Telstra, M2, TPG: Which telecom should you own?

The good, the bad or the ugly – what category does your telecom stock belong to?

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The Australian telecommunications market has passed the point of saturation, meaning that the growth in revenues stemming from new customers will be slower.

So what companies are best placed to tackle the new market dynamics and, more importantly, what stocks should you be adding to your portfolio to take advantage of the change?

The good

Australian telecommunications are up against it — it being Telstra (ASX: TLS). As the country's biggest telecommunications company by a very long way, many investors have reaped the rewards of its dominance over the past two years. Controlling the lion's share of both the fixed internet and mobile markets, Telstra is still the best at what it does. Although investors may have become concerned about the NBN and increasing competition, Telstra is now focused on booming businesses such as its NAS and international divisions.

After years of successful acquisitive growth, M2 Telecommunications (ASX: MTU) is still priced to perfection. The company recently announced its intention to grow organically through its big name brands, Dodo, Primus and Commander.

Similarly to M2, TPG Telecom (ASX: TPG) and iiNet (ASX: IIN) are focusing on organic expansion in the domestic market. They are both exciting prospects but in recent years have experienced rapid growth, making them quite fairly valued at today's prices. Although they are great businesses, if I were to choose from the three stocks, M2 looks most likely to return great capital gains to investors in the medium term.

The bad

Since 2011, Telstra's dominance in mobile markets has been growing, in part thanks to rapid growth in smart phone adoption rates in Australia. This has all but passed by Telstra's number one competitor, Optus. Owned by Singapore Telecommunications (ASX: SGT), Optus has not been able to take advantage of domestic growth and its number of customers has remained largely flat at around 9.5 million. If the company's 4G network doesn't impress the market, expect it to start bleeding customers… and profits.

The ugly

Although some investors believe Vodafone, part-owned by Hutchison Telecommunications Australia (ASX: HTA), has begun to turn the tide on its dwindling customer base, I am still quite bearish. In the half-year to June 30, it reported a loss of $95.8 million, up from a loss of $131 million a year earlier. Although it's undeniably a good thing for investors and shareholders, the fallout of its customer base from network failures in 2011 is still occurring. In the same six-month period the company lost 551,000 customers.

Foolish takeaway

In the last 10 years shareholders have enjoyed solid revenue growth thanks to society's increasing dependence on the internet and associated technologies. Investors must now carefully consider whether or not they believe money could be better invested in other stocks or industries. In this Fool's opinion, the Australian telecommunications industry is set to continue to benefit from faster internet speeds, new technologies (such as cloud computing and big data) and the NBN.

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Motley Fool contributor Owen Raskiewicz does not have a financial interest in any of the mentioned companies.

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