If the analysts at Oppenheimer & Company are correct, the surface has just been scratched. They estimate industrywide revenues will double within five years from $400 billion to $800 billion. For some time, profits have disproportionately gone to Apple and the Internet content providers. In the fourth wave, there may be a shift of some of the those profits back to the carriers.
Oppenheimer’s report suggests a $20 billion EBITDA potential exists over the next six years, and the big winner among the carriers may very well be Verizon Communications Inc. (NYSE: VZ). With a superior 4G LTE network, which combines coverage and speed, bottlenecks may become a thing of the past. Applications in the future may be hosted by the carriers themselves, and they are capable of full web access and functionality even on a new generation of lower cost devices. Plus, the carriers may use their network advantage to offer more apps for free. Verizon is the dominant Android carrier, and the Android operating system has won the OS war and is dominating handset sales. Top of the line Android handset pricing is expected to drop to as low as $100, especially in emerging markets, creating more demand and volume growth.
Another boost to the carriers, and this includes AT&T Inc. (NYSE: T), is falling subsidy prices paid to the handset makers. AT&T’s subsidies could drop from 15% per phone to 5% in time, drastically improving margins. With more than 100 million phones being sold every year, Oppenheimer thinks the carriers could save up to as much as $100 per phone, or $10 billion dollars in annual savings. As smartphones and tablets tumble in price, increased usage and data demands should provide additional strong revenue growth. Although cap-ex is also expected to grow to meet infrastructure demands, Verizon’s combination of Android and LTE dominance may make them a top pick for the future.
It is also all about cloud computing and its ties to wireless data growth. With an expected shifting of mobile applications to remote data centers, and an increase in centralized computing storage and processing, it is very possible that simple low-cost phones and tablets could become highly competitive. Another favorite is Akamai Technologies Inc. (NASDAQ: AKAM). Oppenheimer fully expects Akamai to become a much bigger player for hosting mobile apps, and it sees the explosion of mobile applications as a strong growth vehicle. Also included in the web hosting space and cloud services providers is Rackspace Hosting Inc. (NYSE: RAX). A company with enormous growth potential that Oppenheimer believes may be a potential takeover candidate as well.
Perhaps the real wild card is how a carrier like Sprint Nextel Corp. (NYSE: S) will make out under its new structure. Sprint is now one of the 10 best performing S&P 500 stocks of 2012, and its share price would not remain this high if investors believed its prospects were dimming. And what about cell tower providers like American Tower Corp. (NYSE: AMT) and Crown Castle International Corp. (NYSE: CCI)? These stocks have chugged higher and higher over the past year, and they are trading up very close to 52-week highs.
It may mark a significant shift in time if carriers like AT&T and Verizon get the ball back in their court as far as who is in charge of the carrier vs. handset-maker relationship is concerned. With 5% dividend yields on average, and with shares each down close to 10% from their recent highs, perhaps it makes sense that these are the next winners now that Apple has been back in bear market territory.
The future for wireless at this point seems unlimited. But true to form, what has been written about today most likely will become obsolete five years from now. The key to technology investing has never changed: focus on future areas of growth and expansion rather than seeing if past leaders can ever be resurrected from the dead.
Lee W. Jackson