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Lower IT Spending to Mar Computer Networking Industry Prospects

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The Zacks Computer - Networking industry comprises companies that provide networking and Internet connected products such as wireless (WiFi and LTE), Ethernet and powerline, with focus on reliability and ease-of-use.

Some of the industry participants also provide business, and mission-critical IoT solutions and network security services to help customers create next-generation connected products with high levels of security, reliability and assured performance.

Moreover, increased focus on cloud computing and cloud storage is driving the industry.

Here are the three major themes in the industry:
 

  • Accelerated deployment of 5G and robust adoption of cloud computing applications holds promise considering the rapid growth in demand for video and other bandwidth-intensive applications. We believe prominent industry players, including Cisco Systems (CSCO - Free Report) , NETGEAR (NTGR - Free Report) , Infinera Corporation (INFN - Free Report) and Extreme Networks (EXTR - Free Report) are well poised to gain from this demand. In fact, the industry participants are making significant investments in LTE, broadband and fiber in order to provide additional capacity and improve Internet and wireless networks. These investments hold promise. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. This bodes well for the industry players. Moreover, increased demand for Internet based services amid coronavirus crisis-induced house arrest is likely to favor near-term prospects.
     
  • Brisk technological change, dynamic products, high-speed connectivity, low latency, and evolving industry standards are defining characteristics of the Computer Networking industry. For instance, growing clout of latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders, is a testament to evolving standards in networking infrastructure. Notably, Wi-Fi 6, the latest 802.11 wireless standard, is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). Rapid proliferation of IoT, increasing popularity of smart connected devices and growing adoption of cloud computing are fueling demand for an efficient network support infrastructure. The advancements in areas like AI, ML and increasing adoption of cloud applications hold immense potential for the industry players.
     
  • Slowdown in IT spending, as estimated by IDC, remains an overhang. Moreover, the industry participants have been bearing the brunt of the U.S.-China trade war for quite some time now. It has created an uncertain environment that is not conducive for investments. Further, slowing China economy and the coronavirus outbreak have raised concerns regarding the industry’s near-term prospects. Also, shift in consumer buying patterns is likely to dampen growth prospects of the industry participants.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Computer - Networking industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #171, which places it at the bottom 32% 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 continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. Since Mar 31, 2019, the industry’s earnings estimate for the current year has declined 5.3%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer – Networking industry has underperformed the broader sector and the Zacks S&P 500 composite over the past year.

The industry has fallen 28% over this period compared with the S&P 500’s decline of 3.2% and the broader sector’s growth of 1.8%.

One-Year Price Performance



Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio (P/E), which is a commonly used multiple for valuing computer networking stocks, we see that the industry is currently trading at 12.55X compared with the S&P 500’s 15.72X. It is also below the sector’s forward-12-month P/E of 18.45X.

Over the past five years, the industry has traded as high as 19.21X and as low as 11.26X, with media being at 15.17X, as the charts below show.

Forward 12-Month P/E Ratio



Forward 12-Month P/E Ratio



Bottom Line

Increased focus on cloud computing, big data and cloud storage is expected to drive the industry participants’ revenues. However, slowing China economy and the coronavirus crisis are likely to act as dampeners.

Here, we present one stock, NetScout Systems, Inc. (NTCT - Free Report) , currently flaunting a Zacks Rank #1 (Strong Buy) that investors can take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.

Westford, MA-based NetScout Systems provides service assurance, business analytics and security services, that aid businesses enhance digital services. Notably, the consensus estimates for fiscal 2020 earnings has improved 5.4% to $1.56 over the past 60 days.

Price and Consensus: NTCT



We are also presenting two stocks with a Zacks Rank #3 (Hold) that investors may want to keep a tab on.

Israel-based, Allot Ltd. (ALLT) offers network intelligence and security solutions, which enables users to personalize the digital experience in a secured infrastructure.

The Zacks Consensus Estimate for 2020 bottom line has been revised to loss of 1 cent from a loss of 5 cents in the past 60 days.

Price and Consensus: ALLT



Sunnyvale, CA-based Infinera Corporation offers advanced optical transport networking platforms and software and services globally. Long-term earnings growth rate is currently pegged at 10%.

Price and Consensus: INFN



5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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