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2 Network Software Stocks to Watch in a Challenging Industry
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The Zacks Communication-Network Software industry is suffering from supply-chain disruption as well as a shortage of components. Macroeconomic slowdown, the ongoing Russia-Ukraine war, a high rate of inflation and heightened price competition are hurting industry participants. Small and medium businesses have deferred capital spending on infrastructure buildout due to higher interest rates and inflation, which doesn’t bode well for industry participants. Nevertheless, companies like Frontier Communications Parent (FYBR - Free Report) and A10 Networks (ATEN - Free Report) are gaining from ongoing digitalization efforts that include a shift to cloud computing and rapid deployment of 5G-based networks. The strong demand for network security is benefiting industry participants as a secure environment is required for the proliferation of cloud-based applications.
Industry Description
The Zacks Communication-Network Software Industry comprises companies that provide software solutions supporting cloud, on-premise and hybrid environments, communication technology solutions, including broadband and Voice Over Internet Protocol (“VoIP”), digital communication services delivered as software-as-a-service, and telecom solutions supporting proliferation and deployment of 5G and 6G networks of the future. There are few companies that offer solutions based on Open Radio Access Network (“RAN”) standard. Others offer wireless connectivity solutions for mission-critical Industrial Internet applications and services. Solutions from these companies support a variety of industries, including telecommunications, technology, industrial, government, retail, financial, gaming and education.
3 Trends Shaping the Future of the Communication-Network Software Industry
Increased Adoption of Cloud-based Solutions: Rapid digitalization driven by the disruption caused by the pandemic has increased demand for cloud-based applications, virtualized software and container-based software. Applications are now being increasingly developed in the cloud, which is creating opportunities and, at the same time, challenges for industry participants in terms of performance and security. A rising number of cyber-attacks, including Distributed Denial of Service attacks as well as attacks using malware through Transport Layer Security and Secure Sockets Layer protocols, is redefining the cyberthreat landscape. Enterprises are spending more on cloud-based security solutions. Moreover, the software-defined approach is now increasingly getting preferred over legacy hardware-centric models due to the need for agility.
Growing Importance of Automation Tools: The ongoing rapid transition to the cloud has increased the importance of automation tools. Enterprises are adopting automated tools to efficiently deploy and operate security and application services. This is not only improving performance monitoring and detection as well as reporting of security anomalies but also reducing overall costs.
Rapid Evolution of 5G and 6G Networks: Industry participants are benefiting from a continued rise in demand for data-intensive bandwidth and the need for reduced latency associated with smartphones, tablets and machine-to-machine communication. The proliferation of data centers, big data, cloud-based services, streaming media content and IoT is a key catalyst. The rapid deployment of 5G networks is creating a massive growth opportunity for telecom providers who are using solutions provided by industry participants.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Communication-Network Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #176, which places it in the bottom 30% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Nov 30, 2021, the industry’s earnings estimates for the current year have moved 83% south.
Despite the gloomy industry outlook, a couple of stocks are worth watching due to their strong prospects. But before we present these stocks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Communication-Network Software industry has underperformed the Zacks S&P 500 composite and its sector in the past year.
The industry is down 38% over this period compared with the Zacks Computer and Technology sector’s decrease of 27.6% and the S&P 500’s decline of 10.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales, a commonly used multiple for valuing network software companies, we see that the industry is currently trading at 1.54X compared with the S&P 500’s 3.49X and the sector’s 3.25X.
Over the past five years, the industry has traded as high as 2.93X, as low as 1.34X and at the median of 1.56X, as the chart below shows.
A10 is benefiting from strong demand for its networking solutions among service providers as network security and reliability are necessary. A10’s expanding partner base and portfolio strength are helping it to navigate a challenging macroeconomic environment and supply chain constraints.
The stock has lost 17.5% year to date. The Zacks Consensus Estimate for A10’s 2022 earnings has remained stable at 69 cents per share over the past 30 days.
Price and Consensus: ATEN
Frontier: This Zacks Rank #3 (Hold) is benefiting from its expanding fiber optic network. Frontier plans to expand its fiber footprint to at least 10 million locations by 2025 from 4.4 million at present.
Norwalk, CT-based Frontier has lost 12.1% year to date. The Zacks Consensus Estimate for FYBR’s current-year earnings has declined 3.9% to 99 cents per share over the past 30 days.
