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. 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
Innovation in Networking Technologies is Opening New Business Avenues: The 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.
Rapid Deployment of 5G to Boost Growth Prospects: Adopting a hybrid/flexible work model triggered the demand for network-intensive applications like video conferencing and cloud services. This has accelerated 5G deployment globally. 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 6E 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 6E-compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. The increasing demand to connect more devices to the network has been driving demand for Wi-Fi 6E devices. Wi-Fi 6E addresses Wi-Fi spectrum shortage issues by providing continuous channel bandwidth to support a higher number of connected devices without compromising speed. Moreover, the rollout of Wi-Fi 7 bodes well for the companies in this space.
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 of 107, positioning it in the top 43% 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 bright 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 Underperforms S&P 500 and the Sector
The Zacks Computer – Networking industry has underperformed both the S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.
The industry is up 2.6% over this period compared with the broader sector’s gain of 45.1%. The S&P 500 has gained 20.6% 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 14.55X compared with the S&P 500’s 19.98X. It is also below the sector’s forward-12-month P/E of 24.97X.
In the past five years, the industry has traded as high as 20.33X and as low as 12.56X, with media being at 15.32X, as the charts below show.
Forward 12-Month P/E Ratio
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Forward 12-Month P/E Ratio
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3 Computer - Networking Stocks to Add to Watchlist
NETGEAR: Headquartered in San Jose, CA, NETGEAR, Inc. is a global telecommunications firm that offers innovative networking and Internet-connected products for seamless networking, broadband access, and network connectivity.
NTGR’s performance is being cushioned by robust demand for premium Wi-Fi mesh systems, 5G mobile hotspots and ProAV-managed switched products. It had 844,000 paid service subscribers at the end of the last reported quarter, up 26.7% year over year. The company expects to reach about 875,000 paid subscribers by the end of 2023.
Weakness in the SMB business segment due to continued channel inventory reductions by partners, owing to a volatile macroeconomic environment, is concerning.
At present, NETGEAR carries a Zacks Rank #1 (Strong Buy).
The Zacks Consensus Estimate for 2023 earnings is pegged at a loss of 9 cents per share, unchanged in the past 30 days.
Price and Consensus: NTGR
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NetScout Systems: The Westford, MA-based company provides performance management, cybersecurity and DDoS protection solutions. Demand trends for Service Assurance and Cybersecurity product lines for the long term remain healthy. Extensive cost-cutting efforts to manage discretionary spending bodes well.
The company is focused on advancing several technology initiatives, including Dynamic DDoS and Mobile DDoS security as well as Omnis Cybersecurity solutions. However, the company’s last reported quarter’s performance was affected by slowing order conversion stemming from industry and economic headwinds. NTCT expects these trends to persist into the second half of fiscal year 2024. For fiscal 2024, the company now expects revenues (GAAP and Non-GAAP) in the range of $840-$860 million.
NetScout sports a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for fiscal 2024 earnings for has remained unchanged at $2.10 per share in the past 60 days.
Price and Consensus: NTCT
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Recently, Lantronix teamed up with P3 Digital Services to build a pre-integrated hardware and software turnkey In-Vehicle Infotainment (IVI) platform. This platform will aid OEMs to accelerate time to market while lowering costs.
The company’s revenues totaled $33 million in the last reported quarter, up 4% year over year. Non-GAAP earnings of 7 cents per share came in line with the figure reported in the previous quarter.
For fiscal year 2024, the company anticipates revenue in the range of $175-$185 million and non-GAAP earnings in the range of 50-60 cents per share.
Lantronix carries a Zacks Rank #3. The Zacks Consensus Estimate for the fiscal 2024 is pegged at 58 cents per share, indicating an increase of 152.2% year over year.
Price and Consensus: LTRX
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
