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Which is the best telco share for big growth potential?

If you were allowed to invest in only one industry to beat the market over the next 10 years, what would it be?

Personally, telecommunications and internet would be my go-to sector, and this is why:

Internet subscribers in Australia have grown from 9.5 million in June 2010 to 12.8 million in June 2015, an increase of 34%.

The volume of data downloaded by these subscribers has surged from 155 terabytes in June 2010 to 1,390 terabytes in June 2015, an increase of 800%! (source: ABS)

With every new app added online, each search of Google, or another movie watched on Netflix, consumer data consumption around the world continues to grow.

However, it isn’t only the consumers that are driving this trend; the corporate world is demanding ever-increasing amounts of data and storage space as well. For example, the transition of hardware and software to the cloud is ongoing for businesses, while companies such as Nearmap Ltd (ASX: NEA) are capturing huge amounts of data that need to be stored and then accessed by its customers around the world.

So what?

The companies operating in the telecommunications sector will enjoy strong tailwinds from this rapid growth and investors have the choice of the following companies that operate in Australia:

Telstra Corporation Ltd (ASX: TLS) is the $67 billion giant in the industry with 3.1 million retail broadband customers as at July 2015.

TPG Telecom Ltd (ASX: TPM) is the second-largest company with a market capitalisation of $9 billion and had 821,000 broadband subscribers as of July 2015.

Vocus Communications Limited  (ASX: VOC) is likely to merge with M2 Group Ltd (ASX: MTU) in 2016 which will give it a market capitalisation of around $3 billion. M2 Group had 530,000 customers as of July 2015.

Who will win?

The rivalry between these companies is fierce, but the industry dynamics should allow all of these businesses to grow in the future and a wise investor might spread their money across all three.

However, due to their smaller relative size, investors chasing growth should look toward TPG and Vocus, which are likely to gain the larger share of additional internet customers and those joining the NBN due to their lower cost services, compared to Telstra.

My assumptions are that a large proportion of higher-income households around Australia will already have internet access. Therefore, the most significant growth will occur in the lower-cost space serviced by companies including TPG, and M2 through its iPrimus and Dodo brands. Additionally, in the past many customers chose Telstra because that was the only service available, but the NBN network will equal the playing field and provide consumers greater choice.

All three companies have high-quality fibre and data centre assets and are likely to achieve healthy growth in their corporate business sectors as the transition to the cloud continues.

Foolish takeaway

Telstra, TPG and Vocus are high-quality companies operating in an industry with a favourable outlook. Investors should be happy holding any of these companies in their portfolios when purchased at an attractive price.

TPG and Vocus are currently trading at prices near their all-time highs. This highlights the market’s growth expectations for these businesses. In comparison, shares of Telstra are closer to its 12-month low and could be a good option for those chasing high yields.

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Motley Fool contributor Mitch Sonogan owns shares of M2 Group Ltd, Telstra Limited, and Vocus Communications Limited. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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