Price and Consensus: FYBR
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2 Network Software Stocks to Watch in a Challenging Industry
The Zacks Communication-Network Software industry is suffering from supply-chain disruption as well as a shortage of components. Macroeconomic slowdown, the ongoing Russia-Ukraine war, a high rate of inflation and heightened price competition are hurting industry participants. Small and medium businesses have deferred capital spending on infrastructure buildout due to higher interest rates and inflation, which doesn’t bode well for industry participants. Nevertheless, companies like Frontier Communications Parent (FYBR - Free Report) and A10 Networks (ATEN - Free Report) are gaining from ongoing digitalization efforts that include a shift to cloud computing and rapid deployment of 5G-based networks. The strong demand for network security is benefiting industry participants as a secure environment is required for the proliferation of cloud-based applications.
Industry Description
The Zacks Communication-Network Software Industry comprises companies that provide software solutions supporting cloud, on-premise and hybrid environments, communication technology solutions, including broadband and Voice Over Internet Protocol (“VoIP”), digital communication services delivered as software-as-a-service, and telecom solutions supporting proliferation and deployment of 5G and 6G networks of the future. There are few companies that offer solutions based on Open Radio Access Network (“RAN”) standard. Others offer wireless connectivity solutions for mission-critical Industrial Internet applications and services. Solutions from these companies support a variety of industries, including telecommunications, technology, industrial, government, retail, financial, gaming and education.
3 Trends Shaping the Future of the Communication-Network Software Industry
Increased Adoption of Cloud-based Solutions: Rapid digitalization driven by the disruption caused by the pandemic has increased demand for cloud-based applications, virtualized software and container-based software. Applications are now being increasingly developed in the cloud, which is creating opportunities and, at the same time, challenges for industry participants in terms of performance and security. A rising number of cyber-attacks, including Distributed Denial of Service attacks as well as attacks using malware through Transport Layer Security and Secure Sockets Layer protocols, is redefining the cyberthreat landscape. Enterprises are spending more on cloud-based security solutions. Moreover, the software-defined approach is now increasingly getting preferred over legacy hardware-centric models due to the need for agility.
Growing Importance of Automation Tools: The ongoing rapid transition to the cloud has increased the importance of automation tools. Enterprises are adopting automated tools to efficiently deploy and operate security and application services. This is not only improving performance monitoring and detection as well as reporting of security anomalies but also reducing overall costs.
Rapid Evolution of 5G and 6G Networks: Industry participants are benefiting from a continued rise in demand for data-intensive bandwidth and the need for reduced latency associated with smartphones, tablets and machine-to-machine communication. The proliferation of data centers, big data, cloud-based services, streaming media content and IoT is a key catalyst. The rapid deployment of 5G networks is creating a massive growth opportunity for telecom providers who are using solutions provided by industry participants.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Communication-Network Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #176, which places it in the bottom 30% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Nov 30, 2021, the industry’s earnings estimates for the current year have moved 83% south.
Despite the gloomy industry outlook, a couple of stocks are worth watching due to their strong prospects. But before we present these stocks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Communication-Network Software industry has underperformed the Zacks S&P 500 composite and its sector in the past year.
The industry is down 38% over this period compared with the Zacks Computer and Technology sector’s decrease of 27.6% and the S&P 500’s decline of 10.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/Sales, a commonly used multiple for valuing network software companies, we see that the industry is currently trading at 1.54X compared with the S&P 500’s 3.49X and the sector’s 3.25X.
Over the past five years, the industry has traded as high as 2.93X, as low as 1.34X and at the median of 1.56X, as the chart below shows.
EV/Sales Ratio (TTM)
2 Stocks to Watch Right Now
A10 Networks: San Jose, CA-based A10 currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
A10 is benefiting from strong demand for its networking solutions among service providers as network security and reliability are necessary. A10’s expanding partner base and portfolio strength are helping it to navigate a challenging macroeconomic environment and supply chain constraints.
The stock has lost 17.5% year to date. The Zacks Consensus Estimate for A10’s 2022 earnings has remained stable at 69 cents per share over the past 30 days.
Price and Consensus: ATEN
Frontier: This Zacks Rank #3 (Hold) is benefiting from its expanding fiber optic network. Frontier plans to expand its fiber footprint to at least 10 million locations by 2025 from 4.4 million at present.
Norwalk, CT-based Frontier has lost 12.1% year to date. The Zacks Consensus Estimate for FYBR’s current-year earnings has declined 3.9% to 99 cents per share over the past 30 days.
Price and Consensus: FYBR