The Zacks Computer - Networking industry participants are expected to benefit from the networking infrastructure upgrade driven by AI workloads, cloud computing, big data, network security and next-generation connectivity.

The proliferation of AI workloads and hyperscale data centers is accelerating investments in high-speed interconnects, optical networking and Ethernet switches. Players in this space are focused on capitalizing on the multi-billion-dollar AI infrastructure opportunity. Increasing adoption of AI-driven applications across enterprises is also driving investments in next-gen networking infrastructure capable of supporting higher bandwidth, lower latency and heightened security requirements. Continued deployment of 5G, the proliferation of the Internet of Things (IoT), industrial automation and edge computing is strengthening demand for reliable connectivity solutions. Increasing deployment of Wi-Fi 7 also presents a significant growth opportunity.

Also, the explosion of AI workloads requires a major upgrade to observability infrastructure. There is a greater need for continuous monitoring of hybrid environments and tighter security amid rising attacks. This will spur demand for innovative networking products, favoring prospects for prominent industry players such as Cisco Systems (CSCO Quick QuoteCSCO - Free Report) , Digi International (DGII Quick QuoteDGII - Free Report) and Lantronix (LTRX Quick QuoteLTRX - Free Report) .  

However, cautious IT spending amid heightened uncertainty over global macroeconomic conditions and volatile supply-chain dynamics due to tariff troubles continues to be concerning for the participants in the near term. Fierce competition is an overhang on pricing power and margin expansion.

Industry Description

The Zacks Computer-Networking industry comprises companies that offer networking and Internet-connected products, including wireless (Wi-Fi and Long-Term Evolution or LTE), Ethernet and powerline, focusing on dependability and ease of use. The products are available in numerous configurations to cater to the changing requirements of consumers in each geographic territory where it operates. Several industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products, and implement and manage critical communications infrastructures in demanding environments with enhanced safety levels. Focus on developing IoT sensors, drones and wearables amid increasing demand for cloud computing-based contact tracing applications is driving the industry.

4 Trends Influencing the Industry's Future

Technological Advancement Opening Business Avenues: The proliferation of generative AI, agentic AI and high adoption of cloud and data-intensive applications is driving higher traffic and creating a need for advanced optical networking, high-speed interconnects, Ethernet switches, routing and wireless infrastructure. The transition toward 800G and 1.6T networking technologies is expected to further drive infrastructure modernization and capacity expansion.

Expansion of industrial IoT and edge computing, and the increasing popularity of smart connected devices are further creating growth opportunities. Rising cybersecurity concerns are emerging as a key tailwind, driving demand for solutions such as threat detection, network monitoring and zero-trust security architectures. 

Continued Deployment of 5G to Boost Growth Prospects: The continued expansion of the 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Efforts to develop smart connected homes, hospitals, factories, buildings, cities and self-driving vehicles bode well for industry players. These firms invest heavily in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise. 

Wi-Fi 7 Upgrade Cycle to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards define the networking industry. The growing clout of the latest Wi-Fi 6E-compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. The increasing demand for connecting more devices to the network has been driving demand for Wi-Fi 6E devices. Wi-Fi 6E addresses Wi-Fi spectrum shortage issues by providing continuous channel bandwidth to support a higher number of connected devices without compromising speed. The rollout of Wi-Fi 7 bodes well for the companies in this space.

Macroeconomic Turmoil Is Concerning: Global macroeconomic weakness and volatile supply-chain dynamics are persistent concerns. Tariff troubles, especially between the United States and China, remain an overhang on global supply chains. Inflation could affect spending across small and medium-sized businesses globally and uncertainty in business visibility could dent the industry’s near-term performance.

The computer networking industry remains highly competitive, with a large number of established and new players vying for market share. As growth stabilizes, competition often intensifies, leading to pricing pressure and margin compression. 

Zacks Industry Rank Indicates Bright Near-Term Prospects

The Zacks Computer-Networking Industry is housed within the broader Zacks Computer and Technology sector. The industry carries a Zacks Industry Rank #75, positioning it in the top 30% of more than 247 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term 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 stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture

Industry Outperforms the S&P 500 and the Sector

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

The industry has gained 51.9% over this period, compared with the broader sector’s 13.4% rally. The S&P 500 has appreciated 13.3% over the same time frame.

One-Year Price Performance

 

Industry's Current Valuation

Based on the forward 12-month price-to-earnings (P/E) ratio, a common multiple for valuing Computer-Networking stocks, the industry is currently trading at 24.62X, compared with the S&P 500’s 19.27X. It is also higher than the sector’s forward-12-month P/E of 19.25X.

