number of wireless subscribers in the United States-a number that doubled between 1999 and 2004-will now average a 5.2-percent compound growth rate for the next four years.
The forecasts of subdued growth also come at a time when wireless carriers are spending billions on network upgrades to support speedy wireless data services. The investment in 3G is by no means assured, however, as consumers overwhelmingly use their phones for voice services and not much else. Nevertheless, investment in upgraded networks remains the norm as carriers fret over being left in the technological dust.
The slowing market and high network upgrade costs conspire at a time of significant M&A activity. Larger carriers like the new Cingular Wireless L.L.C. and the proposed combination of Sprint Corp. and Nextel Communications Inc. will put extra pressures on the rest of the market due to their weight and mass.
“Recent/proposed mergers among the larger operators are creating a significant scale advantage that we believe will make it increasingly difficult for smaller carriers to remain cost competitive,” Lehman Brothers wrote.
Although wireless represents an opportunity for growth and profit, Lehman Brothers cautioned that smaller carriers may no longer have the ability to compete with larger carriers in a tightening market. The firm said M&A activity will continue, driven by the likes of Verizon Communications and Alltel Corp., and bigger players will remain safer bets for investors.
