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4 Networking Stocks to Keep an Eye on Amid Pandemic-Led Woes
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Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the Zacks Computer - Networking industry participants’ performance. Accelerated deployment of 5G is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices as well as 5G smartphones, which calls for solid networking infrastructure. This has boosted the demand for networking products, which favors the prospects of prominent industry players like Cisco (CSCO - Free Report) , NetScout Systems (NTCT - Free Report) , Extreme Networks (EXTR - Free Report) and RADCOM Ltd (RDCM - Free Report) . However, the emergence of the Omicron variant and a spike in infection rates across several parts of the world resulting in reimposition of lockdowns might affect recovery in IT spending. With the rapidly evolving pandemic situation, global macroeconomic recovery looks uneven, which doesn’t bode well for the industry.
Industry Description
The Zacks Computer - Networking industry comprises companies that offer networking and Internet connected products, including wireless (WiFi and Long-Term Evolution or LTE), Ethernet and powerline with a focus on dependability and ease-of-use. The products are available in numerous configurations to cater to changing requirements of consumers in each geographic territory where it operates for smooth network connectivity and broadband access. Some industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products as well as implement and manage critical communications infrastructures in demanding environments with enhanced levels of safety. Focus on the development of IoT sensors, drones and wearables, amid increasing demand for cloud computing-based contact tracing applications, is driving the industry.
4 Trends Influencing the Future of the Computer - Networking Industry
Rapid Deployment of 5G to Boost Growth Prospects: Coronavirus-induced continuation in work-from-home along with the adoption of hybrid/flexible work model has triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2022. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Growing efforts to develop smart connected homes, hospitals, factories, buildings and cities and self-driving vehicles bode well for the industry players. The industry players are making significant investments in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.
Uptick in Wi-Fi 6 Networking to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards are defining characteristics of the Computer Networking industry. For instance, the growing clout of the latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. Wi-Fi 6 — the latest 802.11 wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). This is anticipated to bolster the top line for industry participants.
Innovation in Networking Technologies is Opening New Business Avenues: Growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition (HD) streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in networking. Easing shelter-in-place guidelines, as many economies are reopening, have led to high adoption of contact tracing, environment monitoring, automated equipment monitoring and trailer tracking applications. Production ramp of these IoT sensors is opening new opportunities for industry players. Rapid proliferation of IoT, increasing popularity of smart connected devices and growing adoption of cloud computing in network security are fueling demand for an efficient network support infrastructure. The advancements in AI, ML and high adoption of cloud applications hold immense potential for companies in the industry. Enterprises are striving to manage fixed and wireless devices in a secured infrastructure. To address the demand, industry firms are driving innovation in networking technologies, including network virtualization and Software-Defined Networking (SDN), which favors growth prospects.
Expectations of Increases in IT Spending Could Be Affected By Evolving COVID-19 Situation: Per a Gartner report, worldwide IT spending is expected to increase 5.5% in 2022 compared with 2021 levels and reach $4.5 trillion. The upside will be driven by higher technology spending as enterprises continue to build sound technological infrastructure. However, the companies will be developing new technologies rather than acquire and implement, leading to comparatively sluggish spending levels, added the Gartner report. Also, the coronavirus situation is highly evolving with the emergence of a more contagious Omicron variant. Several parts of the world (especially the U.K., the rest of Europe and South Africa) are grappling with increasing infection rates, leading to the reimposition of several COVID-19 restrictions. Even United States is witnessing a surge in the Omicron outbreak. This could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
Zacks Industry Rank Indicates Bleak Near-Term Prospects
The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #233, which places it at the bottom 8% of more than 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not optimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2021 has deteriorated to a loss of $2.64 against earnings of $2.69 as of Dec 31, 2020.
Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector and S&P 500
The Zacks Computer – Networking industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has gained 35% over this period compared with the S&P 500 and the broader sector’s rally of 26.1% and 23.6%, respectively.
One-Year Price Performance
Industry's current Valuation
On the basis of forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 19.61X compared with the S&P 500’s 21.40X. It is also below the sector’s forward-12-month P/E of 28.50X.
In the past five years, the industry has traded as high as 19.61X and as low as 12.56X, with media being at 16.49X, as the charts below show.
Forward 12-Month P/E Ratio
Forward 12-Month P/E Ratio
4 Computer - Networking Stocks to Add to Your Watchlist
Extreme Networks: Based in Morrisville, NC, Extreme Networks specializes in providing next generation of switching solutions that cater to the increasing requirements of enterprise local area networks or LAN, internet service and content providers.
