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3 Communication Stocks Likely to Gain From Industry Tailwinds
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The Zacks Communication - Components industry is likely to benefit from strong demand, driven by fast-track 5G deployment, increasing digitalization, expanding IoT adoption, and the seamless transition to cloud and fiber networks. However, elevated customer inventory levels, high capital expenditure for infrastructure upgrades, margin erosion, volatility in oil prices and geopolitical conflicts have dented the industry’s profitability.
Despite short-term setbacks, Ciena Corporation (CIEN - Free Report) , Viavi Solutions Inc. (VIAV - Free Report) and Ooma, Inc. (OOMA - Free Report) are likely to gain in the long run as the demand for scalable infrastructure for seamless connectivity rises with the widespread proliferation of IoT, accelerated 5G rollout and fiber densification.
Industry Description
The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services to develop scalable network architecture, demand-driven video solutions, and broadband access equipment. These include various building blocks such as small cells, routers and antennas incorporated into equipment and facilities and subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, modems, Embedded Multimedia Terminal Adapter, gateways, set-top boxes, analog and digital microphones, audio processors, glass substrates for LCD TVs and notebooks, and ceramic substrates for mobile and laboratory filtration products.
What's Shaping the Future of the Communication Components Industry?
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 with steady R&D investments 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.
Solid Growth Dynamics: As consumers and enterprises are using networks more extensively, there is tremendous demand for quality networking components. Additionally, data consumption patterns are changing, with a growing propensity to consume more video content, creating the need for faster data transfer. Since optical networks are more efficient and most existing networks are copper-based, the demand for optical solutions is strong. The industry firms offer several products focused on the data center, with a typical portfolio comprising optical fiber, hardware, cables and connectors, enabling them to meet the evolving customer requirements and bridge the digital divide across the United States.
Depleting Margins: 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. High technological obsolescence of most products has escalated operating costs, with steady investments in R&D. High customer inventory levels and a conservative approach toward placing orders for high-value items remain other headwinds. Moreover, high raw material prices due to the United States-Iran war, volatility in oil prices due to restrictions across the Strait of Hormuz and the consequent economic fallout have affected the operation schedule of various firms.
Software-Driven Data-Centric Connectivity: The firms are likely to benefit from a software-driven, data-centric approach that helps customers build their cloud architecture and enhance the cloud experience. The industry participants are well-poised for growth in the data-driven cloud networking business with proactive platforms and predictive operations. Fiber networks are essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Telecom service providers are increasingly leaning toward fiber optic cable to meet the burgeoning demand for cloud-based business data and video streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last-mile local loops, which are required by wireless service providers to deploy the 5G network.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #25, which places it among the top 10% 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 rosy prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
Before we present a few communication component stocks that are well-positioned to outperform the market based on a strong earnings outlook, let us 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 S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has jumped a stellar 158.5% over this period compared with the S&P 500 and sector’s returns of 16% and 27.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 11.71 compared with the S&P 500’s 7.24X. It is also above the sector’s trailing 12-month P/B of 9.55X.
Over the past five years, the industry has traded as high as 15.19X, as low as 1.72X and at the median of 2.56X, as the chart below shows.
Trailing 12-Month Price-to-Book (P/B) Ratio
3 Communication Components Stocks to Buy
Ciena: Headquartered in Fulton, MD, the company is a leading provider of optical networking equipment, software and services. The stock has surged 154.3% over the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 64.2% and 111.7% upward, respectively, over the past year. It has a long-term earnings growth expectation of 12% and delivered an earnings surprise of 17.6%, on average, in the trailing four quarters.
