The communication services sector had a successful year in 2023, rebounding from a lackluster performance in the previous year and driven by investor interest in artificial intelligence. Despite this strong showing, the sector still has significant potential heading into 2024. Valuations within the sector remained attractive by the end of 2023, with positive shifts in earnings estimates. Stock prices in the sector had not yet reached their previous peak levels, despite record earnings and momentum.
Fitch Ratings’ 2024 outlook for the North American Telecommunications and Cable sector is neutral, with large wireless and tower operators expected to de-lever while some telecom and cable operators face competitive and secular challenges. The sector is considered relatively resilient due to the essential nature of broadband and connectivity services. Despite potential risks like consumers opting for lower-priced services, wireless subscriber growth is anticipated to increase, supported by implemented price increases. Fitch projects modest revenue growth and improved free cash flow for the sector in 2024-2025, with EBITDA margins expected to slightly improve. The decline in 5G-related capital expenditures is predicted to drive an overall increase in aggregate free cash flow, allowing certain operators to focus on debt reduction in 2024.
The telecommunications industry is facing strategic challenges similar to mature industries, dealing with increased data consumption but limited pricing power in commoditized services. Despite a projected threefold increase in global data consumption by 2027, revenues from internet access are expected to grow modestly at a 4% CAGR to $921.6 billion. Telecommunications companies are projected to spend $342.1 billion in 2027, particularly with the ongoing transition to 5G. PwC’s Global Telecom Outlook suggests that telcos can explore growth in areas like IoT solutions, private 5G networks, home broadband, and tailored digital services for sectors like entertainment, healthcare, manufacturing, and mobility. Adapting to broader ecosystems is seen as a strategic imperative in this evolving industry.
Some of the best communication stocks to invest in, according to hedge funds, include Meta Platforms, Inc. (NASDAQ: META), T-Mobile US, Inc. (NASDAQ: TMUS), and Charter Communications, Inc. (NASDAQ: CHTR). These companies have shown promising performance and are favored by hedge fund sentiment.
Overall, the communication sector continues to show potential for growth and investment opportunities. By considering the insights and recommendations from hedge funds, investors can make informed decisions about the best communication stocks to buy in the current market.