3 Stocks to Watch for in a Prospering Networking Industry
Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the performance of the Zacks Computer – Networking industry participants. Accelerated deployment of 5G is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices and 5G smartphones, calling for solid networking infrastructure. This has boosted the demand for networking products, favoring the prospects of prominent industry players like Cisco CSCO, Extreme Networks EXTR and Digi International DGII. However, negative impacts stemming from the lingering supply chain disruptions and component shortages are likely to remain a concern in the near term. The spike in inflation and weakness prevailing over global economic conditions and rising crude prices likely to act as additional headwinds.
Industry Description
The Zacks Computer – Networking industry comprises companies that offer networking and Internet-connected products, including wireless (WiFi and Long-Term Evolution or LTE), Ethernet and powerline, with a focus on dependability and ease of use. The products are available in numerous configurations to cater to changing requirements of consumers in each geographic territory where it operates for smooth network connectivity and broadband access. Some industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products as well as implement and manage critical communications infrastructures in demanding environments with enhanced levels of safety. 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 Computer – Networking Industry Future
Rapid Deployment of 5G to Boost Growth Prospects: Continuation in work from home and the adoption of a hybrid/flexible work model have triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2022. The impending 5G boom will likely 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. More efforts to develop smart connected homes, hospitals, factories, buildings and cities and self-driving vehicles bode well for the industry players. The industry players are investing heavily in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.
The Uptick in Wi-Fi 6 Networking to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards define the Computer Networking industry. For instance, the growing clout of the latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. Wi-Fi 6 — the latest 802.11 wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). This is anticipated to bolster the industry participants’ top line.
Innovation in Networking Technologies is Opening New Business Avenues: Growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition (HD) streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in networking. The rapid proliferation of IoT, increasing popularity of smart connected devices and growing adoption of cloud computing in network security are fueling the demand for an efficient network support infrastructure. The advancements in AI, ML and the high adoption of cloud applications hold immense potential for companies in the industry. Enterprises are striving to manage fixed and wireless devices in a secured infrastructure. To address the demand, industry firms are driving innovation in networking technologies, including network virtualization and Software-Defined Networking (SDN), which favors growth prospects.
Relative Slowdown in IT Spending A Concern: Per a Gartner report, worldwide IT spending is expected to increase 3% in 2022 compared with 2021 levels and reach $4.5 trillion. Higher technology spending will drive the upside as enterprises continue to build sound technological infrastructure. However, the geopolitical disruptions, inflationary pressures and protracted pandemic-induced supply chain troubles remain major concerns. Also, consumer spending cuts on the purchase of PCs, tablets and printers are likely to bring down the IT spending growth to much less than the 10.2% spurt witnessed in 2021, added Gartner.
Zacks Industry Rank Indicates Bright Near-Term Prospects
The Zacks Computer – Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #56, which places it at the top 22% of more than 252 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bearish 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 2 to 1.
Before we present a few stocks that 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 Sector But Lags S&P 500
The Zacks Computer – Networking industry has outperformed the broader Zacks Computer and Technology sector but is lagging the S&P 500 composite over the past year.
The industry has lost 22.1% over this period compared with the broader sector’s decline of 28.5%. The S&P 500 has lost 12.2% over the same time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of the forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 14.51X compared with the S&P 500’s 17.39X. It is also below the sector’s forward-12-month P/E of 21.28X.
In the past five years, the industry has traded as high as 20.33X and as low as 12.56X, with media being at 16.91X, as the charts below show.
Forward 12-Month P/E Ratio
3 Computer – Networking Stocks to Keep an Eye on
Digi International: Based in Hopkins, MN, Digi International is a well-known provider of business and mission-critical Internet of Things (IoT) products and services globally. The company is witnessing strong demand for industrial IIoT products which is driving both the company’s bookings and backlog.
Digi International is benefiting from the increasing demand for console server, cellular solutions and OEM solutions along with healthy growth opportunities in smart city and mass transit as well as data center and edge applications’ markets. Synergies from acquisitions like Ventus bode well.
At present, Digi International sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for fiscal 2022 is pegged at $1.56 per share, indicating an increase of 403.2% year over year. The long-term growth earnings rate is pegged at an impressive 17%. Shares have increased 51.7% in the past year.
Price and Consensus: DGII
Extreme Networks: Based in Morrisville, NC, Extreme Networks provides next-generation switching solutions that cater to the increasing requirements of enterprise local area networks or LAN, internet service and content providers.
Higher deployment of 5G base stations on accelerated demand for 5G networking is expected to boost growth prospects. Acquisitions like Ipanema bode well in the long haul.
In June 2022, Extreme Networks launched a new set of solutions and also extended its ExtremeCloud portfolio to include new SD-WAN and AIOps with digital twin functionality. Through a single platform, this functionality will accelerate cloud deployments and aid customers with actionable insights while delivering secure connectivity at the edge of the network. This will also simplify network management, augment security and improve application performance with a simple, cost-effective subscription licensing model.
Extreme Networks carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for fiscal 2023 is pegged at 96 cents per share, indicating an increase of 24.7% year over year. Shares have increased 41.8% in the past year.
Price and Consensus: EXTR
Cisco: This San Jose, CA-based company is expected to gain from strength in its product portfolio, customer segments and momentum in product order growth. It is benefiting from healthy uptake of identity and access, advanced threat and unified threat management security solutions amid high growth in Internet traffic.
The buyout of Acacia is a key catalyst. Cisco’s expanding portfolio with the launch of Silicon One-based 8000 routers, Nexus Cloud, Calisti and Panoptica. Cisco also announced AppDynamics Cloud, a next-gen version of its observability platform for cloud-native applications. Cisco’s investments across its security business, focusing on cloud-based offerings, are expected to drive growth in the long haul. Cisco provided a strong outlook for first-quarter fiscal 2023 and fiscal 2023.
Currently, Cisco carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company’s fiscal 2023 earnings is pegged at $3.53 per share, up 5.1% on a year-over-year basis. The long-term growth earnings rate is pegged at 6.5%.
Price and Consensus: CSCO
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