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3 Networking Stocks to Watch Amid Coronavirus-Induced 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 Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices as well as 5G smartphones, which calls for a solid networking infrastructure. This has boosted the demand for networking products, which favors the prospects of prominent industry players including Cisco (CSCO - Free Report) , NetScout Systems (NTCT - Free Report) and Lantronix (LTRX - Free Report) . However, emergence of Delta variant strain and spike in infection rates across several parts of the world resulting in stringent lockdowns may affect recovery in IT spending. Presently, 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 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 with enhanced levels of safety and dependability. 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 and stay-at-home trends along with 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 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 that prominent industry players, including Cisco, NETGEAR (NTGR - Free Report) , Infinera (INFN - Free Report) and Extreme Networks (EXTR - Free Report) are well-poised to gain from this demand. 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, 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. 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 top-line growth for industry participants like 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 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 up new opportunities for industry players like Lantronix 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 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 8.6% compared with 2020 levels and reach $4.2 trillion. The upside will be driven by higher technology spend as enterprises realize that sound technological infrastructure is the key to positive business outcomes, added the report. However, the coronavirus situation is highly evolving with the emergence of a more contagious Delta variant strain. Several parts of the world (India, Indonesia, Australia and Japan) are grappling with massive spike in infection rates, leading to stringent lockdowns. Even some parts of United States are witnessing Delta variant outbreaks. This could affect spending across small- and medium-sized businesses, globally. The uncertainty in business visibility could put a dent on 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 #250, which places it at the bottom 2% of more than 254 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. The industry’s earnings estimate for 2021 has deteriorated to a loss of $2.62 against an earnings of $2.69 as of Dec 31, 2020.

Despite gloomy industry outlook, few stocks are worth watching in the market. 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 31.4% over this period compared with the S&P 500 and the broader sector’s rally of 34.4% and 41.7%, 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 18.82X compared with the S&P 500’s 21.68X. It is also below the sector’s forward-12-month P/E of 27.58X.

In the past five years, the industry has traded as high as 19.09X and as low as 12.56X, with media being at 15.69X, as the charts below show.

Forward 12-Month P/E Ratio

Forward 12-Month P/E Ratio

3 Computer - Networking Stocks to Add to Your Watchlist

We present three 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.

Cisco: This San Jose, CA-based company is expected to gain from strong demand for Catalyst 9000 family of switches amid projected increases in enterprise IT spending as well as macroeconomic recovery across the United States, Europe and several other parts of the world.

Higher adoption of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic holds 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 hybrid/flexible work model augurs well for Webex.

Shares of Cisco have returned 32.7% in a year’s time. The Zacks Consensus Estimate for the company’s fiscal 2022 earnings improved by 1 cent in the past 60 days at $3.39 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 also holds promise.

Recently, the company debuted NETSCOUT Smart Edge Monitoring solution. The solution is designed to 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 have returned 12.1%. The Zacks Consensus Estimate for fiscal 2022 earnings for the company has improved by 1 cent to $1.73 per share in the past 60 days.

Price and Consensus: NTCT

Lantronix: This Irvine, CA-based company is anticipated to benefit from growing clout of latest Connectivity Services, which connects IoT fleets and remote infrastructure.

The company is benefitting from its diversified product portfolio along with the acquisitions of Maestro & FALCOM Holdings and Intrinsyc.

Recently, the company completed the buyout of Transition Networks and Net2Edge, which constitutes most of Electronics and Software business division of Communications Systems. The buyout adds Power over Ethernet (PoE), complementary switching and media conversion products to the company's IoT connectivity solutions' suite.

Shares of Lantronix have returned 5.4% in a year’s time. The Zacks Consensus Estimate for the company’s fiscal 2022 earnings stands at 38 cents per share, unchanged in the past 60 days.

Price and Consensus: LTRX