UBS lays out key questions - and prime picks - for year in Communications/Media
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Looking ahead to the year in Communications and Media stocks, UBS examines major themes including the fight for broadband share between cable and telecoms, the direct-to-consumer video wars, wireless competition, and the picture for consolidation and mergers/acquisitions.
The year hinges on 10 pivotal questions, it says, starting with "What impact will telco fiber and fixed wireless have on cable broadband?"; "Will cord-cutting accelerate?"; "Can TV advertising continue to grow?"; "What will DTC subscriber growth look like in 2022?"; and "How will Wireless growth and competition evolve in 2022?"
The other questions it's examining: "Who were the biggest spenders at the 3.45 GHz auction?"; "How will 5G evolve this year?"; "Can the towers continue to benefit from 5G network deployments?" "Is the data center supply/demand equation set to improve?"; and "What is the outlook for M&A and regulation?"
On the broadband question, the bank notes cable captured all the broadband net subscriber additions from 2015-2020, but telecoms started "clawing back" share in 2021 and also saw some earlier-than-expected momentum for fixed wireless.
The backdrop should be more challenging going forward, John Hodulik and team write, with competition heating up in a stabilizing growth environment. UBS is expecting cable to add just under 2 million subs this year (down from 2.7 million last year, and 4.7 million in 2020) as telecoms build momentum. As for video, cord-cutting should accelerate (with subs expected down 6.7%) on "continued price increases, broader availability of sports OTT and the continued shift in content budgets from linear to DTC."
Speaking of direct-to-consumer, the key platforms are making their moves overseas as growth moderates at home - and the investment needed will pressure free cash flow for the established players.
"We estimate DTC content spend will begin to exceed spending on traditional outlets (linear TV, theatrical, etc.) in '22," the bank says. And while those paying for 4-5 streaming services often complain it's the cable bill all over again, UBS says it's "skeptical that media companies can re-create the economics of the traditional bundle."
On the wireless industry, competition is expected to stay hot even as investment rises to new highs. Some outsized results in 2021 came from factors including pent-up demand, government stimulus and business growth, but that should moderate this year. And as the players fight over the consumer pie, UBS expects the "focus remaining on device promos but also increasingly on fixed/wireless bundles (as well as entertainment, sports, music, gaming apps) vs. stand-alone service price cuts."
As for regulation, the establishment of a Democratic majority at the FCC should bring a more "activist" posture, UBS says: "We believe residential broadband will take center stage but we believe the focus will be on rural access and stop short of price regulation despite a move to reinstate Net Neutrality." And while antitrust regulators will be busy, bigger deals are still possible, UBS says, naming intriguing prospects for DirecTV (NYSE:T) and Dish (NASDAQ:DISH), and for Charter Communications (NASDAQ:CHTR) and Altice USA (NYSE:ATUS).
The report gives UBS the opportunity to name its top picks in a few areas as well. In Wireless, it sees meaningful upside for T-Mobile (NASDAQ:TMUS) as "EBITDA growth accelerates, (free cash flow) ramps and a multi-year buyback program commences." It also sees cost synergies ramping alongside the shutdown of the legacy Sprint network, and upside to subscriber/revenue performance - but it's also Buy-rated on AT&T (T).
In Media, it has just one Buy-rated stock: Walt Disney (NYSE:DIS). DTC subscriber growth has bottomed, it says, and new market launches mixed with the new content investments should drive better subscriber growth (and investor sentiment) in the coming year. Among the more traditional media players, it also says Fox (FOX, FOXA) is better positioned, though it's staying Neutral expecting worsening pay-TV sub-trends this year, with a better buying opportunity next year.
In Communications Infrastructure, it likes SBA Communications (NASDAQ:SBAC), which UBS says is in the best position for the upcoming 5G investment cycle. All tower operators will benefit, but SBAC has the highest exposure to U.S. towers among peers, at around 80%. And its premium to rivals is "justified given more recession-resistant end-user demand, faster growth and a strong pipeline of catalysts."
BofA also called out SBA Communications as a positive for its U.S. exposure to the coming investment cycle.