The stock in focus this month is TPG Telecom (TPM). One of the key sources of outperformance for investment managers is identifying and investing in companies exposed to positive long term thematics. In recent times, two broad investment thematics have been demographics and technological developments. One convergence of these themes is in the telecommunications industry, where the rise of the connected society and population growth have seen the demand for telecommunications, particularly data, increase dramatically. At the same time, the roll-out of the NBN has meant that the traditional dominant player in the market, Telstra, is under more pressure, as it needs to evolve its offering in the face of increasing competition.

5G is coming.

What has emerged is a battle for a place in the new landscape, with well-established telco providers including Telstra, Optus and Vodaphone competing with new emerging players, such as TPG and Vocus, while everyone is looking to deal with the market positioning of NBN Co in the fixed line space. A key weapon in this battle will be the emergence of 5G in the mobile space, not only in terms of how it can add to the current customer experience, but also as a potential NBN killer.

TPM’s recent purchase of 5G spectrum and entry into the mobile marketplace with what will be a very competitive offering, has been emblematic of the travails of share prices across the whole telco sector. Investor fears of a protracted and deep price war, combined with the impact of the NBN on fixed line margins have taken the sword to short term profitability.

However, it is important to take a longer-term perspective. The demand for fast and unlimited data is not going to reduce, and whatever the technology is that will deliver the connection that consumers and businesses require, providers of telecommunications will enjoy significant thematic tailwinds in the medium and long term, offering potential rewards for investors looking beyond the short term.


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