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The Zacks Communication - Components industry is likely to ride on the 5G bandwagon and increased fiber densification as accentuated by healthy demand trends owing to a gradual revival in post-pandemic market conditions. However, high capital expenditures for infrastructure upgrades, margin erosion, inflationary pressures, supply-chain disruptions amid prolonged Russia-Ukraine war and high customer inventory levels have dented the industry's profitability.
Nevertheless, Arista Networks, Inc., Spirent Communications plc and Ooma, Inc. might benefit in the long run as demand for scalable infrastructure for seamless connectivity rises with the wide proliferation of IoT, fiber upgrade and faster 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?
Thrust on Demand-Driven Operations: Telecom firms are aiding their customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry participants enable customers to manage exponential bandwidth costs effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection.
Steady Infrastructure Upgrade: The exponential growth of mobile broadband traffic and home Internet solutions has resulted in massive demand for advanced networking architecture, forcing service providers to spend more on routers and switches as carriers aim to upgrade their networks. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. Further, there is a continuous need for network tuning and optimization to maintain superior performance standards, creating demand for state-of-the-art wireless products and services.
Margin Woes Persist: 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. High technological obsolescence of most products has escalated operating costs with steady investments in R&D.
High customer inventory levels and a conservative approach toward placing orders for high-value items remain other headwinds for the industry. Extended lead times for basic components are expected to adversely impact the delivery schedule and escalate production costs. Moreover, high raw material prices due to the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have also affected the profitability of various firms.
Cloud Focus, 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 loop, which are required by wireless service providers to deploy the 5G network.
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 #48, which places it among the top 19% 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 bright 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, Lags Sector
The Zacks Communication - Infrastructure industry has outperformed the S&P 500 composite but lagged the broader Zacks Computer and Technology sector over the past year.
The industry has gained 34.3% over this period compared with the S&P 500 and sector's rise of 19.7% and 37.8%, respectively.
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 3.82X compared with the S&P 500's 5.63X. It is also below the sector's trailing 12-month P/B of 6.03X.
Over the past five years, the industry has traded as high as 4.35X, as low as 2.02X and at the median of 3.29X.
3 Communication Components Stocks to Keep a Close Eye 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 datacenter and Ethernet switches and routers in the industry. The stock has gained 77.2% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 34.4% and 25.1% upward, respectively, over the past year. It has a long-term earnings growth expectation of 18.8% and delivered an earnings surprise of 12.8%, 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). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Spirent: Founded in 1936 and headquartered in Crawley, the United Kingdom, Spirent offers a comprehensive, end-to-end solution that validates forwarding performance, latency and functional capabilities in an integrated approach that reduces the cost of ownership. It is a leading provider of Ethernet validation solutions in the market.
This Zacks Rank #2 stock is increasingly gaining traction from the launch of Vantage, an easy-to-deploy solution that breaks down the complexity of 5G assurance for communications service providers (CSPs) with a comprehensive turnkey approach. This allows CSPs to better understand their network and service performance. Investments in new products and solutions, as well as an expansion of the customer base, are likely to result in top-line growth with healthy order trends. It has a VGM Score of A.
Ooma: Headquartered in Sunnyvale, CA, Ooma offers cloud-based communications solutions, smart security and other connected services. Its smart software-as-a-service and unified-communications-as-a-service platforms serve as a hub for seamless communications and networking infrastructure applications.
The Zacks Consensus Estimate for the current fiscal earnings has been revised 13% upward over the past year. It delivered an earnings surprise of 13.5%, on average, in the trailing four quarters. Ooma's focus on small business customers with simple, easy-to-use interfaces that can be implemented quickly without IT support for an integrated business connectivity solution is likely to drive healthy growth momentum.
Its low-cost fixed line that reportedly offers faster emergency access services is expected to gain traction while increased penetration within enterprise markets with customized offerings is likely to bear fruit. This Zacks Rank #2 stock has a VGM Score of A.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Arista Networks, Spirent Communications and Ooma
For Immediate Release
Chicago, IL – October 10, 2023 – Today, Zacks Equity Research discusses Arista Networks, Inc. (ANET - Free Report) , Spirent Communications plc (SPMYY - Free Report) and Ooma, Inc. (OOMA - Free Report) .
