5G Networks Limited (ASX:5GN), a AUDA$6.26M small-cap, operates in the telecommunications market which continues its transformation into the industry that is underpinning the digital and interconnected economy. Transformation is mainly propelled by the continuing innovations and technological developments, which confronts industry incumbents with rapid changes. Telco analysts are forecasting for the entire industry, negative growth in the upcoming year , and an overall negative growth rate in the next couple of years. Unsuprisingly, this is below the growth rate of the Australian stock market as a whole. Is the telco industry an attractive sector-play right now? Today, I will analyse the industry outlook, as well as evaluate whether 5GN is lagging or leading its competitors in the industry. Check out our latest analysis for 5G Networks
What’s the catalyst for 5GN’s sector growth?
The convergence that has been talked about is now happening, but driven by disruption rather than well-considered strategies and marketing campaigns. Overall the growth in this segment of the telco industry is stagnating, and often the only way to maintain profitability is through cost-cutting. On the positive side, innovations and technological developments allow these companies to be more cost-competitive. Over the past year, the industry saw growth of 9.28%, beating the Australian market growth of 5.37%. Given the lack of analyst consensus in 5GN’s outlook, we could potentially assume the stock’s growth rate broadly follows its telco industry peers. This means it is an attractive growth stock relative to the wider Australian stock market.
Is 5GN and the sector relatively cheap?
The telco industry is trading at a PE ratio of 21x, in-line with the Australian stock market PE of 17x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. However, the industry returned a higher 16.84% compared to the market’s 11.92%, potentially illustrative of a turnaround. Since 5GN’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge 5GN’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? Telco sector stocks are currently expected to grow slower than the average stock on the index. This means if you’re overweight in this sector, your portfolio will be tilted towards lower-growth. If growth was one of your main investment catalyst in the sector, now would be the time to revisit your holdings in 5GN. Keep in mind the sector is trading relatively in-line with the rest of the market, which may mean you’ll be selling out at a reasonable price.
Are you a potential investor? The telco sector’s below-market growth and average valuation hardly makes it an exciting investment case. If you’re looking for a high-growth stock with potential mispricing, it seems like telco companies like 5GN isn’t the right place to look. However, if you’re interested in the stock for other reasons, I suggest you research more into the company’s cash flow as well as its financial health in order to gain a holistic view of the stock.
For a deeper dive into 5G Networks’s stock, take a look at the company’s latest free analysis report to find out more on its financial health and other fundamentals. Interested in other telco stocks instead? Use our free playform to see my list of over 300 other telco companies trading on the market.