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3 Communication Stocks Set to Ride on Seamless Connectivity Demand

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The Zacks Communication - Components industry appears poised to benefit from healthy growth dynamics, favorable industry drivers and solid demand trends as the economic rebound picks up pace after the pandemic-induced adversities. The 5G transition is also expected to be disruptive, creating new avenues for the industry.

Amid such tailwinds, Plantronics, Inc. (POLY - Free Report) , Ooma, Inc. (OOMA - Free Report) and TESSCO Technologies Incorporated (TESS - Free Report) and are likely to gain in the long run as pent-up demand for scalable infrastructure rises for seamless connectivity amid wide proliferation of IoT driven by faster pace of 5G deployment.

Industry Description

The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services for the development of scalable network architecture, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas that are incorporated into equipment and facilities and subsequently utilized by service providers to build networks for end users. The product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways, set-top boxes, analog and digital microphones, audio processors, glass substrates for LCD TVs and notebooks, ceramic substrates for mobile, and laboratory filtration products.

What's Shaping the Future of Communication Components Industry

Demand-Driven Business Model Gains Steam: Telecom service providers are increasingly leaning toward fiber optic cable in order to meet the burgeoning demand for cloud-based business data and video-streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last mile local loop, which are required by wireless service providers for the deployment of the 5G network. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. The telecom firms are aiding their customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry is well poised to meet these evolving trends, given its technology prowess, product depth and wide applications. An increased pace of 5G deployment and greater demand for seamless data connectivity due to higher broadband utilization owing to increasing work-from-home trend amid the coronavirus pandemic are likely to propel the industry’s growth.

Cloud Networking, IoT Devices Rise to Prominence: The industry participants are taking a holistic approach to content delivery in order to help providers anticipate demand for more personalized, relevant and mobile experiences. Voice-powered interactions are fast emerging as a critical and necessary feature, as consumers tend to engage with technology through natural, spoken commands across the mobile, ear and IoT platforms. This has led to a wide array of products ranging from mobile phones to headsets, and from smart speakers to household appliances. Moreover, the firms offer a variety of pathways for providing services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside the home. Some firms are also benefiting from the expanding cloud networking market, primarily driven by strong demand for scalable infrastructure, which has become necessary for new applications and services. The convergence of network technologies requires considerable investments from both traditional carriers (telecom and cable) and cloud service providers. Apart from delivering high capacity and availability, cloud networking promises predictable performance along with programmability that enables integration with third-party applications for network, management, automation, orchestration and network services.

Scalable Infrastructure Leading to Seamless Connectivity: Consumer demand for faster Internet speeds with more capacity continues to grow at an escalating rate, primarily driven by increasing consumption of videos. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises are using the network, there is tremendous demand for quality networking equipment. Moreover, the demand for faster data transfer is fueling growth of optical networks. The industry participants provide the technology that enables customers to manage this exponential bandwidth-development cost effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection. Further, some firms are benefiting from innovation in the glass substrate market, enabling panel manufacturers to do away with costs that are usually necessary for making slimmer, lighter and more power-efficient consumer devices.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #167, which places it among the bottom 34% of more than 250 Zacks industries. A couple of leading stocks within the industry are Arista Networks, Inc. (ANET - Free Report) and Corning Incorporated (GLW - Free Report) .

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates grim 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 negative earnings outlook for the constituent companies in aggregate.

Before we present a few communication component stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms S&P 500, Lags Sector

The Zacks Communication - Infrastructure industry has outperformed the S&P 500 composite over the past year but lagged the broader Zacks Computer and Technology sector.

The industry has gained 41% over this period compared with the S&P 500 and sector’s rise of 34.4% and 41.9%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 4.28X compared with the S&P 500’s 7.19X. It is also below the sector’s trailing-12-month P/B ratio of 10.13X.

Over the past five years, the industry has traded as high as 4.53X, as low as 1.21X and at the median of 2.88X, as the chart below shows.

Trailing 12-Month price-to-book (P/B) Ratio

3 Communication Components Stocks to Keep a Close Eye on

Plantronics, Inc.: Founded in 1961 and headquartered in Santa Cruz, CA, Plantronics is a global outfitter of professional-grade audio and video technology. The company’s premium audio and video products connect people with incredible clarity and work seamlessly with any conferencing platform. This Zacks Rank #3 (Hold) stock has gained 78.4% in the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 41.6% and 94.4% upward, respectively, over the past year. The company is benefiting from the massive shift toward reliable, high-fidelity solutions for hybrid work and video collaboration. Plantronics has taken concrete steps to control costs, make disciplined investments in new products and balance supply chain exposures. The company continues to evaluate its logistics processes and implements new strategies to reduce its transportation costs and improve customer lead time with distribution centers around the world.

Price and Consensus: POLY

Ooma Inc.: Headquartered in Sunnyvale, CA, Ooma offers cloud-based communications solutions, smart security, and other connected services. Its smart software-as-a-service and unified-communications-as-a-service (UCaaS) platforms serve as a hub for seamless communications and networking infrastructure applications. The stock has gained 12.1% in the past year. The Zacks Consensus Estimate for the current fiscal earnings has been revised 60% upward over the past year. The company’s focus on small business customers with simple, easy-to-use interfaces that can be implemented quickly without IT support for an integrated business connectivity solution is likely to drive healthy growth momentum. Its low-cost fixed line that reportedly offers faster emergency access services is expected to gain traction, while increased penetration within enterprise markets with customized offerings are likely to bear fruit. The stock carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: OOMA



TESSCO Technologies Incorporated: Headquartered in Hunt Valley, MD, TESSCO offers base station infrastructure products, including base station antennas, cable and transmission lines, and network systems products, such as fixed and mobile broadband radio equipment and security and surveillance products. This Zacks Rank #2 stock has gained 8.6% in the past year. The Zacks Consensus Estimate for the current-year earnings has moved up 39.2% since May 2021. With the completion of the sale of the retail business, the company is likely to be better focused and more growth oriented, even as the industry grapples with various supply constraints. TESSCO has multiple growth drivers over the next several years and is poised to benefit from the faster rollout of 5G and the increasing prevalence of IoT. Focus on pricing and stringent cost-cutting initiatives as well as emphasis on high-margin products are additional tailwinds.

Price and Consensus: TESS