Ciena is well-positioned to capitalize on the secular growth trend through its industry-leading coherent optical technology portfolio, particularly its WaveLogic platform. The company’s latest WaveLogic 6 Extreme solution supports transmission speeds of up to 1.6 terabits per second per wavelength, enabling cloud providers to scale network capacity efficiently while lowering power consumption and operating costs by maximizing existing fiber infrastructure without the need for extensive new fiber deployment. The company is also strengthening its position through software-driven networking solutions. Its Blue Planet automation platform helps operators simplify network management through AI-driven orchestration, analytics and automation capabilities. Ciena currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CIEN
Viavi: Headquartered in Scottsdale, AZ, the company is a leading provider of network test, monitoring and service enablement solutions to diverse sectors across the globe. Viavi offers products with end-to-end network visibility and analytics that help build, test, certify, maintain and optimize complex physical and virtual networks. It delivered an earnings surprise of 14.3%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 165.6% and 61.7% upward, respectively, over the past year.
The integration of Spirent’s high-speed Ethernet and network security testing assets continues to contribute to revenue growth, and broadens Viavi’s addressable market across enterprise and data center applications. Investments in PCIe 7.0 analysis capabilities and the launch of the CyberFlood CF1000 platform expand Viavi’s ability to validate AI inference workloads, encrypted traffic and next-generation data center infrastructure. It strengthens exposure to long-term AI-related network testing demand and supports continued growth in lab, production and field-testing solutions. This Zacks Rank #1 company has skyrocketed 267% in the past year.
Price & Consensus: VIAV
Ooma: Headquartered in Sunnyvale, CA, the company offers cloud-based communications solutions, smart security and other connected services. Ooma’s smart software-as-a-service and unified-communications-as-a-service platforms serve as a hub for seamless communications and networking infrastructure applications. This Zacks Rank #1 firm delivered an earnings surprise of 12%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 44.2% and 8% upward, respectively, over the past year. It has a VGM Score of B. The stock has surged 81.6% in the past year.
Ooma’s focus on small business customers with simple, easy-to-use interfaces, which can be implemented quickly without IT support for an integrated business connectivity solution, is likely to drive healthy growth momentum. Its low-cost fixed line that reportedly offers faster emergency access services is expected to gain traction, while increased penetration within enterprise markets with customized offerings is expected to bear fruit.
View the Zacks #1 Rank List
Image: Bigstock
3 Communication Stocks Likely to Gain From Industry Tailwinds
The Zacks Communication - Components industry is likely to benefit from strong demand, driven by fast-track 5G deployment, increasing digitalization, expanding IoT adoption, and the seamless transition to cloud and fiber networks. However, elevated customer inventory levels, high capital expenditure for infrastructure upgrades, margin erosion, volatility in oil prices and geopolitical conflicts have dented the industry’s profitability.
Despite short-term setbacks, Ciena Corporation (CIEN - Free Report) , Viavi Solutions Inc. (VIAV - Free Report) and Ooma, Inc. (OOMA - Free Report) are likely to gain in the long run as the demand for scalable infrastructure for seamless connectivity rises with the widespread proliferation of IoT, accelerated 5G rollout and fiber densification.
Industry Description
The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services to develop scalable network architecture, demand-driven video solutions, and broadband access equipment. These include various building blocks such as small cells, routers and antennas incorporated into equipment and facilities and subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, modems, Embedded Multimedia Terminal Adapter, gateways, set-top boxes, analog and digital microphones, audio processors, glass substrates for LCD TVs and notebooks, and ceramic substrates for mobile and laboratory filtration products.
What's Shaping the Future of the Communication Components Industry?
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 with steady R&D investments 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.
Solid Growth Dynamics: As consumers and enterprises are using networks more extensively, there is tremendous demand for quality networking components. Additionally, data consumption patterns are changing, with a growing propensity to consume more video content, creating the need for faster data transfer. Since optical networks are more efficient and most existing networks are copper-based, the demand for optical solutions is strong. The industry firms offer several products focused on the data center, with a typical portfolio comprising optical fiber, hardware, cables and connectors, enabling them to meet the evolving customer requirements and bridge the digital divide across the United States.
Depleting Margins: 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. High technological obsolescence of most products has escalated operating costs, with steady investments in R&D. High customer inventory levels and a conservative approach toward placing orders for high-value items remain other headwinds. Moreover, high raw material prices due to the United States-Iran war, volatility in oil prices due to restrictions across the Strait of Hormuz and the consequent economic fallout have affected the operation schedule of various firms.
