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3 Communication Stocks Set to Gain From High Bandwidth Demand

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The Zacks Communication - Infrastructure industry appears to be mired in raw material price volatility and supply-chain disruptions due to continued chip shortage and the prolonged Russia-Ukraine war. Moreover, high capital expenditure for infrastructure upgrades for 5G rollout and margin erosion due to price wars have dented the industry’s profitability.

Nevertheless, CommScope Holding Company, Inc. (COMM - Free Report) , ADTRAN Inc. (ADTN - Free Report) and Bandwidth Inc. (BAND - Free Report) are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, transition to cloud and related next-gen technologies and a faster pace of 5G deployment.

Industry Description

The Zacks Communication - Infrastructure industry comprises firms that provide various infrastructure solutions for the core, access and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions across Internet protocol, asynchronous transfer mode and time division multiplexed architecture in both wireline and wireless network applications. Their product portfolio encompasses optical fiber and twisted-pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed wireless antenna systems and hardened optical terminating enclosures.

What's Shaping the Future of the Communication - Infrastructure Industry?

Transition to Technology Powerhouse: With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are making considerable investments in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks. These companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. The industry participants are also focusing on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. All these efforts have particularly helped firms in the industry cater to the surge in data demand, with digital sustainability becoming the norm of the day as the majority of the population is forced to work from home.

Network Convergence: The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification, short-term profitability has largely been compromised. Nevertheless, the industry firms have enabled enterprises to rapidly scale communications functionalities to a vast range of applications and devices with easy-to-use software application programming interfaces. The firms support high user volumes without affecting deliverability and cost-effectively eliminate performance degradation.

Raw Material Volatility Affecting Operations: The industry is continuously facing an acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. Moreover, high raw material prices due to the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. Although various steps have been taken to address the global shortage of semiconductor chips and devise ways to increase domestic production, the demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. The government has also pledged bipartisan support to ramp up production capacity and reduce supply bottlenecks while eliminating dependence on countries like China. However, unless the policy guidelines assume a tangible effect, the industry firms are likely to face short-term challenges, affecting their cash flow.

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have led to reduced demand, as customers prefer to switch to lower-priced alternatives. Moreover, efforts to build resilient infrastructure facilities to withstand natural catastrophes such as hurricanes and floods add to operating costs. In addition, latent tension between the United States and China relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country has dented the industry’s credibility and will likely lead to a loss of business. An adverse economic impact from the coronavirus pandemic is also likely to dent the overall revenues of the industry participants.

Zacks Industry Rank Indicates Bullish Trends

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #58, which places it at the top 23% 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 solid 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.

Before we present a few communication infrastructure 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 Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.

The industry has lost 60.3% over this period against the S&P 500 and the sector’s decline of 7.7% and 21%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the 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 6.92X compared with the S&P 500’s 12.3X. It is also below the sector’s trailing-12-month EV/EBITDA of 10.72X.

Over the past five years, the industry has traded as high as 11.99X, as low as 6.73X and at the median of 8.75X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Communication - Infrastructure Stocks to Keep a Close Eye on

CommScope Holding Company, Inc.: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. Since its inception in 1976, the company has created a niche market for itself, helping customers scale network capacity, delivering better network response time and performance and simplifying technology migration. CommScope is focused on sound technology and a highly efficient supply chain, and is committed to continuous improvement. This will potentially make the company a preferred partner for all telecommunications businesses as the entire industry moves toward 5G. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, CommScope is dedicatedly developing solutions designed to support wireline and wireless network convergence, which will be essential for the success of 5G technology. It has been pursuing strategies focused on reducing operational costs and optimizing the overall cost structure. The stock has a long-term earnings growth expectation of 28.2% and delivered an earnings surprise of 9.6%, on average, in the trailing four quarters. CommScope carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: COMM

ADTRAN Inc.: Headquartered in Huntsville, AL, ADTRAN designs, manufactures, markets and services network access solutions for communication networks. The company, founded in 1985, develops and supports high-speed network access solutions for use across Internet protocol, asynchronous transfer mode and time division multiplexed architectures in both wireline and wireless network applications. The company’s end-to-end solutions simplify the deployment of fiber-based broadband services and provide a better customer experience. It is focused on being a top global supplier of access infrastructure and related value-added solutions from the Cloud Edge to the Subscriber Edge through a broad portfolio of flexible hardware and software network solutions. These products enable customers to transition to the fully converged, scalable, highly automated, cloud-controlled voice, data, Internet and video network of the future. ADTRAN expects to gain from increased customer engagements across its comprehensive portfolio of software-defined access, 10G solutions and products. The stock delivered an earnings surprise of 159.1%, on average, in the trailing four quarters. ADTRAN sports a Zacks Rank #1.

Price and Consensus: ADTN

Bandwidth Inc.: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to Bandwidth’s comprehensive suite of products and services that cater to the networking requirements of large-scale Internet companies and cloud service providers based in the United States. This reinforces pricing flexibility and provides a significant competitive advantage to build a capital-efficient and customized networking infrastructure. The acquisition of Voxbone complements its product portfolio and enables it to offer a unified software platform to better serve global customers. This Zacks Rank #3 stock has a long-term earnings growth expectation of 25% and pulled off an earnings surprise of 196.6%, on average, in the trailing four quarters. It has a VGM Score of B.

Price and Consensus: BAND

In-Depth Zacks Research for the Tickers Above

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