Wireless Equipment industry appears to be plagued by uncertainties triggered by supply chain disruptions and chip shortage, with large-scale investments to support the transition to 5G and high R&D and raw material costs further eroding margins. Also, tense bilateral trade relations between the United States and China have rendered a grim picture for the near future. Nevertheless, Qualcomm Incorporated ( QCOM Quick Quote QCOM - Free Report) , Nokia Corporation ( NOK Quick Quote NOK - Free Report) , and Clearfield, Inc. ( CLFD Quick Quote CLFD - Free Report) are likely to benefit in the long run from the increasing demand for state-of-the-art wireless products and services with wide proliferation of IoT driven by a faster pace of 5G deployment. Industry Description
The Zacks Wireless Equipment industry primarily comprises companies that provide various networking solutions, wireless telecom products, and related services for wireless voice and data communications through scalable modular platforms. Their product portfolio encompasses integrated circuit devices (chips) and system software for wireless voice and data communications, analog and digital two-way radio, satellite telecommunications, wireless networking and signal processing, and end-to-end enterprise mobility solutions. The firms also provide a broad range of routing, switching and security products, video surveillance, and machine-to-machine communication components that secure VPN appliances, enable intrusion detection and thwart data theft. Some firms even provide electronic warfare, avionics, robotics, advanced communications, and maritime systems to the defense industry.
What's Shaping the Future of Wireless Equipment Industry
With the exponential growth of mobile broadband traffic and home Internet solutions owing to the increasing work-from-home trend, digital sustainability has become the norm of the day and user demand for coverage speed and quality has increased manifold. This has resulted in huge demand for advanced networking architecture, in turn, forcing service providers to spend more on routers and switches as carriers aim to upgrade their networks to support the surge in home data traffic. Further, to maintain superior performance standards, there is a continuous need for network tuning and optimization, creating demand for state-of-the-art wireless products and services. However, uncertainty regarding the continued chip shortage and supply chain disruptions extending beyond semiconductors have crippled the manufacturing operations of most firms, leading to curtailed production schedule. This, in turn, has led to acute demand-supply imbalance, as the industry faces a dearth of essential fiber materials, shipping delays, and shortages of containers and other raw materials, affecting the expansion and rollout of new broadband networks. Extended lead times for basic components have negatively impacted the delivery schedule and escalated costs, prompting several industry groups to urge the government to take immediate corrective actions. Some notable firms within the industry are Qualcomm, Chip Shortage Hurting Operations: Juniper Networks Inc. ( JNPR Quick Quote JNPR - Free Report) , and Motorola Solutions Inc. ( MSI Quick Quote MSI - Free Report) . The continued deployment of 5G technology across the globe is likely to propel the industry to newer heights. Moreover, 5G is expected to augment the scalability, security, and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT. The industry participants are facilitating its customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation through steady infrastructure investments. Although these investments will eventually help minimize service delivery costs to support broadband competition and wireless densification, short-term profitability has largely been compromised. Margins are likely to be affected by the high cost level associated with the first generation 5G products, profitability challenges in China, and pricing pressure in early 5G deals. Short-Term Profitability Compromised: Majority of the industry participants offers mission-critical communication infrastructure, devices, accessories, software, and services that enable its customers to run businesses with increased efficiency and safety for their mobile workforce. These systems drive demand for additional device sales, software upgrades, infrastructure overhaul and expansion as well as additional services to maintain, monitor, and manage these complex networks and solutions. The comprehensive suite of services ensures continuity and reduces risks for constant critical communication operations. However, the paucity of demand due to geopolitical uncertainties and a challenging macroeconomic environment have dented the margins of most industry participants. Intense price wars due to rising costs of raw materials and stiff competition have added to the woes. High technological obsolescence of most products has also escalated operating costs with continuous investments in R&D. Trade hostilities related to various restrictions by two of the most powerful economic powerhouses of the world have dented the profitability of the industry and shrouded it in uncertainty. The Biden administration is ratcheting up pressure on China with the FCC banning telecommunications products from the communist nation. The FCC has also revoked its earlier authorization for the use of such equipment in domestic markets on perceived security threats, forcing most schools, local government facilities, and rural firms to ‘rip and replace’ them. Paucity of Demand: Zacks Industry Rank Indicates Bearish Prospects
The Zacks Wireless Equipment industry is housed within the broader Zacks
Computer and Technology sector. It carries a Zacks Industry Rank #184, which places it at the bottom 27% 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 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 a negative earnings outlook for the constituent companies in aggregate. Before we present a few wireless equipment 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 Lags S&P 500, Sector
The Zacks Wireless Equipment industry has lagged the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has gained 19.3% over this period compared with the S&P 500 and sector’s rally of 38.3% and 42.6%, respectively. One-Year Price Performance
Industry's Current Valuation
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 16.45X compared with the S&P 500’s 16.52X. However, it is trading above the sector’s trailing-12-month EV/EBITDA of 16.09X.