Software-Driven Data-Centric Connectivity: The firms are likely to benefit from a software-driven, data-centric approach that helps customers build their cloud architecture and enhance the cloud experience. The industry participants are well-poised for growth in the data-driven cloud networking business with proactive platforms and predictive operations. Fiber networks are essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Telecom service providers are increasingly leaning toward fiber optic cable to meet the burgeoning demand for cloud-based business data and video streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last-mile local loops, which are required by wireless service providers to deploy the 5G network.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #25, which places it among the top 10% 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 rosy prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
Before we present a few communication component stocks that are well-positioned to outperform the market based on a strong earnings outlook, let us 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 S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has jumped a stellar 158.5% over this period compared with the S&P 500 and sector’s returns of 16% and 27.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 11.71 compared with the S&P 500’s 7.24X. It is also above the sector’s trailing 12-month P/B of 9.55X.
Over the past five years, the industry has traded as high as 15.19X, as low as 1.72X and at the median of 2.56X, as the chart below shows.
Trailing 12-Month Price-to-Book (P/B) Ratio
3 Communication Components Stocks to Buy
Ciena: Headquartered in Fulton, MD, the company is a leading provider of optical networking equipment, software and services. The stock has surged 154.3% over the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 64.2% and 111.7% upward, respectively, over the past year. It has a long-term earnings growth expectation of 12% and delivered an earnings surprise of 17.6%, on average, in the trailing four quarters.
Ciena is well-positioned to capitalize on the secular growth trend through its industry-leading coherent optical technology portfolio, particularly its WaveLogic platform. The company’s latest WaveLogic 6 Extreme solution supports transmission speeds of up to 1.6 terabits per second per wavelength, enabling cloud providers to scale network capacity efficiently while lowering power consumption and operating costs by maximizing existing fiber infrastructure without the need for extensive new fiber deployment. The company is also strengthening its position through software-driven networking solutions. Its Blue Planet automation platform helps operators simplify network management through AI-driven orchestration, analytics and automation capabilities. Ciena currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Price & Consensus: CIEN
Viavi: Headquartered in Scottsdale, AZ, the company is a leading provider of network test, monitoring and service enablement solutions to diverse sectors across the globe. Viavi offers products with end-to-end network visibility and analytics that help build, test, certify, maintain and optimize complex physical and virtual networks. It delivered an earnings surprise of 14.3%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 165.6% and 61.7% upward, respectively, over the past year.
The integration of Spirent’s high-speed Ethernet and network security testing assets continues to contribute to revenue growth, and broadens Viavi’s addressable market across enterprise and data center applications. Investments in PCIe 7.0 analysis capabilities and the launch of the CyberFlood CF1000 platform expand Viavi’s ability to validate AI inference workloads, encrypted traffic and next-generation data center infrastructure. It strengthens exposure to long-term AI-related network testing demand and supports continued growth in lab, production and field-testing solutions. This Zacks Rank #1 company has skyrocketed 267% in the past year.
Price & Consensus: VIAV
Ooma: Headquartered in Sunnyvale, CA, the company offers cloud-based communications solutions, smart security and other connected services. Ooma’s smart software-as-a-service and unified-communications-as-a-service platforms serve as a hub for seamless communications and networking infrastructure applications. This Zacks Rank #1 firm delivered an earnings surprise of 12%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 44.2% and 8% upward, respectively, over the past year. It has a VGM Score of B. The stock has surged 81.6% in the past year.
Ooma’s focus on small business customers with simple, easy-to-use interfaces, which can be implemented quickly without IT support for an integrated business connectivity solution, is likely to drive healthy growth momentum. Its low-cost fixed line that reportedly offers faster emergency access services is expected to gain traction, while increased penetration within enterprise markets with customized offerings is expected to bear fruit.
Price & Consensus: OOMA