- Data volumes are constantly increasing, meaning our telecommunications infrastructure must expand rapidly.
- A key driver is the new mobile phone standard 5G, which also opens up interesting investment opportunities for investors.
- As not all telecoms companies are likely to benefit from the trend at the same time and to the same extent, careful analysis is needed when selecting stocks.
Countries around the world want to boost investment in telecommunications infrastructure.
"Reminder: videoconference starts in fifteen minutes. You have plenty of time to read the article..." Intelligent digital infrastructure has become an essential part of professional and private exchanges; the coronavirus crisis has made this clearer than ever before. If it’s not possible to have a face-to-face appointment, it simply happens virtually. Unsurprisingly, use of video conferencing has increased by 120 percent in the wake of the pandemic.
As a result, telecommunications stocks currently look attractive to investors. However, investors are also wondering about the sector’s potential beyond the pandemic.
Matthias Meyer, investment specialist for liquid real assets & equities at DWS, believes it is unlikely that the telecommunications industry will turn back to how it was before. To the contrary.
"Governments around the world have announced economic stimulus packages, and these provide for greater investment in telecommunications infrastructure,“ he says. "This should support the performance of listed infrastructure operators. At the top of the agenda in Europe is the rapid introduction of 5G networks. The establishment of the new mobile standard is a strong trend from which the industry should benefit in the long term".
The ultra-fast 5G network is becoming the economy’s growth engine
A study by the research and consulting company Gartner shows the growth potential that lies dormant in 5G: the fifth generation of mobile connectivity with ultra-short response times and enormous data capacity. According to current forecasts, global sales of 5G infrastructure are expected to almost double this year, rising to 8.1 billion US dollars. Investment by communications service providers in 5G infrastructure amounted to 10.4 percent of total revenues last year and should account for more than a fifth (21.3%) by 2020.
Enormous investment is therefore required for network operators to create fast mobile phone connections with data rates of up to 10 gigabits per second available nationwide. Private investors can also contribute capital via appropriate investment funds. The German telecommunications market looks particularly exciting. Compared to other EU countries, Germany has lagged behind in expanding its 5G network and broadband provision. This is set to change.
Once established, 5G should not only further simplify interpersonal exchanges but also enable reliable and smooth data communication between objects, products, machines, vehicles and servers. This means networked urban infrastructure -- "smart cities" -- can become reality. This is likely to stimulate the economy as a whole and to boost further the already high data volumes that characterise the digital age.
Data centres already benefit from enormous amounts of data
In the telecommunications industry, data centres should be among the 5G winners. An expansion phase has already begun based on increasing demand for computationally intensive cloud applications. DWS expects global growth in cloud traffic of more than 20 percent this year alone. This is expected to increase the revenue of colocation data centres by five to ten percent, depending on geographical location and capacity utilisation. To enable data centres to expand their capacity further, new centres will have to be built at core locations as well as in peripheral areas.
In addition, 5G should create a considerable growth spurt in fibre optic cables. "Sufficient fibre optic coverage is required if network operators are to have a chance of supporting the predicted network performance of the new mobile communications standard," says Matthias Meyer.
5G data is transmitted at higher frequencies than 4G, which limits the range of 5G networks. In order to enable more secure data transmission over long distances, a dense network of so-called "small cells" connected by a fiber-optic counterpart is therefore required.
Germany wants to make up a lot of ground on 5G and broadband coverage.
And because 5G technology covers shorter distances than its predecessor, it requires significantly more transmission towers to achieve the same network coverage as 4G. As a result, operators of mobile phone masts are likely to be among those that benefit from 5G - especially in the early phase. In the longer term, these companies appear attractive to investors because of stable, predictable cash flows, for example, from long-term leases for antenna sites - often with several network operators.
"In addition, operators of mobile phone masts benefit from high barriers to market entry," says Matthias Meyer. "The limited competition makes them interesting for investors."
Telecommunications providers have to offset 5G rollout costs
Further consolidation in the sector could lead to telecommunications providers selling even more towers to tower operators in future. In the short term, revenues from commercialising frequencies alone may not be sufficient to cover the costs of financing 5G. Alternative sources of income will therefore play a decisive role in recouping the high capital expenditure in the medium term. In addition to selling towers, telecommunications providers will have to rely on providing other services and acquiring new customers in this area.
"Close inspection reveals the need to analyse the investment spectrum continuously and thoroughly when investing in 5G or telecommunications infrastructure, as is the case with all thematic investments," says Matthias Meyer. "This is the only way for investors to find the most promising securities and to take advantage of opportunities that arise in different market phases.“