Buy, Hold or Sell: AT&T Inc. (T) vs. InterDigital (IDCC) With the growing demand for high-speed data connectivity amid rapid digital transformation worldwide and increasing government investments, the telecom industry's growth prospects look promising. Amid this backdrop, let's find out...
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With the growing demand for high-speed data connectivity amid rapid digital transformation worldwide and increasing government investments, the telecom industry's growth prospects look promising. Amid this backdrop, let's find out if investors should buy, hold, or sell AT&T (T) and InterDigital (IDCC) now. Continue reading….
Despite macroeconomic uncertainties, the telecom industry strives to remain resilient. The industry is well-positioned for significant long-term expansion, thanks to soaring demand for efficient connectivity amid the rapid digital transformation of businesses and consumers' lives. In addition, growing federal government funding for telecom infrastructure should fuel the industry's growth.
While investors should hold telecom stock AT&T Inc. (T) and wait for a better entry point in this stock, fundamentally sound InterDigital, Inc. (IDCC) could be an ideal buy now for solid returns.
Despite an uncertain macro environment, the telecom industry is poised to witness robust growth in the foreseeable years, driven by a rising number of mobile users worldwide, the continued importance of efficient data connectivity, and the growing demand for value-added managed services.
Moreover, with a surge in e-commerce, integrated Internet of Things (IoT) solutions in manufacturing and supply chain, or connected vehicle experiences in the automotive industry, the rapid digital transformation of businesses and consumers' lives provides numerous opportunities for the telecom industry to extend revenue streams beyond just connectivity.
Communication services providers (CSPs) capitalize on the opportunities and deliver value to consumer and enterprise customers with bundled services and connectivity options such as 5G fixed wireless access (FWA) and fiber.
According to a report by Grand View Research, the global telecom services market is projected to reach $2.87 trillion by 2030, growing at a 6.2% CAGR. The U.S. telecom services market is expected to expand at a CAGR of 6.5% during the forecast period from 2023 to 2030.
Growing government initiatives and investments to drive 5G deployment and adoption of fixed and wireless networks nationwide should also boost the telecom industry's growth and expansion. On April 12, Biden-Harris Administration announced the launch of the Public Wireless Supply Chain Innovation Fund, which aims to invest $1.5 billion in developing open and interoperable networks.
"The Innovation Fund is a critical step toward securing 5G wireless networks while driving innovation at home and abroad," said U.S. Secretary of Commerce Gina M. Raimondo.
He added, "Investing in the next generation of innovation will unlock opportunities for new and emerging companies to compete in the global telecom market, strengthen our telecom supply chains and provide our allies and friends with trusted choices and innovative technologies to compete in the 21st Century."
As per a report by Grand View Research, the global 5G services market is expected to reach $2.21 trillion by 2030, expanding at a CAGR of 59.4%.
Investors' interest in telecom stocks is evident from the SPDR S&P Telecom ETF's (XTL) 6.2% gains over the past month.
Given this backdrop, investing in quality telecom stock IDCC for potential gains could be wise. However, investors could add T to their watchlist and wait for a better entry in this stock.
Let's discuss the fundamentals of these stocks in detail.
Stock to Hold:
AT&T Inc. (T)
T offers telecom and technology services globally. The company's Communications segment provides wireless voice and data communications services; and sells handsets, wireless data cards, and wireless computing devices. The Latin America segment offers postpaid and prepaid wireless services in Mexico under the AT&T and Unefon brand names.
On June 7, T and Cisco (CSCO) announced new solutions to enhance connectivity and advance the calling landscape for hybrid workforces. AT&T Cloud Voice with Webex Go2 would be available for all Webex Calling users from Cisco partners in the United States later this year.
The companies are also working together to bring SD-WAN connectivity with add-on services such as 5G and broadband to deliver an optimized experience for enterprises of all sizes. This partnership might drive T's growth and profitability.
On May 11, T and BlackRock Inc. (BLK), through a fund managed by its Diversified Infrastructure business, closed their joint venture (JV) to form Gigapower, LLC. plans to Gigapower plans to provide a state-of-the-art fiber network to internet service providers and other businesses in parts of select metro areas throughout the country. This Innovative JV should bode well for T.
T's trailing-12-month gross profit margin of 58.37% is 17.7% higher than the 49.59% industry average. Likewise, the stock's trailing-12-month EBITDA margin of 36.15% is 100.3% higher than the 18.05% industry average. However, its trailing-12-month net income margin of negative 7.52% compared to the 2.81% industry average.