Industry: Communications
Link: https://www.zacks.com/commentary/2162642/3-communication-stocks-likely-to-thrive-on-demand-upswing
The Zacks Communication - Components industry is likely to ride on the 5G bandwagon and increased fiber densification as accentuated by healthy demand trends owing to a gradual revival in post-pandemic market conditions. However, high capital expenditures for infrastructure upgrades, margin erosion, inflationary pressures, supply-chain disruptions amid prolonged Russia-Ukraine war and high customer inventory levels have dented the industry's profitability.
Nevertheless, Arista Networks, Inc., Spirent Communications plc and Ooma, Inc. might benefit in the long run as demand for scalable infrastructure for seamless connectivity rises with the wide proliferation of IoT, fiber upgrade and faster 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?
Thrust on Demand-Driven Operations: Telecom firms are aiding their customers to move away from an economy-of-scale network operating model to demand-driven operations by offering easy programmability and flexible automation. The industry participants enable customers to manage exponential bandwidth costs effectively through steady investments in state-of-the-art technologies. These include DOCSIS (Data Over Cable Service Interface Specification), DSL (Digital Subscriber Line) and Next Generation PON (Passive Optical Network) platforms that enable service providers to deliver the highest bandwidth to subscribers across any physical connection.
Steady Infrastructure Upgrade: The exponential growth of mobile broadband traffic and home Internet solutions has resulted in massive demand for advanced networking architecture, forcing service providers to spend more on routers and switches as carriers aim to upgrade their networks. Higher utilization of advanced routers to deliver data packets from one network to another is gaining prominence, while state-of-the-art antenna systems remain essential architectural components for seamless connectivity. Further, there is a continuous need for network tuning and optimization to maintain superior performance standards, creating demand for state-of-the-art wireless products and services.
Margin Woes Persist: 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. High technological obsolescence of most products has escalated operating costs with steady investments in R&D.
High customer inventory levels and a conservative approach toward placing orders for high-value items remain other headwinds for the industry. Extended lead times for basic components are expected to adversely impact the delivery schedule and escalate production costs. Moreover, high raw material prices due to the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have also affected the profitability of various firms.
Cloud Focus, 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 loop, which are required by wireless service providers to deploy the 5G network.
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 #48, which places it among the top 19% 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 bright 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, Lags Sector
The Zacks Communication - Infrastructure industry has outperformed the S&P 500 composite but lagged the broader Zacks Computer and Technology sector over the past year.
The industry has gained 34.3% over this period compared with the S&P 500 and sector's rise of 19.7% and 37.8%, respectively.
Industry's Current Valuation
On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 3.82X compared with the S&P 500's 5.63X. It is also below the sector's trailing 12-month P/B of 6.03X.
Over the past five years, the industry has traded as high as 4.35X, as low as 2.02X and at the median of 3.29X.
3 Communication Components Stocks to Keep a Close Eye 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 datacenter and Ethernet switches and routers in the industry. The stock has gained 77.2% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 34.4% and 25.1% upward, respectively, over the past year. It has a long-term earnings growth expectation of 18.8% and delivered an earnings surprise of 12.8%, 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). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Spirent: Founded in 1936 and headquartered in Crawley, the United Kingdom, Spirent offers a comprehensive, end-to-end solution that validates forwarding performance, latency and functional capabilities in an integrated approach that reduces the cost of ownership. It is a leading provider of Ethernet validation solutions in the market.
This Zacks Rank #2 stock is increasingly gaining traction from the launch of Vantage, an easy-to-deploy solution that breaks down the complexity of 5G assurance for communications service providers (CSPs) with a comprehensive turnkey approach. This allows CSPs to better understand their network and service performance. Investments in new products and solutions, as well as an expansion of the customer base, are likely to result in top-line growth with healthy order trends. It has a VGM Score of A.
Ooma: Headquartered in Sunnyvale, CA, Ooma offers cloud-based communications solutions, smart security and other connected services. Its smart software-as-a-service and unified-communications-as-a-service platforms serve as a hub for seamless communications and networking infrastructure applications.
The Zacks Consensus Estimate for the current fiscal earnings has been revised 13% upward over the past year. It delivered an earnings surprise of 13.5%, on average, in the trailing four quarters. Ooma's focus on small business customers with simple, easy-to-use interfaces that can be implemented quickly without IT support for an integrated business connectivity solution is likely to drive healthy growth momentum.
Its low-cost fixed line that reportedly offers faster emergency access services is expected to gain traction while increased penetration within enterprise markets with customized offerings is likely to bear fruit. This Zacks Rank #2 stock has a VGM Score of A.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.