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3 Wireless Stocks Likely to Benefit Despite Sector Blues

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The Zacks Wireless Equipment industry is likely to be deterred by large-scale investments for seamless 5G evolution, margin erosion due to escalated price wars, higher customer inventory levels and inflated raw material costs in a challenging macroeconomic environment, prolonged geopolitical conflicts and uncertain business conditions. However, fast-track 5G deployment, transition to cloud and fiber network infrastructure upgrades should help the industry in the long run.

Despite short-term headwinds, Qualcomm Incorporated (QCOM - Free Report) , Motorola Solutions, Inc. (MSI - Free Report) and Ubiquiti Inc. (UI - Free Report) are likely to profit from a 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?

Waning Demand: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have persistently reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, 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, pose another headwind for the companies.

Exponential Growth of Fiber, Cloud Networking: 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 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. The exponential growth 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 Margin 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 to a lesser extent) and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and scarcity 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.

Zacks Industry Rank Indicates Bearish Trends

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #181, which places it in the bottom 28% 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 bleak 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 Outperforms S&P 500, Sector

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

The industry has surged 50% over this period compared with the S&P 500 and sector’s growth of 26.1% and 36.2%, 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 29.39X compared with the S&P 500’s 14.65X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 14.45X.

Over the past five years, the industry has traded as high as 37.31X, as low as 11.89X and at the median of 21.79X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Wireless Equipment Stocks to Watch

Qualcomm: Headquartered in San Diego, CA, Qualcomm designs, manufactures and markets digital wireless telecom products and services based on the Code Division Multiple Access technology. The company is well-positioned to meet its long-term revenue targets driven by solid 5G traction, greater visibility and a diversified revenue stream. It is increasingly focusing on the seamless transition from a wireless communications firm for the mobile industry to a connected processor company for the intelligent edge. The buyout of Veoneer, Inc. has offered Qualcomm a firmer footing in the emerging market of driver-assistance technology. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 8.2% and 7.9% upward, respectively, since the beginning of this year. It has a long-term earnings growth expectation of 10.4% and delivered an earnings surprise of 7.5%, on average, in the trailing four quarters. It has a VGM Score of B. It has gained 90.7% in the past year. Qualcomm 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: QCOM

Motorola: Based in Chicago, IL, Motorola is a leading communications equipment manufacturer with strong market positions in bar code scanning, wireless infrastructure gear and government communications. It develops and services both analog and digital two-way radio, voice and data communications products and systems for private networks, wireless broadband systems and end-to-end enterprise mobility solutions to a wide range of enterprise markets. The stock has a long-term earnings growth expectation of 9.5% and delivered an earnings surprise of 7.5%, on average, in the trailing four quarters. This Zacks Rank #3 stock has climbed 28.1% over the past year. Motorola expects to record strong demand across video security and services, land mobile radio products and related software while benefiting from a solid foundation. The comprehensive suite of services ensures continuity and reduces risks related to critical communications operations. It has a VGM Score of B. The Zacks Consensus Estimate for the current fiscal earnings has been revised 7% upward over the past year.

Price and Consensus: MSI

Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its service-provider product platforms offer carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, while enterprise product platforms provide wireless local area network infrastructure, video surveillance products and machine-to-machine communication components. Ubiquiti’s excellent global business model, which is flexible and adaptable to evolving changes in markets, helps it to beat challenges and maximize growth. The operating model of this Zacks Rank #2 (Buy) stock is backed by a rapidly growing and highly engaged community of service providers, distributors, value-added resellers, systems integrators and corporate IT professionals (referred to as the Ubiquiti Community).

Price and Consensus: UI

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