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Zacks Industry Outlook Highlights: Ericsson, Nokia, Aviat Networks, QUALCOMM, Juniper Networks and Motorola Solutions

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For Immediate Release

Chicago, IL – June 25, 2021 – Today, Zacks Equity Research discusses Wireless Equipment including Telefonaktiebolaget LM Ericsson (ERIC - Free Report) , Nokia Corporation (NOK - Free Report) , Aviat Networks, Inc. (AVNW - Free Report) , QUALCOMM Incorporated (QCOM - Free Report) , Juniper Networks, Inc. (JNPR - Free Report) and Motorola Solutions, Inc. (MSI - Free Report) .

Link: https://www.zacks.com/commentary/1753517/3-wireless-stocks-likely-to-beat-chip-shortage-led-industry-woes

The Zacks Wireless Equipment industry appears to be mired in uncertainties amid continued chip shortage, with large-scale investments to support the transition to 5G, high R&D and raw material costs compounding woes and further eroding margins. In addition, tense bilateral trade relations between the United States and China have rendered a relatively grim picture for the near future.

Nevertheless, EricssonNokia Corp. and Aviat Networks are likely to benefit in the long run from the increasing demand for state-of-the-art wireless products and services with wide proliferation of IoT driven by faster pace of 5G deployment.

Industry Description

The Zacks Wireless Equipment industry primarily comprises companies that provide 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 Wireless Equipment Industry

Chip Shortage Eclipsing Digital Sustainability: The coronavirus pandemic has forced the larger American population to seek refuge in the safety of their homes. With the exponential growth of mobile broadband traffic, digital sustainability has become the norm of the day and user demand for coverage speed and quality has increased manifold.

This has resulted in huge demand for advanced networking architecture, in turn, leading service providers to spend more on routers and switches as carriers aim to upgrade their networks to support the surge in home data traffic. Further, to maintain superior performance standards, there is a continuous need for network tuning and optimization, creating demand for state-of-the-art wireless products and services.

However, uncertainty regarding the continued chip shortage and supply chain disruptions extending beyond semiconductors have crippled operations of most firms. This, in turn, has led to acute demand-supply imbalance, as the industry faces essential fiber materials and labor shortage, shipping delays and shortages of containers and other raw materials, affecting the expansion and rollout of new broadband networks.

Extended lead times for basic components have negatively impacted the delivery schedule, prompting several industry groups to urge the government to take immediate corrective actions.

Near-Term Profitability Compromised: The continued deployment of 5G technology across the globe is likely to propel the industry to newer heights. Moreover, 5G is expected to augment the scalability, security and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT.

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.

Although these 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 high cost levels associated with the first generation 5G products, profitability challenges in China and pricing pressure in early 5G deals.

Tense Geo-Political Environment: Majority of the industry participants offers mission-critical communication infrastructure, devices, accessories, software and services that enable its customers to run businesses with increased efficiency and safety for their mobile workforce. These systems drive demand for additional device sales, software upgrades, infrastructure overhaul and expansion as well as additional services to maintain, monitor and manage these complex networks and solutions.

The comprehensive suite of services ensures continuity and reduces risks for constant critical communication operations. However, paucity of demand due to geopolitical uncertainties and a challenging macroeconomic environment have dented the margins of most industry participants. Intense price wars due to rising costs of raw materials and stiff competition have added to the woes.

High technological obsolescence of most products has also escalated operating costs with continuous investments in R&D. Trade hostilities related to various restrictions by two of the most powerful economic powerhouses of the world have dented the profitability of the industry, and shrouded it in uncertainty. The Biden administration is ratcheting up pressure on China with the FCC giving the final touches to a plan to ban telecommunications products from the communist nation.

The FCC is also likely to revoke its earlier authorization for the use of such equipment on perceived security threats, forcing most schools and local government facilities to replace them. The Congress is further mulling to introduce a bill to prohibit the FCC from reviewing or issuing new equipment licenses to companies on the agency's blacklist, providing an added security layer to foil alleged data intrusion efforts by China-based firms.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #186, which places it at the bottom 26% of more than 250 Zacks industries. Some notable firms within the industry are QUALCOMMJuniper Networks and Motorola Solutions.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dim prospects. 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.

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 Trumps S&P 500, Lags Sector

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

The industry has gained 43.4% over this period compared with the S&P 500 and sector's rally of 39.6% and 48.1%, respectively.

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 12.61X compared with the S&P 500's 17.42X. It is also below the sector's trailing-12-month EV/EBITDA of 16.66X.

Over the past five years, the industry has traded as high as 29.98X and as low as 11.6X and at the median of 18.13X.

3 Wireless Equipment Stocks to Keep a Close Eye On

Ericsson: Founded in 1876 and headquartered in Stockholm, Sweden, Ericsson is a leading provider of communication networks, telecom services and support solutions. This Zacks Rank #3 (Hold) stock has gained 30.6% in the past year compared with the industry's growth of 44.2%. The Zacks Consensus Estimate for the current and next fiscal year earnings has been revised 18.2% and 27.9% upward, respectively, over the past year.

The stock has long-term earnings growth expectation of 9% and delivered an earnings surprise of 22.2%, on average, in the trailing four quarters. To date, Ericsson has secured 139 commercial 5G agreements with unique communication service providers, of which 81 are live networks.

The company is increasingly focusing on 5G system development to capitalize on the upcoming market opportunities. The company believes standardization of 5G is the cornerstone for digitization of industries and broadband. Moreover, Ericsson foresees mainstream 4G offerings to give way to 5G technology in the future.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Nokia Corp.: Headquartered in Espoo, Finland, Nokia is a premier provider of mobile and fixed network solutions worldwide. This Zacks Rank #2 (Buy) stock has gained 13.5% in the past year. The Zacks Consensus Estimate for the current and next fiscal year earnings has been revised 31.8% and 11.1% upward, respectively, since January-end.

The stock has delivered a stellar earnings surprise of 215.2%, on average, in the trailing four quarters.  Nokia is driving the transition of global enterprises into smart virtual networks by creating a single network for all services, converging mobile and fixed broadband, IP routing and optical networks with software and services to manage them.

Nokia facilitates its customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation needed to support dynamic operations, reduce complexity and improve efficiency. The company seeks to expand its business into targeted, high-growth and high-margin vertical markets to address growth opportunities beyond its traditional primary markets.

It has inked more than 165 commercial 5G contracts across the globe. Accelerated strategy execution, sharpened customer focus and reduced long-term costs are expected to position the company as a global leader in the delivery of end-to-end 5G solutions.

Aviat Networks: Headquartered in Austin, TX, Aviat is a leading provider of communication networks, telecom services and support solutions. This Zacks Rank #2 stock has gained a solid 297.8% in the trailing 12 months. The Zacks Consensus Estimate for current-year earnings has been revised 196.3% upward since June 2020.

The stock has delivered an earnings surprise of 57.3%, on average, in the trailing four quarters. The company is witnessing healthy momentum in its business, courtesy of a multi-million rural broadband contract from Nextlink Internet, one of several top RDOF award recipients, as well as a significant deal in mobile 5G with a U.S.-based Tier 1 operator for microwave transport. In addition, with the replacement of Huawei gear, Aviat has reportedly emerged as the only U.S.-based supplier of microwave transport infrastructure.

More Stock News: This Is Bigger than the iPhone!

It could become the mother of all technological revolutions. Apple sold a mere 1 billion iPhones in 10 years but a new breakthrough is expected to generate more than 77 billion devices by 2025, creating a $1.3 trillion market.

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