Few industry groups have done as poorly over the past decade as the telecom equipment companies. Coming out of the tech telecom bust around the turn of the century, many of these stocks were considered very promising. Everyone was talking about the “triple play” (voice, data and video) and 2G/3G/4G build-outs.
So what happened? Several things. Phone companies around the globe did not increase their capital spending as rapidly as expected. Moreover, a wave of mergers among the telecom service providers reduced the number of potential customers and gave them more clout in their purchasing. Probably the most significant factor is the emergence of strong competitors from China. Companies like Huawei and ZTE came on the global stage in the 1990’s. Initially they competed in low-end products largely on price. But they plowed their profits back into R&D and now have a wide range of technically advanced offerings.
Given this history, why would anyone want to buy telecom equipment makers now? They do have a few good things going for them. First of all, potential demand. The volume of wireless data continues to grow at a rapid rate. The number of 4G networks around the world is expected to triple this year compared to last year. And competitive pressures will likely lead to 5G and 6G networks before long. Secondly, the rate of consolidation among service providers could begin to slow. With global behemoths dominating the service landscape, there may be opportunities for nimble new entrants. Finally, while the Chinese competition is not going away, it is becoming more mature and may be losing some of its cost advantage.
This article is excerpted from the October 2012 issue of The Turnaround Letter. Read the subscriber-only version to learn which companies could benefit significantly if there is an upturn in the equipment sector. They are not without risk, but they have very substantial appreciation potential if they can get back on track.