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3 Networking Stocks to Watch for in a Prospering Industry

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Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the performance of the Zacks Computer - Networking industry participants. Accelerated deployment of 5G is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices as well as 5G smartphones, which calls for solid networking infrastructure. This has boosted the demand for networking products, which favors the prospects of prominent industry players like Cisco (CSCO - Free Report) , Infinera Corporation (INFN - Free Report) and Intrusion (INTZ - Free Report) . However, negative impacts stemming from the pandemic-triggered supply chain disruptions and component shortages are a concern in the near term. The emergence of the more transmissible variants and a spike in infection rates across many parts of the world (like Shanghai and Hong Kong), resulting in lockdowns, might further affect supply chain issues, which does not augur 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 a focus on dependability and ease of use. The products are available in various 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 in demanding environments with enhanced levels of safety. Focus on the development of IoT sensors, drones and wearables, amid higherdemand for cloud computing-based contact tracing applications, is driving the industry.

4 Trends Influencing the Computer - Networking Industry Future

Rapid Deployment of 5G to Boost Growth Prospects: Coronavirus-induced continuation in work-from-home and the adoption of hybrid/flexible work model have triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2022. 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. More efforts to develop smart connected homes, hospitals, factories, buildings and cities and self-driving vehicles bode well for the industry players. 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.

The Uptick in Wi-Fi 6 Networking to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards define the Computer Networking industry. For instance, the growing clout of the 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 the top line for industry participants.

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. The 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 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 Bodes Well: Per a Gartner report, worldwide IT spending is expected to increase 4% in 2022 compared with 2021 levels and reach $4.4 trillion. Higher technology spending will drive the upside as enterprises continue to build sound technological infrastructure. However, the geopolitical disruptions, inflationary pressures and protracted pandemic-induced supply chain troubles remain major concerns. These factors are not expected to affect the recovery seen in IT spending globally, as per Gartner,  This bodes well for the industry’s performance.

Zacks Industry Rank Indicates Bright Near-Term Prospects

The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #44, which places it at the top 17% of more than 253 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 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The industry’s earnings estimate for 2022 has improved to earnings of $2.88 against a loss of $2.84 as of Dec 31, 2021.

Before we present a few stocks that you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector But Lags S&P 500

The Zacks Computer – Networking industry has outperformed the broader Zacks Computer and Technology sector but is lagging the S&P 500 composite over the past year.

The industry has gained 0.7% over this period compared with the broader sector’s decline of 13.9%. The S&P 500 has gained 2.4% over the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 16.08X compared with the S&P 500’s 18.46X. It is also below the sector’s forward-12-month P/E of 21.82X.

In the past five years, the industry has traded as high as 20.33X and as low as 12.56X, with media being at 16.91X, as the charts below show.

Forward 12-Month P/E Ratio

Forward 12-Month P/E Ratio

3 Computer - Networking Stocks to Keep an Eye on

Cisco: This San Jose, CA-based company is expected to gain from strength in its product portfolio, customer segments and momentum in product order growth. Strength in Webscale business and solid uptake of switching solutions, especially Catalyst 9000 and Meraki offerings, along with the robust adoption of the company’s subscription-based offerings, are other catalysts.

Higher adoption of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic hold promise. Ongoing momentum in Webex video conferencing and business productivity offerings on account of the COVID-19 induced work-from-home situation remains noteworthy. Mainstream adoption of a hybrid/flexible work model augurs well for Webex.

Currently, Cisco carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Shares of Cisco have lost 0.4% of their value in a year’s time. The Zacks Consensus Estimate for the company’s fiscal 2022 earnings is pegged at $3.45 per share, unchanged in the past 60 days.

Price and Consensus: CSCO

Infinera: The San Jose, CA-based company offers Digital Optical Networking systems to telecommunications carriers, cable operators and other service providers globally. Infinera’s DTN system and PIC technology are designed to provide optical networks that extend operating simplicity, enhanced revenue generation, faster time-to-service and capital cost savings.

At present, Infinera carries a Zacks Rank #2. The Zacks Consensus Estimate for 2022 earnings for the company is pegged at 16 cents per share, unchanged in the past 60 days.

Price and Consensus: INFN

Intrusion: Based in Plano, TX, Intrusion specializes in providing AI-powered enterprise cybersecurity solutions. The company’s suite of security products helps businesses protect critical information assets by quickly detecting, analyzing and responding to network- and host-based attacks. The company’s solutions aid business organizations thwart Zero-Day and Malware-Free attacks.

At present, Intrusion carries a Zacks Rank #2. The Zacks Consensus Estimate for 2022 is pegged at a loss of 63 cents per share.

Price and Consensus: INTZ



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Cisco Systems, Inc. (CSCO) - free report >>

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