Over the past five years, the industry has traded as high as 30.2X and as low as 11.6X and at the median of 18.17X, as the chart below shows. Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Wireless Equipment Stocks to Keep a Close Eye on
Qualcomm Incorporated: Headquartered in San Diego, CA, Qualcomm designs, manufactures, and markets integrated circuits and system software for wireless voice and data communications as well as global positioning system products. This Zacks Rank #3 (Hold) stock has gained 4.8% in the past year compared with the industry’s growth of 17.9%. The Zacks Consensus Estimate for the current and next fiscal year earnings has been revised 17% and 18.6% upward, respectively, over the past year. The stock has a long-term earnings growth expectation of 19.5% and delivered an earnings surprise of 13.5%, on average, in the trailing four quarters. The company is likely to witness strong demand in emerging product categories such as XR and wearables along with 4G and 5G mobile broadband devices and rapid adoption of Wi-Fi 6. Qualcomm has inked an agreement with chipset manufacturer GlobalFoundries to manufacture state-of-the-art 5G multi-gigabit speed RF front-end products owing to their increasing demand. These innovative offerings are specifically designed to power 5G-enabled connected devices with revolutionary coverage and ubiquitous mobility. Qualcomm has also announced the launch of the world’s first drone platform and reference design to offer 5G and AI capabilities that will likely help accelerate the development of commercial drones and unlock innovative possibilities for industries to adopt high-performance drone solutions. You can see . the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Price and Consensus: QCOM Nokia Corporation: Headquartered in Espoo, Finland, Nokia is a premier provider of mobile and fixed network solutions worldwide. This Zacks Rank #3 stock has gained 64% in the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 81.8% and 51.9% upward, respectively, over the past year. The stock has a long-term earnings growth expectation of 10.4% and delivered a stellar earnings surprise of 209.4%, on average, in the trailing four quarters. Nokia is driving the transition of global enterprises into smart virtual networks by creating a single network for all services, converging mobile and fixed broadband, IP routing, and optical networks with software and services to manage them. The company facilitates its customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation needed to support dynamic operations, reduce complexity, and improve efficiency. Nokia seeks to expand its business into targeted, high-growth, and high-margin vertical markets to address growth opportunities beyond its traditional primary markets. It has inked more than 240 commercial 5G contracts across the globe. Accelerated strategy execution, sharpened customer focus, and reduced long-term costs are expected to position the company as a global leader in the delivery of end-to-end 5G solutions. Price and Consensus: NOK Clearfield, Inc.: Headquartered in Minneapolis, MN, Clearfield is a leading provider of communication networks, telecom services, and support solutions. This Zacks Rank #1 stock has gained a solid 172.5% in the trailing 12 months. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 85.7% and 54.5% upward, respectively, over the past year. The stock has delivered an earnings surprise of 49%, on average, in the trailing four quarters. The company is witnessing a strong demand environment largely driven by an effort by rural broadband operators to establish themselves as dominant providers of broadband access. It is gaining traction with Tier 2 carriers that aim to extend their fiber connectivity. Clearfield is also less likely to witness supply constraints given its lack of dependence on semiconductors. It further intends to triple its manufacturing footprint in Mexico. Price and Consensus: CLFD