Saudi Telecom Sector: A Beacon of Growth in a Diversifying Economy

In an era where Saudi Arabia's economy is pivoting decisively away from oil dependence, the telecom sector is emerging as a linchpin of secular growth. With non-oil GDP expansion projected to hit 4.1%-4.3% by 2026 and inflation anchored at historically low levels, telecom stocks like stc (Saudi Telecom Company) are positioned to capitalize on both macro tailwinds and underpenetrated digital transformation opportunities. Here's why investors should consider the telecom sector as a strategic allocation for 2025 and beyond.

Modest but Steady Growth: Riyad Capital's Q2 Forecasts Highlight Sector Resilience

Recent data from Riyad Capital underscores the telecom sector's steady, if unspectacular, growth trajectory. For Q2 2025, the three major players—stc, Mobily, and Zain KSA—are projected to report net profit growth of 7%, 8%, and 2% year-on-year, respectively. While these figures trail the double-digit gains seen in sectors like petrochemicals or banking, they reflect resilience amid a broader economic environment of cautious optimism.

stc, the sector's dominant player, leads with a projected Q2 profit of SAR 3.55 billion, its scale and diversified services (including cloud computing and digital payments) shielding it from volatility. Mobily, meanwhile, is outperforming with an 8% profit rise, signaling competitive agility in a maturing market. Even Zain KSA, the smallest operator, is maintaining positive momentum despite intense competition.

Macro Tailwinds: Non-Oil GDP Growth and Fiscal Support Create a Favorable Ecosystem

The telecom sector's growth is not happening in isolation. Saudi Arabia's Vision 2030 diversification push is accelerating, with non-oil GDP expected to grow at 3.3% in 2025 and 4.3% in 2026, driven by tech, tourism, and infrastructure projects like NEOM and the Red Sea Development. These initiatives rely heavily on robust digital infrastructure, creating a virtuous cycle for telecom firms.

Key tailwinds include:
- Low inflation: Consumer price growth remains subdued at 2.1% (year-on-year in Q1 2025), easing pressure on corporate margins.
- Fiscal flexibility: While the fiscal deficit is projected to widen slightly, Saudi Arabia's $978 billion in foreign reserves and low public debt provide a buffer for sustained investment in telecom and tech.
- Labor market reforms: A record-low unemployment rate of 2.8% (Q1 2025) and skill-based work permits are attracting global talent to tech-driven sectors.

Valuation: Telecom Sector Undervalued Relative to Broader Market

Despite this positive backdrop, telecom stocks remain attractively priced.

- Telecom sector: The average EV/EBITDA for telecom network infrastructure firms is 6.8x (per global multiples analyses), significantly below the Tadawul All-Share Index's P/E of 21.7x (as of July 2025).
- stc's specific metrics: At an EV/EBITDA of 22.86x, stc appears elevated, but this reflects its scale and diversified earnings. By contrast, its trailing P/E of 6.6x (median) and forward P/E of 6.8x suggest it trades at a discount to broader market multiples.

This valuation gap creates an opportunity. While the broader market reflects cautious investor sentiment toward Saudi's oil-reliant past, telecom stocks are undervalued relative to their role in enabling the kingdom's tech-driven future.

Investment Case: Telecom as a Proxy for Secular Diversification Gains

Investors seeking exposure to Saudi Arabia's non-oil growth story should consider telecom stocks as a sector-agnostic play. Here's why:

1. Digital transformation is underpenetrated: With 5G rollout still in early stages and fiber-optic networks expanding, telecom firms are set to profit from rising data demand.
2. Stable cash flows: Telecoms benefit from recurring revenue models (e.g., mobile subscriptions) and inelastic demand, offering stability in volatile markets.
3. Strategic partnerships: stc's ventures with global tech firms (e.g., Microsoft's cloud partnerships) and its 54% stake in regional fintech firm STC Pay highlight its ecosystem-building ambitions.

Recommendations:
- Overweight stc: Its scale, diversified services, and dominant market share make it the sector's safest bet.
- Consider Mobily: Its 8% growth and agility in competitive markets offer upside.
- Monitor Zain KSA: While smaller, its resilience hints at untapped opportunities in niche markets.

Risks and Considerations

• Global tech cycles: Demand for telecom services could falter if global tech spending slows.
• Regulatory headwinds: Saudi Arabia's push for competition could pressure margins.
• Oil price volatility: While non-oil sectors are decoupling, prolonged oil weakness might strain fiscal flexibility.

Conclusion: Telecom as a Bridge to Saudi's Future

The telecom sector is a microcosm of Saudi Arabia's economic evolution—stable yet innovative, anchored in tradition but building toward a tech-driven future. With valuation multiples lagging the broader market and macro tailwinds in place, now is an opportune time to allocate to telecom stocks. For investors seeking exposure to secular growth in a diversifying economy, stc and its peers are not just companies—they are gateways to the next chapter of Saudi Arabia's story.

Invest wisely.