Investing.com -- The global telecom sector is at the early stages of exploring the transformative power of AI, but the potential for the coming years appears strong, according to Morgan Stanley (NYSE:MS).
In a Sunday note, the Wall Street firm revealed that successful AI implementation could boost the sector's free cash flow (FCF) margins by 400 basis points and add approximately $500 billion to its market capitalization. However, achieving these gains depends on overcoming challenges like data silos, limited managerial bandwidth, and the fragmented adoption of AI technologies.
AI's impact in telecom can be categorized across four main pillars: cost savings, revenue enhancement, CAPEX efficiency, and working capital optimization. Each area offers substantial opportunities if barriers to adoption are addressed.
Cost savings represent a significant opportunity for telecom operators. AI can lower expenses in labor-intensive operations, energy use, and customer service.
AI-powered energy-saving systems are also delivering efficiencies of up to 15% in network operations. These advances could result in an average reduction of 15% in COGS and OPEX over a five-year period.
In the revenue domain, telcos are using AI for better customer segmentation and personalization, enabling more effective targeting of products and services. AI tools can help reduce churn and increase average revenue per user (ARPU) by offering tailored solutions at the right time.
Notably, companies like Verizon (NYSE:VZ) report that using AI-driven segmentation and predictive analytics helps retain customers and improve sales conversion. Moreover, some carriers are exploring new revenue streams beyond traditional connectivity, such as edge computing and AI traffic support, although these remain outside Morgan Stanley's current scope of analysis.
AI also holds the potential to optimize CAPEX by improving network planning and maintenance. Digital twin technology, for example, allows carriers to simulate network conditions and optimize infrastructure deployment, reducing costs by up to 20%. Predictive maintenance enabled by AI can prevent system failures and extend the lifecycle of network equipment.
Working capital optimization is another area where AI could make a difference. Applications in demand forecasting and fraud detection are already helping telcos improve inventory management and reduce bad debts. Advanced AI systems have proven effective in streamlining receivables and minimizing risks, supporting financial stability.
However, the widespread adoption of AI in telecom is still a long-term process. Morgan Stanley emphasizes that "we foresee a 5yr implementation process as technology becomes 'enterprise-ready' and telcos address data fragmentation and other challenges." Surveys show that roughly 60% of global carriers are only piloting or assessing AI technologies.
Furthermore, “a significant number of telcos still report achieving low/no savings from implementing AI across different operating domains,” Morgan Stanley notes.
The sector must address core challenges such as fragmented data infrastructure, integration costs, and uneven implementation.
“Breaking data silos is key for widespread adoption,” the note states.
In terms of investment recommendations, analysts highlight that AI has the potential to extend positive free cash flow (FCF) trends for the telecom sector and is expected to attract increasing investor attention.
In the near term, the firm’s preferred stocks include Deutsche Telekom AG Na (ETR:DTEGn), America Movil (NYSE:AMX), Telefonica Brasil (NYSE:VIV), Singapore Telecommunications Ltd (SGX:STEL), Telstra Group Ltd (ASX:TLS), Rakuten Inc (TYO:4755), SK Telecom (NYSE:SKM), and KT Corp (NYSE:KT).