Stocks to Play the Satellite Space Race

A good internet connection has become a bare necessity for millions around the world, as more people began working remotely during the COVID-19 pandemic. Considering the trend is here to say, there couldn’t be a better time to look at the broadband internet revolution that’s taking place in space. To be precise, in low-earth orbit (LEO) at an altitude of about 550 km.

Companies like Elon Musk’s Starlink, Jeff Bezos’ Kuiper Project and OneWeb, the UK-based LEO satellite communications firm, are spending billions of dollars to deploy a constellation of satellites in space to provide seamless internet connectivity covering the entire globe. Once fully operational, these low-latency, high-speed global services could cause significant disruption within the broadband market dominated by a handful of operators.

It’s no surprise that legacy broadband providers are rushing to partner with satellite internet firms to get in on the game and maintain their dominance and competitiveness. Investors looking to get a piece of the space internet race may want to look at the following U.S. internet service providers whose fortunes may directly or indirectly be tied to satellite broadband, regarded by many as the future of internet technology.

U.S. telecom behemoth, Verizon (VZ) derives more than 70% of revenue from its wireless business, serving about 91 million postpaid and four million prepaid phone customers, and another 25 million data devices. The firm’s media segment, which owns AOL and Yahoo, provides the remainder of revenue.

The largest U.S. wireless carrier, Verizon recently partnered with Amazon to use the tech giant’s satellite internet system for rural broadband. Amazon is building a network of 3,236 satellites, as part of Project Kuiper, which will provide high-speed internet to anywhere in the world.

Verizon aims to tap this revolutionary technology to supply broadband to customers based in underserved or unserved communities in rural areas. 

“Verizon has been a leader in deploying the latest network technologies and it has the resources to make major investments, which we think will insulate it from unexpected changes in the future,” says a Morningstar equity report.

While broadband may provide incremental revenue, the traditional wireless business remains far more important. “We expect solid wireless results over the next several years thanks to the industry’s stable structure,” says Morningstar sector director, Michael Hodel, but warns growth will likely remain only modest over the long term.

The firm bounced back strongly from a slow start to the year, reporting impressive third-quarter growth. “Verizon’s market share is likely tracking a bit higher than we’d expected and revenue per customer is also growing faster than we’d anticipated,” notes Hodel who recently lifted the stock’s fair value from US$57 to US$58.

The third largest U.S. telecom giant, AT&T (T) has a customer base of 66 million postpaid and 17 million prepaid phone users. Wireless accounts for about 40% of revenue, while WarnerMedia (a bit less than 20% of revenue) and Fixed-line telecom services (20%) are other key revenue contributors.

AT&T Inc. recently announced partnership with OneWeb to offer the latter’s LEO satellite broadband to its customers in remote areas. The deal marks the first partnership for the British-backed OneWeb with a legacy U.S. telecom provider. Unlike rival LEO satellite firms, OneWeb is opting to strike wholesale agreements with telcos rather than selling directly to users.

“AT&T also benefits from its ownership of deep network infrastructure across much of the U.S. and its ability to provide a range of telecom services, particularly among enterprise customers,” says a Morningstar equity report.

The carrier plans to extend fiber to three million homes and businesses annually over the next four years, which should allow it to serve those locations directly and enhance wireless coverage in the surrounding areas, the report adds.

The wireless business, though, remains AT&T's most important segment, and is projected to produce a roughly 10% return on capital. The company is intensifying its focus on “the telecom business, investing aggressively to extend its fiber and 5G networks to more locations, which will build on the firm’s core strengths,” says Hodel, who puts the stocks fair value at US$36.

AT&T’s third-quarter earnings displayed strong momentum in the wireless business, continued growth at its streaming platform HBO Max, and steady gains in consumer broadband. 

After acquiring rival telecom Sprint, T-Mobile USA (TMUS) grew its scale to join the other two biggest U.S. telecom firms, Verizon, and AT&T.

The company offers nationwide 5G home broadband service to about 30 million people. The company doesn’t have any agreements in place to offer satellite internet services yet. However, this may change as the disruptive new broadband technology either hurts T-Mobile’s competitive position or drives it to partner with a satellite broadband provider.

T-Mobile currently serves 68 million postpaid and 21 million prepaid phone customers, equal to nearly 30% of the U.S. retail wireless market. “T-Mobile’s turnaround over the past several years in among the most impressive we’ve seen in the global telecom industry,” says a Morningstar equity report, noting that the firm has masterfully integrated its businesses, pursued additional high-quality spectrum, and deployed new wireless technologies.

These efforts dramatically improved its network performance, providing both better geographic coverage and capacity, “meeting a higher proportion of customer needs in more places,” the report adds.

The wireless and broadband operator’s strong brand and reputation, together with its industry-leading spectrum position, enable it to steadily grow its customer base without resorting to aggressive promotional offers. “We expect a rational competitive landscape will allow the firm and its rivals to deliver stable, if modest, cash flow growth,” says Hodel, who appraises the stock’s worth to be US$135.

The Sprint acquisition, which made T-Mobile larger than AT&T and reasonably close to Verizon, “will go a long way toward solidifying T-Mobile’s position within a healthier industry structure,” asserts Hodel.