High inflation, rising interest rates, geopolitical instability, and recessionary fears have created an uncertain macroeconomic picture. Despite these headwinds, the telecom industry remained robust, embracing ongoing innovation and digital transformation across industry verticals globally to cater to the high demand for telecom-managed services.
Given this backdrop, in this piece, I evaluated two telecom stocks, AT&T Inc. (T) and Ooma, Inc. (OOMA), to determine which of these is a buy, sell, or hold now.
The telecom services industry is poised for robust growth in the foreseeable years due to the growing adoption of advanced digital technologies in business operations and a significant shift in customer inclination toward next-gen technologies.
According to a report by Grand View Research, the global telecom services market is expected to reach $2.87 trillion by 2030, growing at a CAGR of 6.5%.
Moreover, the industry’s future is undeniably centered around 5G technology. It has enabled seamless high-definition media streaming in densely populated areas or where Wi-Fi hotspots are unavailable. By 2026, global 5G mobile subscriptions are expected to reach the five billion mark, as reported by Statista.
Amid the industry’s bright prospects, OOMA is a clear winner in the price performance, with 5.3% returns over the past month compared to T’s 7% decline. OOMA has gained 13% over the past three months, while T plunged 14.1%. Also, OOMA gained 19.1% over the past year, while T plummeted 18.6%.
But which stock is a better buy? Let’s find out.
Latest Developments
In March, T issued a cautionary notice to its vast user base, informing them about a supply chain cyber-incident that led to the exposure of sensitive data. According to a report by BleepingComputer, the breach stemmed from a hacking episode targeting a T marketing vendor in January 2023.
The company reported that approximately “9 million wireless accounts” had been affected. Such news of a security breach could have significant repercussions for T, including potential damage to its reputation and trust among its users.
On May 22, OOMA and NexHealth announced their strategic collaboration, unveiling the delivery of integrated patient experience and phone system functionalities that optimize value for dental practices and healthcare providers. The partnership holds the potential to significantly expand OOMA's market reach and improve its service offerings.
Recent Financial Results
For the first quarter that ended March 31, 2023, T’s operating income grew 8.4% year-over-year to $6 billion. Its adjusted EBITDA increased 3.9% from the prior year’s quarter to $10.59 billion. However, the company’s net income decreased 13.8% year-over-year to $4.45 billion, while its EPS from continuing operations declined 12.3% from the year-ago value to $0.57.
For the fiscal 2024 first quarter (ended April 30, 2023), OOMA’s non-GAAP operating income increased 24% year-over-year to $3.73 million. Its adjusted EBITDA grew 24.2% from the year-ago value to $4.79 million. Moreover, the company’s non-GAAP net income and non-GAAP EPS stood at $4.01 million and $0.16, up 33.7% and 33.3% year-over-year, respectively.
Past and Expected Financial Performance
Over the past three years, T’s revenue declined at a 12.2% CAGR, while OOMA’s revenue grew at a 12.1% CAGR. Furthermore, T’s total assets decreased at a 9.8% CAGR, while OOMA’s total assets increased at a 19.8% CAGR over the same time frame.
Analysts expect T’s revenue and EPS for the second quarter (ending June 2023) to increase 1.3% and decrease 5.4% year-over-year to $30.02 billion and $0.62, respectively. Also, the company’s EPS for the third quarter (ending September 2023) is expected to decline 6.1% year-over-year to $0.64.
OOMA’s revenue and EPS for the fiscal 2024 second quarter (ending July 2023) is expected to increase 9.5% and 18.1% year-over-year to $57.66 million and $0.14, respectively. In addition, the company’s EPS in the next quarter (ending October 2023) is expected to rise 3.6% from the prior year’s period to $0.15.
Valuation
In terms of trailing-12-month non-GAAP P/E, T is currently trading at 6.24x, 73.4% lower than OOMA, which is trading at 23.47x. T’s trailing-12-month EV/EBITDA multiple of 6.59 is 89.4% lower than OOMA’s 62.14. However, T’s trailing-12-month EV/Sales of 2.38x is 58.7% higher than OOMA’s 1.50x.
Profitability
T’s trailing-12-month revenue is 544.27 times what OOMA generates. However, OOMA is relatively more profitable, with a trailing-12-month gross profit margin of 63.61%, higher than T’s 58.37%. Moreover, OOMA’s trailing-12-month asset turnover of 1.79x compares to T’s 0.25x.
POWR Ratings
T has an overall rating of C, which equates to Neutral in our proprietary POWR Ratings system. On the other hand, OOMA has an overall rating of A, translating to a Strong Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. T has a C grade for Value, consistent with its mixed valuation. T’s forward non-GAAP P/E of 6.52x is 53.5% lower than the industry average of 14.01. However, the stock’s forward EV/Sales of 2.37x is 33.3% higher than the industry average of 1.78x.
On the other hand, OOMA has a grade of B for Value, in sync with its lower-than-industry valuation. OOMA’s forward EV/Sales of 1.42x is 20.2% lower than the 1.78x industry average.
T also has a D grade for Sentiment, consistent with its unfavorable analyst expectations, while OOMA’s B grade for Sentiment is in sync with its optimistic analyst estimates.
T has ranked #7, while OOMA has topped the 18-stock Telecom - Domestic industry,
Beyond what we’ve stated above, we have also rated both stocks for Growth, Stability, Momentum, and Quality. Click here to view T Ratings. Get all OOMA ratings here.
The Winner
Rapid digital transformation worldwide amid the growing adoption of cutting-edge technologies among individuals and enterprises is boosting the demand for broadband and value-managed services, propelling the telecom industry’s growth. Therefore, prominent telecom companies T and OOMA are well-placed to benefit from the industry tailwinds.
However, considering T’s relatively weak financials, bleak growth prospects, and comparatively lower profitability, its competitor, OOMA, could be a better buy now.
Our research shows that the odds of success increase when one invests in stocks with an overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Telecom - Domestic industry here.
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T shares were trading at $16.00 per share on Thursday afternoon, up $0.16 (+1.01%). Year-to-date, T has declined -10.59%, versus a 15.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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