The Zacks Communication - Infrastructure industry is poised to benefit from increased fiber densification and extensive 5G deployment as users tend to stay abreast of the latest digital innovations. However, high capital expenditures for infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions, a volatile energy market and high customer inventory levels amid incessant geopolitical conflicts remain potent threats.

Despite the odds, Bandwidth Inc. (BAND Quick QuoteBAND - Free Report) and Anterix Inc. (ATEX Quick QuoteATEX - Free Report) are likely to gain from solid demand for scalable infrastructure for seamless connectivity with the wide proliferation of IoT, continued transition to fiber, cloud and next-gen technologies, and accelerated 5G rollout.

Industry Description

The Zacks Communication - Infrastructure industry players provide various infrastructure solutions for 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, 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, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. All these efforts have helped firms in the industry cater to the surge in data demand. 

Low Latency 5G & Fiber Ecosystem: Most industry participants are deploying the latest LTE technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments in infrastructure upgrades. The companies are expanding fiber optic networks to support LTE and 5G networks. With low latency and increased bandwidth, business enterprises are increasingly embracing the exciting possibilities offered by artificial intelligence and the IoT via the real-time transfer of mobile data. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed.

Eroding Margins: 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. High raw material prices due to the Iran war, shipping restrictions in the Strait of Hormuz, soaring energy prices, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected profitability. In addition, latent U.S.-China hostilities 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 #9, which places it in the top 4% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 couple of 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 Outperforms S&P 500 & Sector

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

The industry has surged 112.5% over this period compared with the S&P 500 and the sector’s growth of 30.3% and 49.7%, 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 6.95X compared with the S&P 500’s tally of 18.65X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 20.14X.

Over the past five years, the industry has traded as high as 141.8X, as low as 1.19X and at the median of 5.41X, as the chart below shows.

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

2 Communication - Infrastructure Stocks to Watch

Bandwidth: Headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface (API) platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. Bandwidth believes that its evolving portfolio and accretive customer base are the cornerstones of long-term growth across a diverse set of markets. It enables enterprises to rapidly scale communications functionalities to various applications and devices with its easy-to-use software APIs. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to Bandwidth’s comprehensive suite of products and services. It supports high user volumes without affecting deliverability and cost-effectively eliminates performance degradation. The stock has gained a whopping 321.7% in the past year and has a VGM Score of B. Bandwidth sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BAND

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 company’s transformative broadband solutions for critical infrastructure industries and enterprises help to unlock applications from analytics to automation to edge monitoring and artificial intelligence. The stock has gained 130.2% in the past year. Anterix carries a Zacks Rank #3 (Hold).

Price and Consensus: ATEX