3 Communication Stocks Likely to Ride on Faster 5G Rollout

·9-min read

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

Nevertheless, CommScope Holding Company, Inc. COMM, Bandwidth Inc. BAND and Wireless Telecom Group, Inc. WTT 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 to provide additional capacity and ramp up Internet and wireless networks. 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, the 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 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 Bullish Trends

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #54, which places it at the top 21% 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 solid 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 top 50% of the Zacks-ranked industries is a result of a positive 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 lost 47.6% over this period against the S&P 500 and the sector’s rise of 21.6% and 13.4%, 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 7.11X compared with the S&P 500’s 15.7X. It is also below the sector’s trailing-12-month EV/EBITDA of 14.53X.

Over the past five years, the industry has traded as high as 11.99X, as low as 6.73X and at the median of 8.77X, 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

CommScope Holding Company, Inc.: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. Since its inception in 1976, the company has created a niche market for itself, helping customers scale network capacity, delivering better network response time and performance, and simplifying technology migration. CommScope is focused on sound technology, a highly efficient supply chain and commitment to continuous improvement. This will potentially make the company a preferred partner for all telecommunications businesses as the entire industry moves toward 5G. With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, CommScope is dedicatedly developing solutions designed to support wireline and wireless network convergence, which will be essential for the success of 5G technology. It has been pursuing strategies focused on reducing operational costs and optimizing the overall cost structure. The stock has a long-term earnings growth expectation of 21.6% and delivered an earnings surprise of 4.4%, on average, in the trailing four quarters. CommScope sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: COMM

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 a long-term earnings growth expectation of 17.5% and pulled off an earnings surprise of 886.8%, on average, in the trailing four quarters. The Zacks Consensus Estimate for current-year earnings has been revised 114.3% upward over the past year. Bandwidth carries a Zacks Rank #3 (Hold). It has a VGM Score of A.

Price and Consensus: BAND

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 globally with healthy traction in the fiber LAN ecosystem and a robust portfolio of products and services in the wireless connectivity space. The stock has a VGM Score of A. The Zacks Consensus Estimate for current-year earnings has been revised 71.4% upward over the past year, and the same for the next year is up 275%. 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 agreement with NXP Semiconductors further expands its scale of operations and reach with several monetization opportunities for the high-margin business of software stack for private LTE/5G networks. The stock carries a Zacks Rank #3 and delivered an earnings surprise of 52.5%, on average, in the trailing four quarters.

Price and Consensus: WTT

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