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3 Wireless Stocks Likely to Benefit From Pent-Up Demand
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Despite the uncertainties triggered by supply-chain disruptions and chip shortages, the Zacks Wireless Equipment industry appears well poised to benefit from pent-up demand with the gradual revival in post-pandemic market conditions. However, large-scale investments to support the transition to 5G and high R&D and raw material costs amid tense geopolitical situations are likely to erode margins.
Nevertheless, Qualcomm Incorporated (QCOM - Free Report) , Clearfield, Inc. (CLFD - Free Report) and Sierra Wireless, Inc. 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 firms 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, and 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 the Wireless Equipment Industry?
Fast-Track Deployment of 5G & Fiber Optic: 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, 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. Moreover, a faster pace of 5G deployment across the globe is likely to propel the industry to newer heights. It is expected to augment the scalability, security, and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT. Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards as well as wireline connections are likely to act as tailwinds. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. 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. 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.
Short-Term Profitability Compromised: Although higher infrastructure 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 of first-generation 5G products, profitability challenges in China, hostile Russian invasion in Ukrainian soil and pricing pressure in early 5G deals. Uncertainty regarding the chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays, and shortages of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also likely to impact the delivery schedule and escalate production costs. High technological obsolescence of most products has also escalated operating costs with steady investments in R&D. However, with various administrative and federal support along with ramp-up in production facilities for chip manufacturing, the demand-supply imbalance is likely to ease gradually in the upcoming quarters.
Pent Up Demand for Avant-Garde Networking Architecture: The majority of the industry participants offer 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. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #67, which places it at the top 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. While the industry’s earnings estimates for the current year have increased 18.5% since March 2021, the same for 2023 has improved a stellar 376.9% over the past year.
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, Outperforms Sector
The Zacks Wireless Equipment industry has lagged the S&P 500 composite but outperformed the broader Zacks Computer and Technology sector over the past year.
The industry has gained 3% over this period compared with the S&P 500 rally of 8.3% and 2.6% decline of the sector.
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 19.58X compared with the S&P 500’s 13.81X. It is also trading above the sector’s trailing-12-month EV/EBITDA of 11.81X.
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 18.56X, 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: 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 #2 (Buy) stock has gained 17.9% in the past year compared with the industry’s growth of 3.4%. The Zacks Consensus Estimate for its current and next fiscal-year earnings has been revised 43.2% and 48.6% upward, respectively, over the past year. The stock has a long-term earnings growth expectation of 16.1% and delivered an earnings surprise of 12.2%, 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. The acquisition of Veoneer is expected to offer Qualcomm a firmer footing in the emerging market of driver-assistance technology, as it aims to extend the Snapdragon Ride Advanced Driver Assistance Systems (ADAS) portfolio. The Arriver business of Veoneer operates the dedicated software unit focused on sensor perception and drive policy, including a full stack of features and functions. With the acquisition, Qualcomm aims to incorporate Arriver's Computer Vision, Drive Policy and Driver Assistance assets into its ADAS portfolio to deliver an open and competitive platform for automakers to better compete with rivals within the self-driving vehicle market. This, in turn, is likely to augment its automotive business as it strives to boost revenues beyond chipmaking for the smartphone market.
Clearfield: 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 77% in the trailing 12 months. The Zacks Consensus Estimate for its current-fiscal earnings has been revised 102.7% upward over the past year. The stock has delivered an earnings surprise of 50.7%, 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. In addition, the company is gaining traction with Tier 2 carriers that aim to extend their fiber connectivity across the country. Clearfield is also less likely to witness supply constraints and cost issues given its lack of dependence on semiconductors. It further intends to triple its manufacturing footprint in Mexico to serve customers better.
Price and Consensus: CLFD
Sierra Wireless: Headquartered in Richmond, Canada, Sierra Wireless is a premier provider of device-to-cloud IoT solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It has a long-term earnings growth expectation of 12.5% and delivered an earnings surprise of 58%, on average, in the trailing four quarters. Over the past year, Sierra Wireless has gained 14.8%. Earnings estimates for the current year for this Zacks Rank #2 stock have moved up 68.8% since March 2021. Sierra Wireless continues to launch innovative products for business-critical operations that require high security and optimum 5G performance. The company has ramped up production at three facilities to meet higher demand for connectivity and edge intelligence solutions across a multitude of end markets, including industrial, enterprise, and public safety. With a record backlog, it appears well-positioned to pivot to sustained profitable growth in the near future.