In the past five years, the industry traded as high as 31.47X and as low as 12.45X, with the median being 17.27X, as the charts below show.

 

3 Computer-Networking Stocks to Add to Your Portfolio

Cisco Systems: Headquartered in San Jose, CA, the company offers identity and access, advanced threat and unified threat management solutions.

Cisco is benefiting from the demand for AI Infrastructure solutions, with hyperscaler demand acting as a key catalyst. The company expects AI infrastructure revenues from hyperscalers to reach $7.5 billion in fiscal 2027.

Strong demand for its Silicon One based systems and Acacia optical networking solutions is expected to support growth. Fiscal 2026 hyperscaler AI orders were about 60% Silicon One-based systems and 40% optics. Acacia generated more than $1 billion in orders in the fiscal fourth quarter. 

On the last earnings call, CSCO noted that accelerating agentic AI is driving a “networking super cycle” resulting in increasing demand for its Networking stack to support inferencing across cloud, on-premise and edge environments. In October, Cisco announced a collaboration with NVIDIA to develop an open industry specification for next-generation 400G-per-lane pluggable optics, further strengthening its position in the evolving AI networking ecosystem.

For fiscal 2027, Cisco projects revenues of $72.2-$73.4 billion and non-GAAP earnings of $5.05-$5.11 per share. The Zacks Consensus Estimate for fiscal 2027 bottom line is pinned at $5.11, unchanged in the past 30 days. Shares have gained 51.3% in the past year. 

At present, CSCO carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

Price & Consensus: CSCO

Lantronix: Based in Irvine, CA, Lantronix specializes in providing Industrial and Edge AI IoT solutions for high-growth applications in certain verticals, including enterprise IT, smart cities and commercial and defense unmanned systems. 

The company's unmanned systems business has emerged as a meaningful growth driver. Revenues from Unmanned systems came in at $12.6 million in fiscal 2026 and management expects the segment to represent 15% to 20% of total revenues in fiscal 2027. Increasing adoption of AI-enabled drones and counter-UAS applications across defense, industrial and commercial applications presents significant opportunities for its unmanned systems business.  The recent inclusion of its Open-Q 8550CS system-on-module in the Blue UAS Framework strengthens its ability to serve U.S. defense drone manufacturers. 

The company also introduced the Spotter edge AI computing platform, which expands its offerings for autonomous drones and robotics. 

Beyond unmanned systems, the IoT System Solutions is witnessing improving conditions after federal government shutdowns led to extended procurement cycles. The tuck-in acquisition of Vecima Networks' Industrial IoT business, including the Nero Global Tracking platform, is also expanding its recurring software revenue base. 

However, tightening memory availability and rising costs remain concerns, while the increasing contribution from relatively lower-margin unmanned systems solutions could weigh on profitability.

At present, LTRX carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2027 earnings is 22 cents per share, unchanged in the past 60 days. Shares have gained 23.8% in the past year.

Price & Consensus: LTRX

Digi International: Based in Hopkins, MN, Digi is a well-known provider of business and mission-critical Internet of Things (IoT) products and services globally. The company’s industrial Internet of Things offerings encompass embedded, edge and turnkey vertical solutions. These solutions find applications across emerging technology trends such as AI, edge computing and industrial automation. The company is embedding AI across its portfolio. 

Digi’s outlook remains supported by sustained ARR growth, ongoing benefits from acquisitions and the long-term opportunity to integrate AI into industrial IoT solutions. The company expects ARR to grow 27% in fiscal 2026, up from 25% projected earlier. 

To capitalize on the AI opportunity, DGII had unveiled DANI, the Digi Artificial Network Intelligence agent, earlier in the year. DANI is an AI network operations agent that is embedded in Digi Remote Manager, a networking device management platform, enabling network operators/managed service providers to monitor issues, identify causes and offer recommended actions through a unified conversational interface. 

The recent launch of Digi EX60, an enterprise 5G router integrating Wi-Fi 7 and AI-assisted network management capabilities, further strengthens its offerings for distributed enterprise networks.

Digi continues to pursue strategic acquisitions, which are likely to supplement organic growth. The proposed acquisition of Disruptive Technologies is expected to expand the capabilities and reach of its SmartSense platform. The company expects the transaction to contribute approximately $9 million in additional adjusted EBITDA and free cash flow in fiscal 2028. The transaction is expected to close before the end of 2026, subject to regulatory approval. 

On the last earnings call, management highlighted challenges in the supply chain, which could exert pressure on margins. 

At present, DGII carries a Zacks Rank #3. The Zacks Consensus Estimate for fiscal 2027 bottom line is pegged at $3.17, unchanged in the past 60 days. Shares have gained 106% in the past year. 

Price & Consensus: DGII