The Zacks Communication - Infrastructure industry appears to be facing raw material prices volatility and supply-chain disruptions due to chip shortage and the coronavirus-induced adversities that have affected the delivery schedule of most companies. Moreover, high capital expenditures for infrastructure upgrade and margin erosion due to price wars have dented the industry’s profitability.

Nevertheless, Bandwidth Inc. (BAND Quick QuoteBAND - Free Report) , ADTRAN, Inc. (ADTN Quick QuoteADTN - Free Report) , and Wireless Telecom Group, Inc. are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, driven by a faster pace of 5G deployment.

Industry Description

The Zacks Communication - Infrastructure industry comprises firms that provide various infrastructure solutions for the core, access, and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions for use across Internet protocol, asynchronous transfer mode, and time division multiplexed architecture in both wireline and wireless network applications. Their product portfolio encompasses optical fiber and twisted pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed antenna wireless systems and hardened optical terminating enclosures.

What's Shaping the Future of the Communication - Infrastructure Industry?

Evolution With Changing Demand Patterns: With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are making considerable investments in LTE, broadband, and fiber in order to provide additional capacity and ramp up Internet and wireless networks. As a result, these companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice, and IP solutions. The industry participants are also focusing on leveraging wireline momentum, expanding media coverage, improving customer service, and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. All these efforts have particularly helped firms in the industry to cater to the surge in data demand, with digital sustainability becoming the norm of the day as the majority of the population is forced to work from home.

Network Convergence: The success of 5G hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. 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 to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition, expand rural coverage and wireless densification, short-term profitability has largely been compromised. Nevertheless, the industry firms 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.

Chip Shortfall, Discounts Mar Profitability: The industry is currently facing an acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. Although the Biden administration is trying to address the global shortage of semiconductor chips and devise ways to increase domestic production, demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices. The government has also pledged bipartisan support for funds of $50 billion to ramp up production capacity and reduce supply bottlenecks while eliminating dependence on countries like China. However, unless the policy guidelines assume a tangible effect, the industry firms are likely to face short-term challenges, affecting their cash flow.

Low-Priced Alternatives Resulting in Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have led to reduced demand, as customers prefer to switch to lower-priced alternatives. Moreover, the local-line access for traditional telephony service continues to face a decline among large customers due to higher wireless substitution and migration to IP-based services. This is reflected in the persistent erosion in overall network access services on a year-over-year basis, hurting revenues of local and long-distance operations. With Digital Subscriber Line and cable modems gaining widespread acceptance, customers are deactivating extra phone lines that were earlier used to access the Internet via dial-up modem. In addition, a shift toward wireless services and the aggressive rollout of VoIP and long-distance services by Tier-1 competitors have resulted in access line erosion. These negative impacts have become more pronounced as the coronavirus pandemic has hurt global economic growth, triggering large-scale unemployment.

Zacks Industry Rank Indicates Bearish Trends

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #232, which places it at the bottom 32% 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 grim 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. The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.

Before we present a few communication infrastructure 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 Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology sector as well as the S&P 500 composite over the past year.

The industry has risen 11.9% over this period compared with the S&P 500 and the sector’s rise of 33.5% and 43.1%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the 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 8.16X compared with the S&P 500’s 15.97X. It is also below the sector’s trailing-12-month EV/EBITDA of 16.23X.

Over the past five years, the industry has traded as high as 11.99X, as low as 6.73X and at the median of 8.78X, as the chart below shows.

Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio

3 Communication - Infrastructure Stocks to Keep a Close Eye on

Bandwidth Inc.: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to Bandwidth’s comprehensive suite of products and services that cater to the networking requirements of large-scale Internet companies and cloud service providers based in the United States. This reinforces pricing flexibility and provides a significant competitive advantage to build a capital-efficient and customized networking infrastructure. Higher demand for work-from-home connectivity solutions amid the coronavirus-induced lockdown is fueling its growth engine. The acquisition of Voxbone complements its product portfolio and enables it to offer a unified software platform to better serve global customers. The stock has long-term earnings growth expectation of 10% and pulled off an earnings surprise of 1,170.1%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised 329.4% upward over the past year, and that for the next year is up 15.3%. Bandwidth 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: BAND

ADTRAN, Inc.: Headquartered in Huntsville, AL, ADTRAN designs, manufactures, markets, and services network access solutions for communication networks. The company’s business continues to be driven by strong demand for its fiber access platforms, in-home service delivery platforms and software platforms with regional service providers across the United States and Europe. ADTRAN’s end-to-end solutions simplify the deployment of fiber-based broadband services and provide a better customer experience. The company is focused on being a top global supplier of access infrastructure and related value-added solutions from the Cloud Edge to the Subscriber Edge through a broad portfolio of flexible hardware and software network solutions. These products enable customers to transition to the fully converged, scalable, highly automated, cloud-controlled voice, data, Internet and video network of the future. The company has enabled service providers to leverage the ADTRAN Mosaic Software-Defined Access architecture that combines modern Web-scale technologies with open-source platforms to facilitate rapid innovation in multi-technology, multi-vendor environments. The Mosaic cloud platform and Mosaic OS, combined with programmable network elements, provide operators with a highly agile, open-services architecture. This allows operators to better compete with Web-scale competition by reducing the time and cost to launch new service, technologies, and best-of-breed suppliers as they strive to reduce operational costs while creating and deploying differentiated product offerings. The Zacks Consensus Estimate for current-year earnings has been revised 83.9% upward over the past year, and that for the next year is up 6.2% since November 2020. This Zacks Rank #3 stock delivered an earnings surprise of 115%, on average, in the trailing four quarters and has gained 87.4% over the past year. It has a VGM Score of B.

Price and Consensus: ADTN

Wireless Telecom Group, Inc.: Headquartered in Parsippany, NJ, Wireless Telecom Group manufactures advanced RF and microwave components, modules, systems, and instruments. The company is likely to benefit from the secular trend of 5G deployment across the globe with healthy traction in the fiber LAN ecosystem and a robust portfolio of products and services in the wireless connectivity space. The stock has gained 73.8% over the past year and has a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has been revised 171.4% upward since October-end, and the same for the next year is up 266.7%. With customized solutions targeting niche segments of large and growing end markets, WTT is likely to benefit from the wide proliferation of 5G, network densification, private networks, and satellite communications. The collaboration with NXP Semiconductors further expands its scale of operations with several monetization opportunities for the high-margin business of software stack for private LTE/5G networks. This Zacks Rank #3 stock delivered an earnings surprise of 27.5%, on average, in the trailing four quarters. 
Price and Consensus: WTT