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3 Stocks to Watch for in a Flourishing Networking 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 and 5G smartphones, calling for solid networking infrastructure. This boosted the demand for networking products, favoring the prospects of prominent industry players like Cisco (CSCO - Free Report) , Infinera Corporation (INFN - Free Report) and RADCOM (RDCM - Free Report) . However, negative impacts stemming from the lingering supply chain disruptions and component shortages are likely to remain a concern in the near term. Geopolitical instability in Europe due to the Ukraine war, weak global economic conditions and rising inflation and crude prices are likely to act as additional headwinds.

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 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 and implement and manage critical communications infrastructures in demanding environments with enhanced levels of safety. Focus on developing IoT sensors, drones and wearables amid increasing demand 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: Continuation in work from home and the adoption of a 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 and beyond. The impending 5G boom will likely 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 investing heavily 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. 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 802.11ax wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). This is anticipated to bolster the industry participants’ top line.

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, the increasing popularity of smart connected devices and the growing adoption of cloud computing in network security are fueling the demand for an efficient network support infrastructure. The advancements in AI and ML and the 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.

Relative Slowdown in IT Spending A Concern in the Near Term: Per a Gartner report, worldwide IT spending is expected to increase 0.8% in 2022 compared with 2021 levels and reach around $4.4 billion. The geopolitical disruptions, inflationary pressures and protracted pandemic-induced supply chain troubles are a major concern. Also, consumers are deferring spending on the purchase of devices which is likely to affect the IT spending growth in 2022. However, the research firm was upbeat regarding the 2023 projection, wherein it expects IT spending to increase 5.1% year over year to $4.7 billion.

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 78, positioning it in the top 31% of more than 251 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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.

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 and S&P 500

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

The industry has lost 12.5% over this period compared with the broader sector’s decline of 33.2%. The S&P 500 has lost 16.4% over the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the 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 15.22X compared with the S&P 500’s 17.81X. It is also below the sector’s forward-12-month P/E of 21.22X.

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

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.

For the third quarter of 2022, the company reported total revenues of $390.4 million, up 9% on a year-over-year basis, driven by momentum in product revenues amid supply chain troubles. The company is witnessing an increasing number of customers for ICE6 solution, which comprised more than 30% of product revenue in the third quarter. For 2022, the company expects revenues to be $435 million (+/- $15 million).

At present, Infinera carries a Zacks Rank #2. The Zacks Consensus Estimate for 2022 earnings for the company is pegged at 2 cents per share, revised upward from a loss of a cent in the past 60 days. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here. 

Price and Consensus: INFN

RADCOM: This Tel Aviv, Israel-based company specializes in providing cloud-native, automated service assurance offerings for telecommunication operators for 5G networks.

The company recently reported its third-quarter 2022 results, with revenues totaling $12 million, up 17% on a year-over-year basis. The company reiterated its guidance for revenues for the full year. Revenues are expected in the range of $45-$48 million in 2022. The company also renewed its agreement with Japan-based Rakuten Mobile to deliver advanced cloud-native assurance solutions for Rakuten Mobile's network in the country.

RADCOM carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2022 earnings is pegged at 17 cents per share, up 70% in the past 60 days.

Price and Consensus: RDCM

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. Cisco’s expanding portfolio with the launch of Silicon One-based 8000 routers, Nexus Cloud, Calisti and Panoptica. It is benefiting from healthy uptake of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic.

The buyout of Acacia is a key catalyst. Cisco’s investments across its security business, focusing on cloud-based offerings, are expected to drive growth in the long haul. Cisco provided a strong outlook for first-quarter fiscal 2023 and fiscal 2023.

For first-quarter fiscal 2023, revenues are expected to grow 2-4% year over year. Non-GAAP gross margin is anticipated between 63% and 64% for the quarter. Non-GAAP operating margin is anticipated between 31.5% and 32.5% for the quarter. Non-GAAP earnings are anticipated to be 82-84 cents per share.

For fiscal 2023, revenues are expected to rise 4-6% on a year-over-year basis. Non-GAAP earnings are anticipated between $3.49 and $3.56 per share.

Cisco carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is pegged at $3.55 per share, up 0.5% on a year-over-year basis. The long-term growth earnings rate is pegged at 6.5%.

Price and Consensus: CSCO

In-Depth Zacks Research for the Tickers Above

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