Computer Networking Industry Near-Term Prospects Bleak

The Zacks Computer - Networking industry comprises companies that provide networking and Internet connected products such as wireless (WiFi and LTE), Ethernet and powerline, with focus on reliability and ease-of-use.

Some of the industry participants also provide business and mission-critical IoT solutions and services to help customers create next-generation connected products with high levels of security, reliability and assured performance.

Moreover, increased focus on cloud computing and cloud storage is driving the industry.

A prominent industry player is Cisco Systems, Inc. (CSCO).

Here are the three major themes in the industry:

• The industry is characterized by brisk technological change, dynamic products, high-speed connectivity, low latency, and evolving industry standards. The advancements in areas like IoT, AI, ML and increase of cloud applications are creating hold immense potential for the industry players.

• With rapid growth in video and other bandwidth-intensive applications, the industry participants are making significant investments in LTE, broadband and fiber in order to provide additional capacity and improve Internet and wireless networks. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. This bodes well for the industry players.

• However, the ongoing U.S.-China trade war has created an uncertain environment that is not conducive for investments. Moreover, foreign exchange volatility, sluggishness in global economic growth and shift in consumer buying patterns is likely to dampen growth prospects of the industry participants.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Computer - Networking industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #219, which places it at the bottom 13% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperforms 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector and S&P 500

The Zacks Computer – Networking industry has underperformed the broader sector as well as the Zacks S&P 500 composite over the past year.

The industry has gained 5% over this period compared with the S&P 500’s rally of 13% and the broader sector’s growth of 18.9%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer networking stocks, we see that the industry is currently trading at 18.42X compared with the S&P 500’s 19.24X. It is also below the sector’s forward-12-month P/E of 24.09X.

Over the past five years, the industry has traded as high as 21.75X and as low as 11.89X, with media being at 15.46X, as the chart below shows.

Price-to-Earnings (P/E) Ratio (F1)

 

Price-to-Earnings (P/E) Ratio (F1)

 

Bottom Line

Increased focus on cloud computing, big data and cloud storage will continue to drive revenues for the industry participants. However, sluggishness in global economic growth and shift in consumer buying patterns are likely to act as dampeners.

Currently, none of the stocks in the ZacksComputer – Networking industry flaunts either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

However, we are presenting three stocks with a Zacks Rank #3 (Hold) that investors may retain for the time being.

Digi International Inc. (DGII): This provider of business and mission-critical IoT products and services has a long-term expected EPS growth rate of 14.5%.

Price and Consensus: DGII

Extreme Networks, Inc. (EXTR): The company offers next generation of switching solutions that meet the increasing needs of enterprise local area networks Internet service providers and content providers

Price and Consensus: EXTR

NetScout Systems, Inc. (NTCT): The company is a provider of business assurance for today's most demanding service providers, enterprises and government networks.

Price and Consensus: NTCT

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
NetScout Systems, Inc. (NTCT) : Free Stock Analysis Report
 
Extreme Networks, Inc. (EXTR) : Free Stock Analysis Report
 
Digi International Inc. (DGII) : Free Stock Analysis Report
 
Cisco Systems, Inc. (CSCO) : Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research