Yahoo Finance 3 Wireless Stocks Set to Transcend Margin Woes on Solid Demand
The Zacks Wireless Equipment industry appears well poised to benefit from healthy demand trends with an accelerated pace of 5G deployment and fiber network infrastructure upgrade. However, large-scale investments to support the 5G transition, margin erosion due to price wars, higher customer inventory levels and inflated raw material costs amid a challenging macroeconomic environment and supply chain adversities might erode profitability.
Nevertheless, Nokia Corporation NOK, Juniper Networks, Inc. JNPR and InterDigital Inc. IDCC are likely to profit from the increasing demand for state-of-the-art wireless products with a vast proliferation of IoT, fiber densification and a gradual shift to cloud services.
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 the Wireless Equipment Industry?
Fiber Densification, 5G Coverage Expansion: With the exponential growth of mobile broadband traffic and home Internet solutions, demand for advanced networking architecture has increased manifold. This has forced service providers to spend more on routers and switches to upgrade their networks and support the surge in home data traffic. A faster pace of 5G deployment is expected to augment the scalability, security and universal mobility of the telecommunications industry and propel the wide proliferation of IoT. Expansion of fiber optic networks to support 4G LTE and 5G wireless standards, as well as wireline connections, are likely to act as tailwinds. The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. 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.
Margin Woes Deter Growth: Although higher infrastructure 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 the high cost of first-generation 5G products, profitability challenges in China, the prolonged Russia-Ukraine war and pricing pressure in early 5G deals. Uncertainty regarding chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and shortages of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also likely to hurt the delivery schedule and escalate production costs. Further, the high technological obsolescence of most products has escalated operating costs with steady investments in R&D. High customer inventory levels owing to a challenging macroeconomic environment and intense market volatility remain another headwind for the companies.
Integrated Service Offering With Cloud Focus: The majority of the industry participants offer 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. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #100, which places it in the top 40% 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 bright 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 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 Lags S&P 500, Sector
The Zacks Wireless Equipment industry has lagged the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has lost 10.1% over this period compared with the S&P 500 and sector’s decline of 8.2% and 9.3%, respectively.
One-Year Price Performance
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 17.98X compared with the S&P 500’s 12.54X. It is also trading above the sector’s trailing-12-month EV/EBITDA of 10.41X.
Over the past five years, the industry has traded as high as 37.26X and as low as 11.84X and at the median of 18.85X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Wireless Equipment Stocks to Keep a Close Eye on
Juniper: Based in Sunnyvale, CA, Juniper is a leading provider of networking solutions and communication devices. The company develops, designs and sells products that help build network infrastructure for services and applications based on a single Internet protocol network worldwide. This Zacks Rank #2 (Buy) stock has a long-term earnings growth expectation of 7%. It is witnessing encouraging trends across various areas of its business, including solid momentum in Mist Systems and strength in the services organization. Juniper has made significant changes to the go-to-market structure to better align sales strategies with each of its core customer verticals. The company is set to capitalize on the increasing demand for data center virtualization, cloud computing and mobile traffic packet/optical convergence.
Price and Consensus: JNPR
InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies and develops a wide range of advanced technology solutions, which are used in digital cellular as well as wireless 3G, 4G and IEEE 802-related products and networks. InterDigital aims to become a leading designer and developer of technology solutions and innovation for the mobile industry, IoT and allied technology areas by leveraging its research and development capabilities, technological know-how and rich industry experience. At the same time, it intends to enhance its licensing revenue base by adding licensees and expanding into adjacent technology areas that align with its intellectual property position. It has a VGM Score of A. It has a long-term earnings growth expectation of 11.4% and delivered an earnings surprise of 40.3%, on average, in the trailing four quarters. The stock has gained 17.2% in the past year. It carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: IDCC
Nokia: This Finland-based telecom equipment provider is well-positioned for the ongoing technology cycle, given the strength of its end-to-end portfolio. Nokia’s deal win rate is encouraging, with notable successes in the key 5G markets of the United States and China. Its installed base of high-capacity AirScale products, which enables customers to quickly upgrade to 5G, is growing fast. Nokia’s end-to-end portfolio includes products and services for every part of a network, which are helping operators to enable key 5G capabilities, such as network slicing, distributed cloud and industrial IoT. Accelerated strategy execution, sharpened customer focus and reduced long-term costs are expected to position Nokia as a global leader in the delivery of end-to-end 5G solutions. It has a long-term earnings growth expectation of 1.8% and delivered an earnings surprise of 9.7%, on average, in the trailing four quarters. This Zacks Rank #3 stock has gained 8.2% over the past six months.
Price and Consensus: NOK
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