3 Networking Stocks to Watch for in a Troubled 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 spurred the demand for networking products, favoring the prospects of prominent industry players like Cisco CSCO, Lantronix LTRX and RADCOM Ltd RDCM. However, negative impacts stemming from the lingering supply chain disruptions and component shortages will likely be a concern in the near term. Weak global economic conditions and rising inflation will likely 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, focusing on dependability and ease of use. The products are available in numerous configurations to cater to the 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 and implement and manage critical communications infrastructures in demanding environments with enhanced safety levels. 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 Industry's Future

Relative Slowdown in IT Spending Amid Economic Turmoil Concerning: The industry participants grapple with weak macroeconomic conditions and inflationary pressure. Soft macro conditions will likely weigh on IT spending, at least in the near term. According to the latest Gartner report, worldwide IT spending is expected to increase 3.5% in 2023 from 2022 levels and reach around $4.7 trillion. For 2024, worldwide IT spending is projected to be $5.1 trillion, up 8% from 2023. Earlier, the research firm projected IT spending for 2023 and 2024 to increase by 4.3% and 8.8%, respectively. Consumers are deferring expenditures on the purchase of devices, which will likely affect IT spending growth to an extent in 2023. Nonetheless, the device spending is expected to rebound, although modestly, in 2024. Also, the software and IT services segments are anticipated to witness double-digit growth owing to higher cloud spending in 2024. Higher cybersecurity spending is also driving the software segment’s growth. Gartner added that spending on public cloud services is expected to increase by 20.4% in 2024. The report added that though generative AI does not yet have a material impact on IT spending, increasing investment in AI supports IT spending growth.

Rapid Deployment of 5G to Boost Growth Prospects: Adopting a hybrid/flexible work model has triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2023 and beyond. 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. Efforts to develop smart connected homes, hospitals, factories, buildings, cities and self-driving vehicles bode well for industry players. These firms invest 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. 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 802.11ax 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, the increasing popularity of smart connected devices and the growing adoption of cloud computing in network security fuel the demand for an efficient network support infrastructure. The advancements in AI and 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 favor growth prospects.

Zacks Industry Rank Indicates Dim Near-Term Prospects

The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of 185, positioning it in the bottom 26% of more than 251 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dim 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 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 S&P 500 But Lags the Sector

The Zacks Computer – Networking industry has outperformed the S&P 500 composite but lags the broader Zacks Computer and Technology sector in the past year.

The industry is up 27.1% over this period compared with the broader sector’s gain of 37.1%. The S&P 500 has gained 19.8% 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 14.88X compared with the S&P 500’s 18.67X. It is also below the sector’s forward-12-month P/E of 23.30X.

In the past five years, the industry has traded as high as 20.33X and as low as 12.56X, with media being at 15.41X, as the charts below show.

Forward 12-Month P/E Ratio

3 Computer - Networking Stocks to Add to Watchlist

Lantronix: Based in Irvine, CA, Lantronix specializes in providing Industrial and Enterprise Internet of Things (IoT) solutions for high-growth applications in certain verticals, including Intelligent Transportation, Smart Grid, Smart Cities and AI Data Centers.

Recently, Lantronix announced the expansion of its G520 series of transport pack routers. The latest G528 5G and G526 4G CAT-4 routers are designed to deliver robust cybersecurity and enhanced connectivity.

The company’s revenues totaled $34.9 million in the last reported quarter, up 6% quarter over quarter. Non-GAAP earnings of 6 cents per share came in line with the figure reported in the previous quarter.

For fiscal year 2024, the company anticipates revenue in a range of $175-$185 million and non-GAAP earnings in the range of 50-60 cents per share.

Lantronix carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

The Zacks Consensus Estimate for fiscal 2024 is pegged at 54 cents per share, indicating an increase of 134.8% year over year.

Price and Consensus: LTRX

RADCOM: This Tel Aviv, Israel-based company specializes in providing cloud-native, automated service assurance offerings for telecommunication operators for 5G networks.

In July 2023, RADCOM unveiled a 5G assurance solution on Google Cloud. The company noted that availability on Google Cloud will extend the availability of 5G assurance solutions to clients to help them streamline 5G rollouts. In the last reported quarter, its revenues came in at $12.4 million, up 11% on a year-over-year basis.

RADCOM carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2023 earnings is pegged at 39 cents per share, indicating an increase of 105.3% year over year.

Price and Consensus: RDCM

Cisco: Headquartered in San Jose, CA, Cisco provides performance management, cybersecurity and DDoS protection solutions. Cisco is riding on the growing demand for its security products, artificial intelligence and cloud products. Its security portfolio benefits from the launch of new data loss prevention, firewall and zero trust capabilities. Zero Trust portfolio is riding on strong demand for its Duo offering. Optimized application experience is benefiting from solid demand for ThousandEyes. Its investments across the security business, focusing on cloud-based and AI-driven offerings, are expected to drive growth. Expanding growth opportunities for low-power-consuming technologies, including IoT, Silicon One and Power over Ethernet, bodes well for Cisco. Acquisitions including Lightspin Technologies, Smartlook and Armorblox is expected to benefit top-line growth.

In the last reported quarter, revenues increased 16% year over year to $15.2 billion and beat the consensus mark by 1.04%. Product revenues (76.6% of total revenues) increased 20.3% on a year-over-year basis to $11.09 billion.

Cisco carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2024 earnings is pegged at $4.05 per share, up 4.1% on a year-over-year basis. Shares have increased 28.9% in the past year.

Price and Consensus: CSCO

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