The Zacks Wireless Equipment industry is poised to capitalize on the healthy demand trends driven by fast-track 5G deployment and transition to cloud and fiber network infrastructure upgrade. However, large-scale investments for seamless 5G evolution, margin erosion due to price wars, higher customer inventory levels and inflated raw material costs in a challenging macroeconomic environment, geopolitical conflicts and uncertain business conditions might erode profitability.

Nevertheless, InterDigital, Inc. (IDCC Quick QuoteIDCC - Free Report) , Viasat Inc. (VSAT Quick QuoteVSAT - Free Report) and Aviat Networks, Inc. (AVNW Quick QuoteAVNW - Free Report) are likely to profit from solid growth dynamics owing to vast proliferation of IoT, continued fiber densification and a gradual shift to cloud services.

Industry Description

The Zacks Wireless Equipment industry primarily comprises companies providing 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?

Cloud Networking at Core: 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.

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, the prolonged Russia-Ukraine war and the Israel-Hamas conflict. Uncertainty regarding chip shortage (albeit at a lesser extent) and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and shortages of other raw materials due to geopolitical unrest 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. High customer inventory levels, owing to a challenging macroeconomic environment and intense market volatility, pose another headwind for the companies.

Fiber Densification: 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 telecommunications industry's scalability, security and universal mobility 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. 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.

Zacks Industry Rank Indicates Bullish Trends

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #83, which places it in the top 33% 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 jumped 4.3% over this period compared with the S&P 500 and sector’s growth of 19.7% and 43.3%, 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 25.16X compared with the S&P 500’s 13.43X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 12.81X.

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 21.02X, 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

InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company engages in designing and developing 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. The stock has a long-term earnings growth expectation of 17.4% and has surged 121.1% over the past year. A well-established global footprint, diversified product portfolio and ability to penetrate different markets are key growth drivers for the company. Apart from a strong portfolio of wireless technology solutions, the addition of technologies related to sensors, user interface and video to its offerings is likely to drive considerable value, given the massive size of the market it offers licensing technologies to. The Zacks Consensus Estimates for the current fiscal and next fiscal earnings have been revised 238.8% and 104.5% upward, respectively, over the past year. InterDigital sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: IDCC

Viasat: Headquartered in Carlsbad, CA, Viasat designs, develops and markets advanced digital satellite telecommunications and other wireless networking and signal processing equipment. It serves high-bandwidth, high-performance communication solutions to the public as well as military, enterprises and government enterprises. Viasat’s impressive bandwidth productivity sets it apart from conventional and lower-yield satellite providers that run on incumbent business models. The company is ramping up investments in the development of a revolutionary ViaSat-3 broadband communications platform, which will boast nearly 10 times the bandwidth capacity of ViaSat-2. The ViaSat-3 platform will help to form a global broadband network with an affordable, high-quality, high-speed Internet and video streaming service. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 78.6% and 311.5% upward, respectively, over the past year. This Zacks Rank #2 (Buy) stock has a long-term earnings growth expectation of 15.8%.

Price and Consensus: VSAT

Aviat: Headquartered in Austin, TX, Aviat has been a global provider of microwave networking solutions. It offers public and private operators communications networks to cater to the accretive demand for IP-centric, multi-gigabit data services. Backed by avant-garde technology, Aviat simplifies the entire lifecycle of designing, deploying and maintaining wireless transport networks with greater performance and reliability. The company is well-positioned to benefit from robust market dynamics, cost-reduction efforts, favorable customer mix and higher investments in innovative software solutions. A solid liquidity position and healthy balance sheet are likely to aid the company in executing key long-term strategic objectives. It has a VGM Score of B. This Zacks Rank #2 stock has gained 4.9% in the past year. The Zacks Consensus Estimate for the current fiscal earnings has been revised 10.1% upward since December 2022.

Price and Consensus: AVNW