Price and Consensus: SWIR
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3 Wireless Stocks Likely to Benefit From Pent-Up Demand
Despite the uncertainties triggered by supply-chain disruptions and chip shortages, the Zacks Wireless Equipment industry appears well poised to benefit from pent-up demand with the gradual revival in post-pandemic market conditions. However, large-scale investments to support the transition to 5G and high R&D and raw material costs amid tense geopolitical situations are likely to erode margins.
Nevertheless, Qualcomm Incorporated (QCOM - Free Report) , Clearfield, Inc. (CLFD - Free Report) and Sierra Wireless, Inc. 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 firms 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, and 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 the Wireless Equipment Industry?
Fast-Track Deployment of 5G & Fiber Optic: 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, 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. Moreover, a faster pace of 5G deployment across the globe is likely to propel the industry to newer heights. It is expected to augment the scalability, security, and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT. Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards as well as wireline connections are likely to act as tailwinds. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. 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. 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.
Short-Term Profitability Compromised: Although higher infrastructure 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 of first-generation 5G products, profitability challenges in China, hostile Russian invasion in Ukrainian soil and pricing pressure in early 5G deals. Uncertainty regarding the chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays, and shortages of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also likely to impact the delivery schedule and escalate production costs. High technological obsolescence of most products has also escalated operating costs with steady investments in R&D. However, with various administrative and federal support along with ramp-up in production facilities for chip manufacturing, the demand-supply imbalance is likely to ease gradually in the upcoming quarters.
Pent Up Demand for Avant-Garde Networking Architecture: The majority of the industry participants offer 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. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #67, which places it at the top 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 encouraging 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. While the industry’s earnings estimates for the current year have increased 18.5% since March 2021, the same for 2023 has improved a stellar 376.9% over the past year.
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, Outperforms Sector
The Zacks Wireless Equipment industry has lagged the S&P 500 composite but outperformed the broader Zacks Computer and Technology sector over the past year.
The industry has gained 3% over this period compared with the S&P 500 rally of 8.3% and 2.6% decline of the sector.
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 19.58X compared with the S&P 500’s 13.81X. It is also trading above the sector’s trailing-12-month EV/EBITDA of 11.81X.
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 18.56X, 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: 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 #2 (Buy) stock has gained 17.9% in the past year compared with the industry’s growth of 3.4%. The Zacks Consensus Estimate for its current and next fiscal-year earnings has been revised 43.2% and 48.6% upward, respectively, over the past year. The stock has a long-term earnings growth expectation of 16.1% and delivered an earnings surprise of 12.2%, 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. The acquisition of Veoneer is expected to offer Qualcomm a firmer footing in the emerging market of driver-assistance technology, as it aims to extend the Snapdragon Ride Advanced Driver Assistance Systems (ADAS) portfolio. The Arriver business of Veoneer operates the dedicated software unit focused on sensor perception and drive policy, including a full stack of features and functions. With the acquisition, Qualcomm aims to incorporate Arriver's Computer Vision, Drive Policy and Driver Assistance assets into its ADAS portfolio to deliver an open and competitive platform for automakers to better compete with rivals within the self-driving vehicle market. This, in turn, is likely to augment its automotive business as it strives to boost revenues beyond chipmaking for the smartphone market.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: QCOM
Clearfield: 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 77% in the trailing 12 months. The Zacks Consensus Estimate for its current-fiscal earnings has been revised 102.7% upward over the past year. The stock has delivered an earnings surprise of 50.7%, 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. In addition, the company is gaining traction with Tier 2 carriers that aim to extend their fiber connectivity across the country. Clearfield is also less likely to witness supply constraints and cost issues given its lack of dependence on semiconductors. It further intends to triple its manufacturing footprint in Mexico to serve customers better.
Price and Consensus: CLFD
Sierra Wireless: Headquartered in Richmond, Canada, Sierra Wireless is a premier provider of device-to-cloud IoT solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It has a long-term earnings growth expectation of 12.5% and delivered an earnings surprise of 58%, on average, in the trailing four quarters. Over the past year, Sierra Wireless has gained 14.8%. Earnings estimates for the current year for this Zacks Rank #2 stock have moved up 68.8% since March 2021. Sierra Wireless continues to launch innovative products for business-critical operations that require high security and optimum 5G performance. The company has ramped up production at three facilities to meet higher demand for connectivity and edge intelligence solutions across a multitude of end markets, including industrial, enterprise, and public safety. With a record backlog, it appears well-positioned to pivot to sustained profitable growth in the near future.
Price and Consensus: SWIR