In terms of forward non-GAAP P/E, T is currently trading at 6.63x, 55.7% lower than the industry average of 14.97x. Also, the stock's forward EV/EBITDA multiple of 6.79 is 20.1% lower than the industry average of 8.54.
For the first quarter that ended March 31, 2023, T's operating revenues increased 1.4% year-over-year to $30.14 billion. Its operating income grew 8.4% year-over-year to $6 billion. Also, the company's adjusted EBITDA rose 3.9% from the prior year's quarter to $10.59 billion.
However, the company's net income decreased 13.8% year-over-year to $4.45 billion, while its EPS from continuing operations declined 12.3% from the year-ago value to $0.57.
Analysts expect T's revenue to increase 1.1% year-over-year to $122.08 billion for the fiscal year (ending December 2023). However, the company's EPS for the ongoing year is expected to decline 5.4% from the prior year to $2.43.
Shares of T have gained 5.2% over the past month to close the last trading session at $16.12. However, the stock has plunged 14% over the past six months.
T's mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
T has a B grade for Growth. It has a C grade for Quality, Sentiment, and Value. The stock is ranked #6 out of 18 stocks within the Telecom - Domestic industry.
In addition to the POWR Ratings I've just highlighted, you can see T's ratings for Momentum and Stability here.
Stock to Buy:
InterDigital, Inc. (IDCC)
IDCC designs and develops technologies that enable and enhance wireless communications internationally. The company provides technology solutions, including 3G, 4G, 5G, and IEEE 802-related products. It also offers video coding and transmission technologies; and engages in the research and development of artificial intelligence.
On May 17, IDCC and the 6G Innovation Centre (6GIC) at the University of Surrey announced a bilateral research partnership to develop 6G enabling technologies that might impact future wireless standards.
"Our new partnership with 6GIC reflects InterDigital's commitment to collaborate with leading universities and programs to encourage innovative research outcomes and bolster the impact of our innovation through wireless standards like ETSI and 3GPP," said Milind Kulkarni, VP and Head of Wireless Labs at IDCC.
On May 15, IDCC signed a new patent license agreement with Alps Alpine Co., Ltd., and the deal covers Alps Alpine's range of devices under IDCC's standard essential patents related to HEVC.
In addition to demonstrating how IDCC's innovation is applied across a range of devices, its long history of research in the video space implies its asset portfolio strength in HEVC and other leading codecs. The collaboration should boost IDCC's revenue stream and expansion.
IDCC's trailing-12-month gross profit margin and EBIT margin of 86.18% and 43.36% are 76.9% and 943.2% higher than the industry averages of 48.72% and 4.16%, respectively. Likewise, the stock's trailing-12-month net income margin of 32.38% is significantly higher than the 1.71% industry average.
In terms of forward non-GAAP P/E, IDCC is trading at 12.25x, 47.7% lower than the industry average of 23.40x. Also, its forward EV/EBITDA multiple of 7.20 is 51% lower than the industry average of 14.69%.
IDCC's total revenue increased 99.7% year-over-year to $202.37 million in the first quarter that ended March 31, 2023. Its income from operations rose 295.1% from the year-ago value to $119.26 million. Also, the company's adjusted EBITDA grew 179.5% year-over-year to $154.81 million.
Furthermore, the company's non-GAAP net income and non-GAAP net income per share were $123.62 million and $4.21, up 301.3% and 325.3% year-over-year, respectively.
Analysts expect IDCC's revenue for the fiscal year (ending December 2023) to come in at $532.85 million, indicating an increase of 16.4% year-over-year. The consensus EPS estimate of $7.85 for the current year reflects a 107.9% year-over-year improvement. Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters.
IDCC's stock has gained 70.9% over the past six months and 55.5% over the past year to close the last trading session at $96.09. The stock has gained 14.5% over the month.
IDCC's POWR Ratings reflect a strong outlook. The stock has an overall grade of B, translating to Buy in our proprietary rating system.
IDCC has a B grade for Growth, Value, Sentiment, and Quality. Within the same industry, it is ranked #3 of 18 stocks.
To see additional POWR Ratings (Momentum and Stability) for IDCC, click here.
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T shares were unchanged in premarket trading Tuesday. Year-to-date, T has declined -9.91%, versus a 16.92% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet's keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet's looks to help retail investors understand the underlying factors before making investment decisions.
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