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3 Wireless Stocks Set to Profit Despite Short-Term Headwinds
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The Zacks Wireless Equipment industry is likely to be plagued by large-scale investments for seamless 5G evolution, margin erosion due to price wars, higher customer inventory levels and inflated raw material costs in a challenging macroeconomic environment, prolonged geopolitical conflicts and uncertain business conditions. However, fast-track 5G deployment and transition to cloud and fiber network infrastructure upgrades should help the industry in the long run.
Despite short-term headwinds, Qualcomm Incorporated (QCOM - Free Report) , Ubiquiti Inc. (UI - Free Report) and InterDigital, Inc. (IDCC - Free Report) are likely to profit owing to a vast proliferation of IoT, continued fiber densification and a gradual shift to cloud services.
Industry Description
The Zacks Wireless Equipment industry primarily comprises companies providing 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?
Short-Term Profitability at Stake: 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 the Israel-Hamas conflict. Uncertainty regarding chip shortage (albeit to a lesser extent) and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and scarcity of other raw materials due to geopolitical unrest are expected 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.
Fiber Densification, Cloud Focus: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the telecommunications industry's scalability, security and universal mobility and propel the wide proliferation of IoT. Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards, as well as wireline connections, are likely to act as tailwinds. 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. 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.
Persistent Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, 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, pose another headwind for the companies.
Zacks Industry Rank Indicates Bearish Trends
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #163, which places it in the bottom 35% 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 dull 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 jumped 15.5% over this period compared with the S&P 500 and sector’s growth of 27.1% and 49.3%, 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 21.6X compared with the S&P 500’s 14.74X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 13.7X.
Over the past five years, the industry has traded as high as 37.64X, as low as 12.02X and at the median of 21.2X, 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
Qualcomm: Headquartered in San Diego, CA, Qualcomm designs, manufactures and markets digital wireless telecom products and services based on the Code Division Multiple Access (CDMA) technology. The company is well-positioned to meet its long-term revenue targets driven by solid 5G traction, greater visibility and a diversified revenue stream. It is increasingly focusing on the seamless transition from a wireless communications firm for the mobile industry to a connected processor company for the intelligent edge. The buyout of Veoneer, Inc. has offered Qualcomm a firmer footing in the emerging market of driver-assistance technology. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 4.7% and 9.1% upward, respectively, over the past year. It has a long-term earnings growth expectation of 9.6% and delivered an earnings surprise of 5.9%, on average, in the trailing four quarters. It has gained 31.9% in the past year. Qualcomm carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: QCOM
Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its service-provider product platforms offer carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, while enterprise product platforms provide wireless local area network infrastructure, video surveillance products and machine-to-machine communication components. Ubiquiti’s excellent global business model, which is flexible and adaptable to evolving changes in markets, helps it to beat challenges and maximize growth. The operating model of this Zacks Rank #2 stock is backed by a rapidly growing and highly engaged community of service providers, distributors, value-added resellers, systems integrators and corporate IT professionals (referred to as the Ubiquiti Community).
Price and Consensus: UI
InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company engages in designing and developing 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. This Zacks Rank #2 stock has a long-term earnings growth expectation of 17.4% and has surged 121.1% over the past year. A well-established global footprint, diversified product portfolio and ability to penetrate different markets are key growth drivers for the company. Apart from a strong portfolio of wireless technology solutions, the addition of technologies related to sensors, user interface and video to its offerings is likely to drive considerable value, given the massive size of the market it offers licensing technologies to. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 91.1% and 110.5% upward, respectively, over the past year. It has a VGM Score of A.
Price and Consensus: IDCC
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3 Wireless Stocks Set to Profit Despite Short-Term Headwinds
The Zacks Wireless Equipment industry is likely to be plagued by large-scale investments for seamless 5G evolution, margin erosion due to price wars, higher customer inventory levels and inflated raw material costs in a challenging macroeconomic environment, prolonged geopolitical conflicts and uncertain business conditions. However, fast-track 5G deployment and transition to cloud and fiber network infrastructure upgrades should help the industry in the long run.
Despite short-term headwinds, Qualcomm Incorporated (QCOM - Free Report) , Ubiquiti Inc. (UI - Free Report) and InterDigital, Inc. (IDCC - Free Report) are likely to profit owing to a vast proliferation of IoT, continued fiber densification and a gradual shift to cloud services.
Industry Description
The Zacks Wireless Equipment industry primarily comprises companies providing 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?
Short-Term Profitability at Stake: 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 the Israel-Hamas conflict. Uncertainty regarding chip shortage (albeit to a lesser extent) and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and scarcity of other raw materials due to geopolitical unrest are expected 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.
Fiber Densification, Cloud Focus: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the telecommunications industry's scalability, security and universal mobility and propel the wide proliferation of IoT. Expansion of fiber optic networks by carriers to support their 4G LTE and 5G wireless standards, as well as wireline connections, are likely to act as tailwinds. 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. 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.
Persistent Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers tend to switch to lower-priced alternatives. Moreover, 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, pose another headwind for the companies.
Zacks Industry Rank Indicates Bearish Trends
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #163, which places it in the bottom 35% 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 dull 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 jumped 15.5% over this period compared with the S&P 500 and sector’s growth of 27.1% and 49.3%, 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 21.6X compared with the S&P 500’s 14.74X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 13.7X.
Over the past five years, the industry has traded as high as 37.64X, as low as 12.02X and at the median of 21.2X, 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
Qualcomm: Headquartered in San Diego, CA, Qualcomm designs, manufactures and markets digital wireless telecom products and services based on the Code Division Multiple Access (CDMA) technology. The company is well-positioned to meet its long-term revenue targets driven by solid 5G traction, greater visibility and a diversified revenue stream. It is increasingly focusing on the seamless transition from a wireless communications firm for the mobile industry to a connected processor company for the intelligent edge. The buyout of Veoneer, Inc. has offered Qualcomm a firmer footing in the emerging market of driver-assistance technology. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 4.7% and 9.1% upward, respectively, over the past year. It has a long-term earnings growth expectation of 9.6% and delivered an earnings surprise of 5.9%, on average, in the trailing four quarters. It has gained 31.9% in the past year. Qualcomm carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: QCOM
Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its service-provider product platforms offer carrier-class network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, while enterprise product platforms provide wireless local area network infrastructure, video surveillance products and machine-to-machine communication components. Ubiquiti’s excellent global business model, which is flexible and adaptable to evolving changes in markets, helps it to beat challenges and maximize growth. The operating model of this Zacks Rank #2 stock is backed by a rapidly growing and highly engaged community of service providers, distributors, value-added resellers, systems integrators and corporate IT professionals (referred to as the Ubiquiti Community).
Price and Consensus: UI
InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company engages in designing and developing 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. This Zacks Rank #2 stock has a long-term earnings growth expectation of 17.4% and has surged 121.1% over the past year. A well-established global footprint, diversified product portfolio and ability to penetrate different markets are key growth drivers for the company. Apart from a strong portfolio of wireless technology solutions, the addition of technologies related to sensors, user interface and video to its offerings is likely to drive considerable value, given the massive size of the market it offers licensing technologies to. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 91.1% and 110.5% upward, respectively, over the past year. It has a VGM Score of A.
Price and Consensus: IDCC