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4 Networking Stocks to Dodge Coronavirus-Induced Industry Woes

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Increasing focus on network security, cloud computing, big data and cloud storage is expected to drive the Zacks Computer - Networking industry participants’ performance.

Nevertheless, slowdown in IT spending and broader macroeconomic weakness due to the coronavirus crisis are likely to act as dampeners. Consequently, the outlook for the Zacks Computer – Networking industry appears bleak at the moment.

However, rapid deployment of 5G networking is aiding the proliferation of Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices, and 5G smartphones, which necessitates a future of robust networking infrastructure.

This has bolstered the demand for networking products, which favors the prospects of prominent industry players including Cisco (CSCO - Free Report) , NetScout Systems (NTCT - Free Report) , NETGEAR (NTGR - Free Report) , and Extreme Networks (EXTR - Free Report) .

Industry Description

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 players 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.

4 Trends Influencing the Future of the Computer – Networking Industry

Accelerated Deployment of 5G to Boost Growth Prospects: 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 anticipated to accelerate 5G deployment through 2021. 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, NETGEAR, Infinera Corporation (INFN - Free Report) and Extreme Networks 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.

Coronavirus Crisis Induced Sluggish IT Spend Remains a Woe: Slowdown in IT spending as estimated by IDC and broader macroeconomic weakness due to the pandemic have raised concerns regarding the industry’s near-term prospects. Moreover, the industry players 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. Per Gartner data, overall IT spending dipped 3.2% in 2020, globally, as companies focused more on technology and services spend that was adjudged “mission-critical” through the early stages of the coronavirus crisis. However, the gradual reopening of economies with people returning to offices and students resuming commute to schools and colleges encouraged by ramped up vaccination efforts is expected to result in a rebound in enterprise spending on campus-networking offerings.

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, 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). This is anticipated to boost top-line growth for industry participants, including Cisco and NETGEAR.

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 continues to drive innovations in networking. Moreover, easing shelter-in-place guidelines, as economies started to reopen, has led to growing clout of contact tracing, environment monitoring, automated equipment monitoring, and trailer tracking applications. Increase in production ramp of such IoT sensors is opening up new opportunities for industry participants like Lantronix (LTRX - Free Report) and Digi International (DGII - Free Report) . 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. 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.

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 #239, which places it at the bottom 6% 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 bearish 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are not optimistic on this group’s earnings growth potential. Since Jul 31, 2020, the industry’s earnings estimate for 2021 has declined 1.1%.

Despite gloomy industry outlook, few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, 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 Computer – Networking industry has underperformed the broader sector and the Zacks S&P 500 composite over the past year.

The industry has gained 26.2% over this period compared with the S&P 500 and the broader sector’s rally of 50% and 70.2%, 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 17.49X compared with the S&P 500’s 22.98X. It is also below the sector’s forward-12-month P/E of 28.41X.

Over the past five years, the industry has traded as high as 19.09X and as low as 12.56X, with media being at 15.52X, 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

We present four Computer – Networking stocks that investors can take a look at. All of these stocks currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

San Jose, CA-based, Cisco is anticipated to benefit from strong demand for Catalyst 9000 family of switches amid expected increase in enterprise IT spending, and recovery across Europe, Middle East and Africa (EMEA).

Also, robust adoption of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic, holds promise. Moreover, ongoing momentum in Webex video conferencing and business productivity offerings on account of COVID-19 induced work-from-home demand environment remains noteworthy.

Shares of Cisco have returned 26% in a year’s time. The Zacks Consensus Estimate for the company’s fiscal 2021 earnings has been revised upward by 1.3% over the past 60 days to $3.22 per share. This reflects on bullish sentiments for the stock.

Price and Consensus: CSCO

Westford, MA-based NetScout Systems is gaining from robust uptick in its nGeniusONE management software that enables customers to resolve network and service delivery problems.

Although shares of the company have declined 2.4% in a year’s time, strength in its nGeniusPULSE testing tool and nGenius Business Analytics solution that aids enterprises to identify infrastructure performance issues and analyze network traffic hold promise.

The Zacks Consensus Estimate for fiscal 2021 earnings for the company has improved by 5 cents to $1.67 per share over the past 60 days, indicating year-over-year growth of 6.4%.

Price and Consensus: NTCT

NETGEAR is well-poised to benefit from robust demand for its new products based on Wi-Fi 6 networking standards and focus on leveraging latest technological innovation to drive growth. Notably, it holds nearly 49% of the share in U.S. retail Wi-Fi products market.

Moreover, solid subscriber base and growing clout of connected home products in the wake of growing work-from-home trend hold promise. Markedly, San Jose, CA-based NETGEAR ended fourth quarter of 2020 with 437,000 paid subscribers. The next-gen products are likely to enhance the efficiency of hybrid cloud access network, thereby strengthening its market position.

Notably, shares of NETGEAR have appreciated 65.2% in the past year. The Zacks Consensus Estimate for 2021 earnings for the company is pegged at $3.25 per share, steady over the past seven days, suggesting year-over-year growth of 12.9%.

Price and Consensus: NTGR

Domiciled in San Jose, CA, Extreme Networks offers software-driven networking solutions for enterprise, data center, and service provider customers. Increasing deployment of 5G base stations on accelerated demand for 5G networking is expected to boost growth prospects.

Further, product refreshment cycle of Brocade's products in the growing 5G wireless market is encouraging. Moreover, strength in its highly differentiated technology across one-fabric/one-network enhances business prospects.

The company’s shares have skyrocketed 226.2% in a year’s time. The Zacks Consensus Estimate for fiscal 2021 earnings for the company stands at 52 cents per share, steady over the past seven days, indicating year-over-year improvement of 420%.

Price and Consensus: EXTR

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