The last two weeks iShares Telecom ETF has bounced off support at the 200 DMA and taken on a renewed vigor to lead breaking through resistance at the $31 level. After spending the last seven months in a wide trading range and producing some extreme volatility the sector looks to be ready to push higher. The digital world is accelerating at a rate faster than many believed with the integration and adoption of smart phones, tablets and laptops to integrate data across platforms. This need to push bigger amounts of data faster has challenged the traditional side of the telecom sector to the limit. We could also say in many ways they have failed to keep pace… thus the volatility and trading range stated above. As you can see on the chart below… technically the breakout is positive, but the bigger question lies in the fundamental data and who will be able to control cost relative to revenue? Who will the winners and losers be as this rush to deliver data accelerates with the likes of Netflix, Spotify and others piggybacking on the telecom systems?
As with any disruptive technology the smaller companies have the advantage in that they can pivot faster to take advantage of what is new and growing. However, in this sector the cost to develop and deliver digitized data is huge. There is little doubt the challenge this industry faces as the realities of delivering a quality product with customer satisfaction grows with each new app or service created. In order to accomplish this analyst have said, “the telecom providers must completely redefine their relationships with the end customer.” The model must change from price to a superior customer experience. This is a big model shift from my view. The companies that can achieve this will have a leg up on the rest of the sector. Too many variables at this point to declare anyone a winner… but, it is worth scanning and watching how it unfolds moving forward.
Scanning the sector for the leaders shows they are easy to define crurently. GNCMA (earning driving traditional larger company higher), EGHT (cloud based/UCC services and smaller company with more mobility), SPOK (solutions based company and smaller company as well), VG (cloud based like 8×8, but bigger in size.) and SHEN (earnings driving traditional company smaller in size). Breaking down and looking at what is leading and why, we see the clear distinction between the traditional older carriers big and small are moving on earnings, and the smaller cloud based/piggyback services providers are making moves to be more cutting edge in services and service provided for better profits. Both offer their respective advantages, but it is clear that it comes down to the ability to deliver on the quality of service and cutting edge applications that will determine the winner going forward. Running this scan consistently will show who the leaders become and where the opportunity is short term.
The sub-component of this sector that is moving higher and leading is the semiconductors or chip makers. In many ways they have an easier road to map as they just need to keep improving on the apps, software, functionality and speed of the processing within the phones themselves. Skyworks (SWKS) is a good example of a leader in this space. Synaptics (SYNA) in the software space is leading that sector currently. The telecom sector as a whole is breaking higher technically, fundamentally the earnings are improving for some of the traditional companies and the smaller companies are learning how to better monetize their assets. One key shift in the coming months will be a continued shift away from unlimited data services. It is believed that the heavy users will pay a premium for quality services. This is where the future battle will be waged and won for both the business and the consumer. The limited services and lower end customer will get the leftovers so to speak… and that is sure to cause a level of discontent in Washington and on Main Street. Plenty to come as to how this will actually unfold and who makes money.
This is one sector to dig in and define your beliefs and align the stocks that give you the best opportunities based on the metrics of where the business going. Equally important is the speed it is currently heading towards better connectivity of all devices and more data.