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Remote Working Boosts Computer Networking Industry Prospects

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The Zacks Computer - Networking industry comprises companies that provide networking and Internet connected products, including wireless (WiFi and LTE), Ethernet and powerline, with focus on reliability and ease-of-use.

Some of the industry participants also provide business, and mission-critical IoT solutions and network security services to help customers create next-generation connected products with high levels of security, reliability and performance.

Moreover, increased focus on cloud computing and cloud storage is driving the industry.

Here are the three major themes in the industry:

 

  • Coronavirus crisis induced work-from-home and stay-at-home trends have triggered demand for network-intensive applications like video conferencing and cloud services. This is expected to accelerate 5G deployment. 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. We believe prominent industry players, including Cisco Systems (CSCO - Free Report) , NETGEAR (NTGR - Free Report) , Infinera Corporation (INFN - Free Report) and Extreme Networks (EXTR - Free Report) are well poised to gain from this demand. In fact, the industry players are making significant investments in LTE, broadband and fiber in order to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.
     
  • Brisk technological change, dynamic products, high-speed connectivity, low latency, and evolving industry standards are defining characteristics of the Computer Networking industry. For instance, growing clout of latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders, is a testament to the same. Notably, Wi-Fi 6 — the latest 802.11 wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). 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 areas like AI, ML and increasing adoption of cloud applications hold immense potential for the industry players. Moreover, enterprises are increasingly looking to manage fixed and wireless devices in a secured infrastructure, amid remote working trends. In a bid to address the demand, industry players are driving innovation in networking technologies, including network virtualization, and Software-Defined Networking (SDN), which favors growth prospects.
     
  • However, slowdown in IT spending as estimated by IDC, and broader macroeconomic weakness owing to the pandemic have raised concerns regarding the industry’s near-term prospects. Moreover, the industry participants have been bearing the brunt of the U.S.-China trade war for quite some time now. It has created an uncertain environment that is not conducive for investments. Also, shift in consumer buying patterns is likely to remain an overhang.



Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #93, which places it at the top 37% 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 bright 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 top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Apr 30, 2020, the industry’s earnings estimate for the current year has improved 2.4%.

Before we present a few stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer – Networking industry has underperformed the broader sector and the Zacks S&P 500 composite over the past year.

The industry has fallen 18.3% over this period against the S&P 500 and the broader sector’s growth of 8.8% and 28.8%, 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 commonly used multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 16.39X compared with the S&P 500’s 22.83X. It is also below the sector’s forward-12-month P/E of 26.54X.

Over the past five years, the industry has traded as high as 19.21X and as low as 11.26X, with media being at 15.53X, as the charts below show.

Forward 12-Month P/E Ratio



Forward 12-Month P/E Ratio



Bottom Line

Increased focus on network security, cloud computing, big data and cloud storage is expected to drive the industry participants’ revenues. However, slowdown in IT spending and broader macroeconomic weakness owing to the coronavirus crisis are likely to act as dampeners.

Investors can count on Cisco, currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in San Jose, CA, Cisco is an IP-based networking company, which offers networking related products and services to service providers, enterprises, commercial users and individuals. It has a trailing four-quarter earnings surprise of 3.99%, on average.

Price and Consensus: CSCO




We are also presenting two stocks with a Zacks Rank #3 (Hold) that investors may want to keep an eye on.

Israel-based, Allot Ltd. (ALLT - Free Report) offers network intelligence and security solutions that enable users to personalize the digital experience in a secured infrastructure.

Shares have returned 53.4% in a year’s time.

The Zacks Consensus Estimate for the company’s current-year earnings stands at 2 cents per share, unchanged over the past 60 days.

Price and Consensus: ALLT




Hopkins, MN-based Digi International Inc. (DGII - Free Report) offers advanced IoT connectivity products, services, and solutions globally. Long-term earnings growth rate is currently pegged at 14.5%. It has a trailing four-quarter earnings surprise of 395.54%, on average.

Price and Consensus: DGII




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