The increasing focus on cloud computing, network security, big data and cloud storage is expected to increase the performance of Zacks Computer – Networking industry participants. The accelerated deployment of 5G is driving the spread of the Internet of Things (IoT), advanced driver assistance systems (ADAS), augmented reality/virtual reality (AR/VR) devices and 5G smartphones, and requires a robust network infrastructure. This boosted demand for networking products and boosted the prospects of prominent industry players such as Cisco CSCO, Infinera Corporation INFN and RADCOM RDCM. However, the negative impact of ongoing supply chain disruptions and component shortages are likely to remain a concern in the near term. The geopolitical instability in Europe due to the Ukraine war, the weak global economy and rising inflation and crude oil prices are likely to act as additional headwinds.
Zacks’ computer networking industry includes companies that offer networking and Internet-connected products, including wireless (WiFi and Long-Term Evolution or LTE), Ethernet and Powerline, with a focus on reliability and ease of use. The products are available in numerous configurations to meet the changing needs of consumers in each geographic area where they are deployed for seamless network connectivity and broadband access. Some industry players also offer mission-critical IoT solutions and network security services to help customers design next-generation connected products and deploy and manage critical communications infrastructure in demanding, security-enhanced environments. Focusing on the development of IoT sensors, drones and wearables amid rising demand for cloud computing-based contact tracing applications is driving the industry.
4 trends affecting the future of the computer networking industry
Rapid deployment of 5G to boost growth prospects: The continuation of working from home and the adoption of a hybrid/flexible working model have fueled demand for network-intensive applications such as video conferencing and cloud services. This is intended to accelerate 5G deployment into 2022 and beyond. The upcoming 5G boom is likely to take the industry to new heights. The success of 5G technology depends on significant investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Further efforts to develop smart connected homes, hospitals, factories, buildings and cities, and self-driving vehicles bode well for industry players. Industry players are investing heavily in LTE, broadband and fiber to provide additional capacity and improve internet and wireless networks. These initiatives are promising.
The upward trend in Wi-Fi 6 networks to increase momentum: Rapid technological advances, dynamic products, high-speed connectivity, low latency, and evolving industry standards are defining the computer networking industry. The growing clout of the latest Wi-Fi 6 compatible home gateways, Wi-Fi routers, set-top boxes and wireless range extenders is testament to this. Wi-Fi 6—the latest 802.11ax wireless standard—offers an estimated 30% faster network speeds than 802.11ac (Wi-Fi 5). This is expected to strengthen the sales of the industry participants.
Innovation in network technologies opens up new business opportunities: The growing importance of smart home and internet-connected products such as smart TVs, game consoles, HD (high definition) streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in connectivity. The rapid spread of IoT, the increasing popularity of smart connected devices and the increasing adoption of cloud computing in network security are driving the demand for efficient network support infrastructure. The advances in AI and ML and the high acceptance of cloud applications hold immense potential for companies in the industry. Enterprises strive to manage fixed and wireless devices in a secured infrastructure. To meet demand, industrial companies are driving innovation in networking technologies, including network virtualization and software-defined networking (SDN), boosting growth prospects.
Relative slowdown in IT spending worrying in the near term: According to a Gartner report, global IT spending in 2022 is expected to grow 0.8% from 2021 levels, reaching around $4.4 billion. Geopolitical disruptions, inflationary pressures and ongoing pandemic-related supply chain issues are major concerns. Also, consumers are deferring spending on purchasing devices, which is likely to impact IT spending growth in 2022. However, the research firm was bullish on its 2023 guidance, in which it expects IT spending to grow 5.1% year over year to $4.7 billion.
Zacks’ industry ranking suggests a good near-term outlook
The Zacks computer networking industry is housed within the broader Zacks computer and technology sector. It has a Zacks industry rank of 78, placing it in the top 31% of more than 251 Zacks industries.
The Group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, indicates good near-term prospects. Our research shows that the top 50% of industries evaluated by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before we present some stocks to consider for your portfolio given the bright prospects, let’s take a look at recent stock market performance and the valuation picture for the industry.
The industry is outperforming the sector and the S&P 500
The Zacks Computer – Networking industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 Composite over the past year.
The industry is down 12.5% over the period, compared to a 33.2% decline in the broader sector. The S&P 500 is down 16.4% over the same period.
One-year price development
Current rating of the industry
Based on the 12-month price-to-earnings (P/E) multiple, which is a common multiple for valuing computer networking stocks, we see that the industry is currently trading at 15.22X, compared to 17.81 of the S&P 500X. It is also below the sector’s expected 12-month P/E of 21.22X.
Over the past five years, the industry has traded as high as 20.33X and as low as 12.56X, with the media trading at 16.91X, as shown in the charts below.
Forward 12-month P/E
Forward 12-month P/E
3 Computer Networking Stocks to Watch
Infinera: Based in San Jose, California, the company provides digital optical networking systems to telecommunications carriers, cable operators and other service providers worldwide. Infinera’s DTN system and PIC technology are designed to deliver optical networks that simplify operations, improve revenue generation, accelerate time-to-service and save on capital costs.
For the third quarter of 2022, the company reported total revenue of $390.4 million, up 9% year over year, driven by momentum in product sales amid supply chain issues. The company is seeing an increasing number of customers for the ICE6 solution, which accounted for more than 30% of product sales in the third quarter. For 2022, the company expects sales of 435 million US dollars (+/- 15 million US dollars).
Currently, Infinera carries a Zacks rank #2. The Zacks Consensus estimate for the company’s 2022 earnings is set at 2 cents per share, which has been revised up from a loss of one cent over the last 60 days. You can see the full list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Price and consensus: INFN
RADCOM: Based in Tel Aviv, Israel, this company specializes in providing cloud-native, automated service assurance offerings to telecom operators for 5G networks.
The company recently released its third-quarter 2022 results, which totaled $12 million in revenue, up 17% year over year. The company reiterated its sales guidance for the full year. Revenues of $45 million to $48 million are expected for 2022. The company also renewed its agreement with Japan-based Rakuten Mobile to provide advanced cloud-native backup solutions for Rakuten Mobile’s network in the country.
RADCOM carries a Zacks Rank #2. Zacks’ consensus estimate for the company’s 2022 earnings is 17 cents a share, up 70% over the past 60 days.
Price and consensus: RDCM
Cisco: This San Jose, California-based company is expected to benefit from the strength of its product portfolio, customer segments and momentum in product order growth. Cisco’s expanded portfolio with the introduction of Silicon One-based 8000 routers, Nexus Cloud, Calisti and Panoptica. It benefits from a healthy acceptance of identity and access, advanced security solutions for threats, and unified threat management in the midst of skyrocketing Internet traffic.
The acquisition of Acacia is an important catalyst. Cisco’s investments across the security business, which are focused on cloud-based offerings, are expected to drive growth over the long term. Cisco provided a strong outlook for the first quarter of fiscal 2023 and fiscal 2023.
Revenue growth of 2-4% YoY is expected for the first quarter of fiscal 2023. Non-GAAP gross margin is expected to be between 63% and 64% for the quarter. Non-GAAP operating margin is expected to be between 31.5% and 32.5% for the quarter. Non-GAAP earnings are expected to be 82-84 cents per share.
For fiscal 2023, revenue is expected to grow 4-6% year over year. Non-GAAP earnings are expected to be between $3.49 and $3.56 per share.
Cisco carries a Zacks Rank #3 (hold). The Zacks Consensus estimate for the company’s fiscal 2023 earnings is $3.55 per share, up 0.5% year over year. The long-term earnings growth rate is set at 6.5%..
Price and consensus: CSCO
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