3 Communication Stocks Set to Ride on Post

The Zacks Communication - Components industry is likely to benefit from healthy demand trends with an accelerated pace of 5G deployment and fiber densification driven by 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. ANET, Altice USA, Inc. ATUS and Ooma, Inc. OOMA might benefit in the long run as demand for scalable infrastructure rises for seamless connectivity 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. The 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

Focus on Novel Technologies: 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 the 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. Further, some firms offer a variety of pathways for providing services through a combination of network-based video transcoding, packaging, storage and compression technologies required to deliver new IP video formats and home gateways to connected devices inside and outside the home.Short-Term Profitability at Stake: The exponential growth of mobile broadband traffic and home Internet solutions has resulted in a massive demand for advanced networking architecture, forcing service providers to spend more on routers and switches as carriers aim to upgrade their networks. 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. 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 for indenting high-value items remain other headwinds.Fiber Densification: 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.Inflated Equipment Prices: Uncertainty regarding chip shortage and supply-chain disruptions leading to a dearth of essential fiber materials, shipping delays and shortages of other raw materials are likely to affect the expansion and rollout of new broadband networks. Extended lead times for basic components are also 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 affected the operation schedule of various firms.

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 #82, which places it among the top 33% 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, Sector

The Zacks Communication - Infrastructure industry has outperformed the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.The industry has gained 25.2% over this period compared with the S&P 500 and sector’s rise of 15% and 23.6%, respectively.One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month price-to-book (P/B), the industry is currently trading at 3.66X compared with the S&P 500’s 6.09X. It is also below the sector’s trailing 12-month P/B of 6.43X.Over the past five years, the industry has traded as high as 4.34X, as low as 2.02X and at the median of 3.22X, as the chart below shows.Trailing 12-Month price-to-book (P/B) Ratio

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 65.4% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 39.1% and 37.5% upward, respectively, over the past year. It has a long-term earnings growth expectation of 15.1% and delivered an earnings surprise of 14.7%, on average, in the trailing four quarters.Arista continues benefiting 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. Price and Consensus: ANET

Altice: Headquartered in Long Island City, NY, Altice is one of the largest broadband communications and video services providers in the United States. The company is focused on accelerating its network expansion plans and fiber network upgrades for long-term sustainable growth. It offers a range of broadband speeds for all budgets, from Altice Advantage Internet to multi-gigabit services for enterprise customers. It is on track with its five-year plan to build a fiber-to-the-home (FTTH) network and deploy its home communications hub. It believes that the FTTH network will be more resilient with reduced maintenance requirements and lower power usage.Altice, carrying a Zacks Rank #2, has a VGM Score of A. The company has a market presence in some of the most populous and economically active regions of the United States, such as the New York City metro area. This provides it with a significant growth opportunity, as these regions have a high demand for high-speed Internet and other telecommunications services.

Price and Consensus: ATUS

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 (UCaaS) platforms serve as a hub for seamless communications and networking infrastructure applications. The stock has gained 28.9% in the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 20% upward over the past year.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 has a VGM Score of B.Price and Consensus: OOMA (Chart 5)

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