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3 Communication Stocks Set to Ride on Solid Sector Dynamics
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The Zacks Communication - Infrastructure industry appears well poised to benefit from healthy demand trends and an increasing user propensity to stay abreast of the latest digital innovations. However, high capital expenditures for infrastructure upgrades, margin erosion, supply chain adversities albeit at diminishing pace, geopolitical conflicts, raging wars and high customer inventory levels have dented the industry’s profitability.
Nevertheless, Anterix Inc. (ATEX - Free Report) , CommScope Holding Company, Inc. (COMM - Free Report) and Bandwidth Inc. (BAND - Free Report) are likely to gain from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, transition to cloud and next-gen technologies and accelerated 5G rollout.
Industry Description
The Zacks Communication - Infrastructure industry players 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?
Seamless Transition to Cloud: 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 considerably investing in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks while facilitating a seamless transition to the cloud. 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.
Waning Profits: Although supply chain woes have declined progressively, the industry is facing a dearth of chips, which are the building blocks of various equipment used by telecom carriers. Moreover, high raw material prices due to inflation, the Israel-Hamas conflict, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected profitability. In addition, latent Sino-U.S. tensions relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country have dented the industry’s credibility, leading to a loss of business. The industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios.
Network Convergence: 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. These investments are likely to help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification. The industry players 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.
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 #115, which places it in the top 46% 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 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 declined 58.8% over this period against the S&P 500 and the sector’s growth of 20.7% and 42.5%, 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 3.29X compared with the S&P 500’s tally of 14.40X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 14.14X.
Over the past five years, the industry has traded as high as 12.14X, as low as 3.29X and at the median of 8.05X, as the chart below shows.
Trailing 12-Month enterprise value-to-EBITDA (EV/EBITDA) Ratio
3 Communication - Infrastructure Stocks to Watch
Anterix: Headquartered in Woodland Park, NJ, Anterix is a premier wireless communications firm. It reportedly holds the largest licensed spectrum in the 900 MHz band, with coverage throughout the United States, Alaska, Hawaii and Puerto Rico. Anterix expects to monetize its spectrum assets to generate long-term value. The stock delivered an earnings surprise of 36.5%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised upward by 35.5% since February 2023. Anterix 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: ATEX
CommScope: 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. In an effort to drive growth and efficiency within the organization, it has completed the divestiture of its Home Networks business to Vantiva SA (formerly Technicolor SA). The tax-free spin-off will enable CommScope to drive innovation while focusing more on go-to-market strategy and developing its own technologies for home and consumer products on the back of a resilient manufacturing model. The restructuring will also enable it to focus more on core operations. This Zacks Rank #3 (Hold) stock has a long-term earnings growth expectation of 17.2%. It has a VGM Score of B.
Price and Consensus: COMM
Bandwidth: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service 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. Bandwidth delivers unparalleled network quality and proactively monitors network operations 24/7 to resolve quality issues, capitalizing on an efficient cost structure for seamless connectivity and speed-to-market. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 3.1% and 7.8%, respectively, since February 2023. This Zacks Rank #3 stock delivered an earnings surprise of 175.3%, on average, in the trailing four quarters. It has a VGM Score of B.
Price and Consensus: BAND
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3 Communication Stocks Set to Ride on Solid Sector Dynamics
The Zacks Communication - Infrastructure industry appears well poised to benefit from healthy demand trends and an increasing user propensity to stay abreast of the latest digital innovations. However, high capital expenditures for infrastructure upgrades, margin erosion, supply chain adversities albeit at diminishing pace, geopolitical conflicts, raging wars and high customer inventory levels have dented the industry’s profitability.
Nevertheless, Anterix Inc. (ATEX - Free Report) , CommScope Holding Company, Inc. (COMM - Free Report) and Bandwidth Inc. (BAND - Free Report) are likely to gain from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, transition to cloud and next-gen technologies and accelerated 5G rollout.
Industry Description
The Zacks Communication - Infrastructure industry players 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?
Seamless Transition to Cloud: 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 considerably investing in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks while facilitating a seamless transition to the cloud. 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.
Waning Profits: Although supply chain woes have declined progressively, the industry is facing a dearth of chips, which are the building blocks of various equipment used by telecom carriers. Moreover, high raw material prices due to inflation, the Israel-Hamas conflict, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected profitability. In addition, latent Sino-U.S. tensions relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country have dented the industry’s credibility, leading to a loss of business. The industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios.
Network Convergence: 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. These investments are likely to help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification. The industry players 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.
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 #115, which places it in the top 46% 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 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 declined 58.8% over this period against the S&P 500 and the sector’s growth of 20.7% and 42.5%, 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 3.29X compared with the S&P 500’s tally of 14.40X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 14.14X.
Over the past five years, the industry has traded as high as 12.14X, as low as 3.29X and at the median of 8.05X, as the chart below shows.
Trailing 12-Month enterprise value-to-EBITDA (EV/EBITDA) Ratio
3 Communication - Infrastructure Stocks to Watch
Anterix: Headquartered in Woodland Park, NJ, Anterix is a premier wireless communications firm. It reportedly holds the largest licensed spectrum in the 900 MHz band, with coverage throughout the United States, Alaska, Hawaii and Puerto Rico. Anterix expects to monetize its spectrum assets to generate long-term value. The stock delivered an earnings surprise of 36.5%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised upward by 35.5% since February 2023. Anterix 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: ATEX
CommScope: 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. In an effort to drive growth and efficiency within the organization, it has completed the divestiture of its Home Networks business to Vantiva SA (formerly Technicolor SA). The tax-free spin-off will enable CommScope to drive innovation while focusing more on go-to-market strategy and developing its own technologies for home and consumer products on the back of a resilient manufacturing model. The restructuring will also enable it to focus more on core operations. This Zacks Rank #3 (Hold) stock has a long-term earnings growth expectation of 17.2%. It has a VGM Score of B.
Price and Consensus: COMM
Bandwidth: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service 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. Bandwidth delivers unparalleled network quality and proactively monitors network operations 24/7 to resolve quality issues, capitalizing on an efficient cost structure for seamless connectivity and speed-to-market. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 3.1% and 7.8%, respectively, since February 2023. This Zacks Rank #3 stock delivered an earnings surprise of 175.3%, on average, in the trailing four quarters. It has a VGM Score of B.
Price and Consensus: BAND