Nevertheless, Arista Networks, Inc. ANET, Harmonic Inc. HLIT and AudioCodes Ltd. AUDC are likely to gain in the long run as demand for scalable infrastructure for seamless connectivity rises with the wide proliferation of IoT, fiber densification, transition to cloud and accelerated 5G rollout.
Industry Description
The Zacks Communication - Components industry primarily comprises companies that provide diverse telecom products and services to develop scalable network architecture, demand-driven video solutions and broadband access equipment. These include various building blocks such as small cells, routers and antennas incorporated into equipment and facilities, and subsequently utilized by service providers to build networks for end users. Their product portfolio encompasses optical and copper connectivity products, hybrid fiber-coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, modems, EMTAs (Embedded Multimedia Terminal Adapter), gateways, set-top boxes, analog and digital microphones, audio processors, glass substrates for LCD TVs and notebooks, ceramic substrates for mobile and laboratory filtration products.
What's Shaping the Future of the Communication Components Industry?
Network Convergence: With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions with steady R&D investments to support wireline and wireless network convergence. These investments are likely to help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification. The industry players have enabled enterprises to rapidly scale communications functionalities to a vast range of applications and devices with easy-to-use software application programming interfaces. The firms support high user volumes without affecting deliverability and cost-effectively eliminate performance degradation.
Focus on Cloud & Fiber Densification: The firms are likely to benefit from a software-driven, data-centric approach that helps customers build their cloud architecture and enhance the cloud experience. The industry participants are well-poised for growth in data-driven cloud networking business with proactive platforms and predictive operations. Fiber networks are essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Telecom service providers are increasingly leaning toward fiber optic cable to meet the burgeoning demand for cloud-based business data and video streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last-mile local loops, which are required by wireless service providers to deploy the 5G network.
Robust Demand for Quality Products: As both consumers and enterprises are using networks more extensively, there is tremendous demand for quality networking components. Additionally, data consumption patterns are changing, with a growing propensity to consume more video content, creating the need for faster data transfer. Since optical networks are more efficient and most existing networks are copper-based, the demand for optical solutions is strong. The industry firms offer several products focused on the data center, with a typical portfolio consisting of optical fiber, hardware, cables and connectors, enabling them to meet the evolving customer requirements and bridge the digital divide across the United States.
Waning Profits: Although supply chain woes have declined progressively, the industry is facing a dearth of chips, which are the building blocks of various equipment used by telecom carriers. Moreover, high raw material prices due to the Middle East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. High technological obsolescence of most products has escalated operating costs, while high customer inventory levels and a conservative approach toward placing orders for high-value items remain headwinds.
Zacks Industry Rank Indicates Bullish Trends
The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #21, which places it among the top 8% 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 solid 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 communication component 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 Outperforms S&P 500, Sector
The Zacks Communication - Infrastructure industry has outperformed the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.
The industry has rallied 51.8% over this period compared with the S&P 500 and sector’s rise of 23.6% and 27%, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 5.95X compared with the S&P 500’s 8.4X. It is also below the sector’s trailing 12-month P/B of 9.35X.
Over the past five years, the industry has traded as high as 6.58X, as low as 2.03X and at the median of 3.58X, as the chart below shows.
Trailing 12-Month price-to-book (P/B) Ratio
3 Communication Components Stocks to Bet on
Arista: Santa Clara, CA-based Arista provides cloud networking solutions for data centers and cloud computing environments. It offers one of the broadest product lines of data center and Ethernet switches and routers in the industry. The stock has surged 67.9% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 23.4% and 22.4% upward, respectively, over the past year. It has a long-term earnings growth expectation of 17.2% and delivered an earnings surprise of 15%, on average, in the trailing four quarters.
Arista continues to benefit from the expanding cloud networking market, driven by strong demand for scalable infrastructure. In addition to high capacity and easy availability, its cloud networking solutions promise predictable performance and programmability that enable integration with third-party applications for network management, automation and orchestration. Arista currently carries a Zacks Rank #2 (Buy).
Price and Consensus: ANET
Harmonic: Headquartered in San Jose, CA, Harmonic provides video delivery software, products, system solutions and services worldwide. With more than three decades of experience, it has revolutionized cable access networking via the industry's first virtualized cable access solution, enabling cable operators to more flexibly deploy gigabit Internet service to consumers' homes and mobile devices.
Harmonic, sporting a Zacks Rank #1, delivered an earnings surprise of 32.5%, on average, in the trailing four quarters. The company is likely to benefit from its product launches that help operators simplify their fiber upgrades, enabling them to accelerate the time to market of high-speed fiber broadband by integrating several functionalities into one module.
Price and Consensus: HLIT
AudioCodes: Incorporated in 1992 and headquartered in Lod, Israel, AudioCodes offers advanced communications software, products and productivity solutions for the digital workplace. Its product portfolio includes session border controllers, life cycle management solutions, VoIP network routing solutions, media gateways and servers, multi-service business routers, IP phone solutions and value-added applications, as well as professional services.
AudioCodes is likely to benefit from the secular tailwinds related to IP-based communications. It aims to leverage its long-term partnership with Microsoft to further strengthen its market position. AudioCodes is also likely to benefit from its continued focus on high-margin businesses. This Zacks Rank #2 stock has delivered an earnings surprise of 10.1%, on average, in the trailing four quarters. It has a VGM Score of B.
Price and Consensus: AUDC
Only $1 to See All Zacks' Buys and Sells
We're not kidding.
Several years ago, we shocked our members by offering them 30-day access to all our picks for the total sum of only $1. No obligation to spend another cent.
Thousands have taken advantage of this opportunity. Thousands did not - they thought there must be a catch. Yes, we do have a reason. We want you to get acquainted with our portfolio services like Surprise Trader, Stocks Under $10, Technology Innovators,and more, that closed 228 positions with double- and triple-digit gains in 2023 alone.
See Stocks Now >>Arista Networks, Inc. (ANET) : Free Stock Analysis Report
Harmonic Inc. (HLIT) : Free Stock Analysis Report
AudioCodes Ltd. (AUDC) : Free Stock Analysis Report
To read this article on Zacks.com click here.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
