Stocks to buy

The 3 Most Undervalued Communications Stocks to Buy Now: August 2023

The telecommunications industry is key to powering our digital lives. Providing consumers and businesses with not only basic access to the internet but also data servers and cloud networks. Communications companies have helped build the infrastructure of the modern world. Similarly, they will also be integral in enabling the next digital and technology breakthroughs.

In 2023, the industry has been facing a number of growth headwinds, as the cost-of-living crisis worsens and the slowdown in consumer spending have impacted the demand for telecom services and equipment. However, this also creates an opportunity for savvy investors to find some undervalued communications stocks that could benefit from the long-term growth of 5G and beyond. Here are three communications stocks that are worth considering for your portfolio in 2023.

Nokia (NOK)

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Nokia (NYSE:NOK) is one of the leading providers of telecom equipment and software, with a strong presence in Europe, Asia and North America. The telecom giant operates in several segments including network infrastructure, mobile networks and cloud services. What has remained constant across Nokia’s business model is the company’s ample investments in its 5G portfolio. These accounted for a substantial amount of its network sales in the second quarter of 2023. Nokia has also successfully expanded its cloud and software capabilities, as well as its enterprise and IoT solutions.

Nokia lowered its sales and profit guidance for 2023, citing the macroeconomic environment and customers’ inventory digestion as the main reasons. However, the company also said that it expects a gradual recovery in late 2023 and improved market conditions in 2024. The company has been proactively managing its costs and improving its operational efficiency, which should help it maintain its profitability and cash flow. Nokia’s market valuation is trading at around 8.9x forward earnings, while the company’s enterprise value is trading at 4.8x forward EBITDA. This implies the telecom giant is providing large enough profits relative to its value. Nokia is a solid value play among communications stocks that could reward patient investors with its 5G potential and dividend income.

Ericsson (ERIC)

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Ericsson (NASDAQ:ERIC) is another major player in the telecom equipment market, with a focus on radio access networks, core networks, digital services and managed services. The company has been winning 5G contracts around the world, especially in China, where it has secured deals with all three major operators. Furthermore, Ericsson has worked to further its market reach in India, where it has plans to build several 5G equipment manufacturing sites.

Ericsson reported a sharp decline in sales in North America in the second quarter of 2023, which weighed on its overall performance. The company attributed this to lower operator spending and delayed projects due to the macroeconomic uncertainty. However, Ericsson also said that it expects a recovery in the second half of the year, as well as continued growth in other regions. Though Ericsson’s market capitalization is trading a bit high at 14.7 x forward earnings, the company’s enterprise value is only around 6.2x forward EBITDA. The stock also offers a dividend yield of 3.25%, which is attractive for income investors.

Overall, Ericsson is a cheap stock that could benefit from its global leadership in 5G and its diversified portfolio.

Verizon (VZ)

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Verizon (NYSE:VZ) is the largest wireless carrier in the U.S. with over 140 million subscribers. The company has been building its 5G network using both mmWave and C-band spectrum, which provide high-speed and wide-coverage services respectively. Verizon has also been expanding its fiber-optic network, which supports its wireless and wireline businesses.

Over the years, Verizon has been pursuing strategic partnerships and acquisitions, such as its deal with Amazon (NASDAQ:AMZN) Web Services in 2022 to offer edge computing solutions and its purchase of Tracfone in 2021 to boost its prepaid segment. The telecom provider’s valuation is also attractive. Verizon’s stock is trading at only 7.1x forward earnings. VZ stock also offers a pretty sizeable dividend yield at 7.82%. Given the slight economic downturn that is imminent, Verizon could serve as a defensive stock that could offer steady returns and income in an uncertain market.

On the date of publication, Tyrik Torres did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the Publishing Guidelines.

Tyrik Torres has been studying and participating in financial markets since he was in college, and he has particular passion for helping people understand complex systems. His areas of expertise are semiconductor and enterprise software equities. He has work experience in both investing (public and private markets) and investment banking.