Higher deployment of 5G base stations on accelerated demand for 5G networking is expected to boost growth prospects. Strength in its highly-differentiated technology across one-fabric/one-network enhances business prospects. The acquisition of Ipanema bodes well in the long haul
The company’s shares have skyrocketed 103.8% in a year. The Zacks Consensus Estimate for fiscal 2022 earnings for the company is at 75 cents per share, up 4 cents in the past 60 days. The projection indicates a year-over-year improvement of 31.6%.
Price and Consensus: EXTR
RADCOM: This Tel Aviv, Israel-based company specializes in providing cloud-native, automated service assurance offerings for telecommunication operators for both 4G and 5G networks.
RADCOM recently announced integration with Amazon Web Services (“AWS”) which will aid operators with an automated service assurance solution for easy deployment of 5G services on the AWS cloud, noted the company.
Shares of RADCOM, which carries a Zacks Rank #2, have returned 3.3% in a year. The Zacks Consensus Estimate for the company’s 2021 earnings is pegged at a loss of 17 cents per share.
Price and Consensus: RDCM
Cisco: This San Jose, CA-based company is expected to gain from strength in its product portfolio, customer segments and momentum in product order growth. Strength in Webscale business and solid uptake of switching solutions, especially Catalyst 9000 and Meraki offerings, along with the robust adoption of the company’s subscription-based offerings, are other catalysts.
Higher adoption of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic hold promise. Ongoing momentum in Webex video conferencing and business productivity offerings on account of COVID-19 induced work-from-home situation remains noteworthy. Mainstream adoption of a hybrid/flexible work model augurs well for Webex.
Shares of Cisco have returned 38.2% in a year’s time. The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s fiscal 2022 earnings stands at $3.42 per share.
Price and Consensus: CSCO
NetScout Systems: The Westford, MA-based company is gaining from healthy uptake of its nGeniusONE management software solution that helps customers troubleshoot network and service delivery issues. Momentum in its nGeniusPULSE testing tool and nGenius Business Analytics offerings holds promise.
The company’s NETSCOUT Smart Edge Monitoring solution will enable IT to detect and remediate performance problems across any network or application to suit the scattered workforce model.
In the past year, shares of NetScout, which carries a Zacks Rank #3, have returned 20.8%. The Zacks Consensus Estimate for fiscal 2022 earnings for the company improved by 2 cents to $1.75 per share in the past 60 days.
Price and Consensus: NTCT
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4 Networking Stocks to Keep an Eye on Amid Pandemic-Led Woes
Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the Zacks Computer - Networking industry participants’ performance. Accelerated deployment of 5G is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices as well as 5G smartphones, which calls for solid networking infrastructure. This has boosted the demand for networking products, which favors the prospects of prominent industry players like Cisco (CSCO - Free Report) , NetScout Systems (NTCT - Free Report) , Extreme Networks (EXTR - Free Report) and RADCOM Ltd (RDCM - Free Report) . However, the emergence of the Omicron variant and a spike in infection rates across several parts of the world resulting in reimposition of lockdowns might affect recovery in IT spending. With the rapidly evolving pandemic situation, global macroeconomic recovery looks uneven, which doesn’t bode well for the industry.
Industry Description
The Zacks Computer - Networking industry comprises companies that offer networking and Internet connected products, including wireless (WiFi and Long-Term Evolution or LTE), Ethernet and powerline with a focus on dependability and ease-of-use. The products are available in numerous configurations to cater to changing requirements of consumers in each geographic territory where it operates for smooth network connectivity and broadband access. Some industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products as well as implement and manage critical communications infrastructures in demanding environments with enhanced levels of safety. Focus on the development of IoT sensors, drones and wearables, amid increasing demand for cloud computing-based contact tracing applications, is driving the industry.
4 Trends Influencing the Future of the Computer - Networking Industry
Rapid Deployment of 5G to Boost Growth Prospects: Coronavirus-induced continuation in work-from-home along with the adoption of hybrid/flexible work model has triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2022. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Growing efforts to develop smart connected homes, hospitals, factories, buildings and cities and self-driving vehicles bode well for the industry players. The industry players are making significant investments in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.
