The Zacks Wireless Equipment industry is likely to benefit from healthy demand trends with an accelerated pace of 5G deployment and fiber network infrastructure upgrade. However, large-scale investments to support the 5G transition, margin erosion due to price wars, higher customer inventory levels and inflated raw material costs amid a challenging macroeconomic environment and supply chain adversities might erode profitability.

Nevertheless, Juniper Networks, Inc. (JNPR Quick QuoteJNPR - Free Report) , Viasat, Inc. (VSAT Quick QuoteVSAT - Free Report) and InterDigital Inc. (IDCC Quick QuoteIDCC - Free Report) are expected to profit from the increasing demand for state-of-the-art wireless products with a vast proliferation of IoT, fiber densification and a gradual shift to cloud services.

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 the Wireless Equipment Industry?

Wide Proliferation of IoT: With the exponential growth of mobile broadband traffic and home Internet solutions, demand for advanced networking architecture has increased manifold. This has forced service providers to spend more on routers and switches to upgrade their networks and support the surge in home data traffic. To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the scalability, security and universal mobility of the telecommunications industry and 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. 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 at Stake: 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, the prolonged Russia-Ukraine war and pricing pressure in early 5G deals. Uncertainty regarding chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and shortages of other raw materials are expected to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. Further, the high technological obsolescence of most products has escalated operating costs with steady investments in R&D. High customer inventory levels owing to a challenging macroeconomic environment and intense market volatility remain another headwind for the companies.

Transition to Cloud Services: 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 #112, which places it in the top 44% 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 bright 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 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 lost 1.8% over this period against the S&P 500 and sector’s growth of 16.4% and 27.2%, 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 24.71X compared with the S&P 500’s 13.54X. It is also trading above the sector’s trailing-12-month EV/EBITDA of 12.56X.

Over the past five years, the industry has traded as high as 37.26X and as low as 11.87X and at the median of 19.93X, 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

Juniper: Based in Sunnyvale, CA, Juniper is a leading provider of networking solutions and communication devices. The company develops, designs and sells products that help build network infrastructure for services and applications based on a single Internet protocol network worldwide. The stock has a long-term earnings growth expectation of 7.3%. It is witnessing encouraging trends across various areas of its business, including solid momentum in Mist Systems and strength in the services organization. Juniper has made significant changes to the go-to-market structure to better align sales strategies with its core customer verticals. The company is set to capitalize on the increasing demand for data center virtualization, cloud computing and mobile traffic packet/optical convergence. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 4% and 14.7% upward, respectively, over the past year. Juniper carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: JNPR

Viasat: Headquartered in Carlsbad, CA, Viasat designs, develops and markets advanced digital satellite telecommunications and other wireless networking and signal processing equipment. The company serves its high-bandwidth, high-performance communications solutions to the public as well as military, enterprises and government enterprises. It has completed the buyout of Inmarsat, a global leader in delivering innovative and reliable mobile communication services worldwide. The acquisition will immensely strengthen Viasat’s portfolio, diversify service offerings and accelerate global expansion in areas that are well-suited for its products and solutions. Management expects this transaction to be accretive to adjusted EBITDA and free cash flow on a per-share basis, enabling it to provide better services to customers at lower costs. This Zacks Rank #1 stock has gained 46.5% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 313.5% and 277.8% upward, respectively, over the past year.

Price and Consensus: VSAT

InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies and develops a wide range of advanced technology solutions, which are used in digital cellular as well as wireless 3G, 4G and IEEE 802-related products and networks. InterDigital aims to become a leading designer and developer of technology solutions and innovation for the mobile industry, IoT and allied technology areas by leveraging its research and development capabilities, technological know-how and rich industry experience. At the same time, it intends to enhance its licensing revenue base by adding licensees and expanding into adjacent technology areas that align with its intellectual property position. It has a VGM Score of A. It has a long-term earnings growth expectation of 13.9% and delivered an earnings surprise of 170.9%, on average, in the trailing four quarters. This Zacks Rank #1 stock has gained 59.5% in the past year. The Zacks Consensus Estimate for the current fiscal earnings has been revised 56.1% upward over the past year.

Price and Consensus: IDCC