Expectations of Increases in IT Spending Could Be Affected By Evolving COVID-19 Situation: Per a Gartner report, worldwide IT spending is expected to increase 5.5% in 2022 compared with 2021 levels and reach $4.5 trillion. The upside will be driven by higher technology spending as enterprises continue to build sound technological infrastructure. However, the companies will be developing new technologies rather than acquire and implement, leading to comparatively sluggish spending levels, added the Gartner report. Also, the coronavirus situation is highly evolving with the emergence of a more contagious Omicron variant. Several parts of the world (especially the U.K., the rest of Europe and South Africa) are grappling with increasing infection rates, leading to the reimposition of several COVID-19 restrictions. Even United States is witnessing a surge in the Omicron outbreak. This could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
Uptick in Wi-Fi 6 Networking to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards are defining characteristics of the Computer Networking industry. For instance, the growing clout of the latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. Wi-Fi 6 — the latest 802.11 wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). This is anticipated to bolster the top line for industry participants.
Innovation in Networking Technologies is Opening New Business Avenues: Growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition (HD) streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in networking. Easing shelter-in-place guidelines, as many economies are reopening, have led to high adoption of contact tracing, environment monitoring, automated equipment monitoring and trailer tracking applications. Production ramp of these IoT sensors is opening new opportunities for industry players. Rapid proliferation of IoT, increasing popularity of smart connected devices and growing adoption of cloud computing in network security are fueling demand for an efficient network support infrastructure. The advancements in AI, ML and high adoption of cloud applications hold immense potential for companies in the industry. Enterprises are striving to manage fixed and wireless devices in a secured infrastructure. To address the demand, industry firms are driving innovation in networking technologies, including network virtualization and Software-Defined Networking (SDN), which favors growth prospects.
Zacks Industry Rank Indicates Bleak Near-Term Prospects
The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #233, which places it at the bottom 8% of more than 253 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not optimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2021 has deteriorated to a loss of $2.64 against earnings of $2.69 as of Dec 31, 2020.
Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector and S&P 500
The Zacks Computer – Networking industry has outperformed the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.
The industry has gained 35% over this period compared with the S&P 500 and the broader sector’s rally of 26.1% and 23.6%, respectively.
One-Year Price Performance
Industry's current Valuation
On the basis of forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 19.61X compared with the S&P 500’s 21.40X. It is also below the sector’s forward-12-month P/E of 28.50X.
In the past five years, the industry has traded as high as 19.61X and as low as 12.56X, with media being at 16.49X, as the charts below show.
Forward 12-Month P/E Ratio
Forward 12-Month P/E Ratio
4 Computer - Networking Stocks to Add to Your Watchlist
Extreme Networks: Based in Morrisville, NC, Extreme Networks specializes in providing next generation of switching solutions that cater to the increasing requirements of enterprise local area networks or LAN, internet service and content providers.
Higher deployment of 5G base stations on accelerated demand for 5G networking is expected to boost growth prospects. Strength in its highly-differentiated technology across one-fabric/one-network enhances business prospects. The acquisition of Ipanema bodes well in the long haul
Extreme Networks carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
The company’s shares have skyrocketed 103.8% in a year. The Zacks Consensus Estimate for fiscal 2022 earnings for the company is at 75 cents per share, up 4 cents in the past 60 days. The projection indicates a year-over-year improvement of 31.6%.
Price and Consensus: EXTR
RADCOM: This Tel Aviv, Israel-based company specializes in providing cloud-native, automated service assurance offerings for telecommunication operators for both 4G and 5G networks.
RADCOM recently announced integration with Amazon Web Services (“AWS”) which will aid operators with an automated service assurance solution for easy deployment of 5G services on the AWS cloud, noted the company.
Shares of RADCOM, which carries a Zacks Rank #2, have returned 3.3% in a year. The Zacks Consensus Estimate for the company’s 2021 earnings is pegged at a loss of 17 cents per share.
Price and Consensus: RDCM
Higher adoption of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic hold promise. Ongoing momentum in Webex video conferencing and business productivity offerings on account of COVID-19 induced work-from-home situation remains noteworthy. Mainstream adoption of a hybrid/flexible work model augurs well for Webex.
Shares of Cisco have returned 38.2% in a year’s time. The Zacks Consensus Estimate for this Zacks Rank #3 (Hold) company’s fiscal 2022 earnings stands at $3.42 per share.
Price and Consensus: CSCO
NetScout Systems: The Westford, MA-based company is gaining from healthy uptake of its nGeniusONE management software solution that helps customers troubleshoot network and service delivery issues. Momentum in its nGeniusPULSE testing tool and nGenius Business Analytics offerings holds promise.
The company’s NETSCOUT Smart Edge Monitoring solution will enable IT to detect and remediate performance problems across any network or application to suit the scattered workforce model.
In the past year, shares of NetScout, which carries a Zacks Rank #3, have returned 20.8%. The Zacks Consensus Estimate for fiscal 2022 earnings for the company improved by 2 cents to $1.75 per share in the past 60 days.
Price and Consensus: NTCT