For Immediate Release
Chicago, IL – September 6, 2022 – Today, Zacks Equity Research discusses Gogo Inc. GOGO, ATN International, Inc. ATNI and Cambium Networks Corp. CMBM.
The Zacks Wireless National industry appears well poised to benefit from healthy demand trends with the gradual revival in post-pandemic market conditions. However, high capital expenditure for infrastructure upgrades and margin erosion due to raw material price volatility and supply-chain disruptions owing to continued chip shortage and tense geopolitical conditions have dented the industry's profitability.
Nevertheless, Gogo Inc., ATN International, Inc. and Cambium Networks Corp. are likely to benefit in the long run from higher demand for scalable infrastructure for seamless connectivity with a wide proliferation of IoT and a faster pace of 5G rollout.
The Zacks Wireless National industry primarily comprises companies that provide a comprehensive range of communication services and business solutions. These include wireless, wireline, local exchange, long-distance calls, data/broadband and Internet, video, managed networking, messaging, wholesale and cloud-based services to retail consumers.
The firms within the industry also offer IP-based voice and data services, targeted advertising, television, streaming content, cable networks and publishing operations, multiprotocol label switching networking, fiber optic long-haul network, hosting and communications systems to businesses and government agencies. In addition, the firms provide edge computing services that allow businesses to route application-specific traffic to where it is required and is most effective — whether in the cloud, the network, or on their premises.
What's Shaping the Future of Wireless National Industry
Fast-Track Deployment of 5G & Fiber Optic: Most industry participants are deploying the latest 4G LTE Advanced technologies to deliver higher peak data speeds and capacity, driven by customer-focused planning, disciplined engineering and investments for infrastructure upgrades. The companies are also expanding their fiber optic networks to support 4G LTE and 5G wireless standards as well as wireline connections.
The fiber-optic cable network is vital for backhaul and the last mile local loop, which are required by wireless service providers for 5G deployment. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Further, leading firms within the industry have been deploying the C-Band spectrum to gain additional coverage.
These mid-band airwaves offer significant bandwidth with better propagation characteristics for optimum coverage in rural and urban areas compared with mmWave. As the 5G ecosystem evolves, customers are expected to experience significant enhancements in coverage and speed. However, increased infrastructure spending has largely compromised short-term margins. Unless the high investments generate healthy ROI in the long run, it is likely to weigh on the bottom line.
Margin Woes Persist with Raw Material Price Volatility: The industry is continuously facing an acute shortage of chips, which are the building blocks for various equipment used by the telecom carriers. 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 likely to 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. Although various steps have been taken 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 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.
Improved Operational Efficiency with Software-Centric Focus: Aggressive promotional expenses, lucrative discounts and adoption of several low-priced service plans to attract and retain customers are eroding profits. A steady decline in linear TV subscribers and legacy services adds to the margin woes.
Consequently, the firms within the industry are increasingly seeking diversification from legacy telecom services to more business, enterprise and wholesale opportunities. The companies are making significant investments to upgrade their network and product portfolio, including considerable advances in software-defined, wide-area network capabilities and a new Cloud Core architecture.
This has realigned the companies' wireless network toward a software-centric model to cater to the increasing business demands and customer needs through remote facilities. The industry players are focused on bringing improved operational efficiencies through network simplification and rationalization, thereby boosting end-to-end provisioning time and driving standardization.
Holistic Business Model: The industry participants are taking a holistic approach to content delivery to help providers anticipate demand for more personalized, relevant and on-the-go experiences. Moreover, the firms are offering a variety of pathways for delivering services through a combination of network-based video transcoding, packaging, storage and compression technologies to offer new IP video formats, live TV, streaming services and home gateways to connected devices inside and outside home.
In addition, some sector firms are reinventing online advertising by pooling a unique set of assets — valuable consumer data and insights, advanced advertising capabilities and engaged passionate fanbases. This has led to a faster turnaround of advertising campaigns, enabling marketers to access and understand the efficacy of these messages in weeks instead of months. These, in turn, are giving a new dimension to the business models.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Wireless National industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #149, which places it at the bottom 41% 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 grim 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate.
Before we present a few wireless national 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, Outperforms Sector
The Zacks Wireless National industry has lagged the S&P 500 composite but outperformed the broader Zacks Computer and Technology sector over the past year.
The industry has lost 20.5% over this period compared with the S&P 500 and sector's decline of 14% and 30%, respectively.
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 7.17X compared with the S&P 500's 12.2X. It is also below the sector's trailing-12-month EV/EBITDA of 9.2X.
Over the past five years, the industry has traded as high as 12.02X and as low as 5.46X and at the median of 6.86X.
3 Wireless National Stocks Likely to Move Ahead of the Pack
Gogo, Inc.: Founded in 1991 and headquartered in Chicago, IL, Gogo is a premier global provider of network and broadband connectivity products and services for the business aviation market. With the divestiture of the commercial in-flight connectivity division, the company has restructured its business model to focus more on its core operations. The stock has gained 4.5% in the past year.
The Zacks Consensus Estimate for current-year earnings has been revised 24.5% upward over the past year, while that for the next year is up 4.1% over the same time frame. The transformative sale agreement has unlocked new business opportunities for Gogo within the business aviation market and has improved its liquidity position. It delivered an earnings surprise of 60.2%, on average, in the trailing four quarters. Gogo carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
ATN International, Inc.: Headquartered in Beverly, MA, ATN International offers digital infrastructure and communications services with a focus on rural and remote markets. The company is progressing steadily with its "Glass-and- Steel" network expansion strategy and is gradually moving away from the legacy wireless wholesale business.
The acquisition of Sacred Wind Enterprises by Commnet Broadband, which is a wholly owned subsidiary of ATN International, is likely to extend its geographic footprint with a complementary portfolio. It is aiming to focus more on the rural markets to augment its leading position with support from government stimulus programs for broadband deployment in under-served areas.
The Zacks Consensus Estimate for current-year earnings has been revised 77.9% upward over the past year, while that for the next year is up 118.5% over the same time frame. The stock carries a Zacks Rank #3.
Cambium Networks Corp.: Headquartered in Rolling Meadows, IL, Cambium operates as a wireless solutions provider, connecting people with a flexible network infrastructure. Backed by dynamic business fundamentals, the company has a broad portfolio of fixed wireless broadband and Wi-Fi networking solutions.
The innovative offerings enable the creation of a unified wireless fabric that spans multiple frequencies of Wi-Fi, managed centrally via the cloud. The Zacks Consensus Estimate for current-year earnings has been revised 34.7% upward since May 2022, while that for the next year has remained steady over the same time frame.
Cambium is well-positioned to benefit from proprietary software and product ramp-up, likely facilitating it to deliver a compelling combination of price, performance and spectrum efficiency. One of its major advantages is its fixed wireless broadband networking infrastructure solutions, distinguished by embedded intelligence and scalability. It delivered an earnings surprise of 100.9%, on average, in the trailing four quarters and has a long-term earnings growth expectation of 17%. Cambium carries a Zacks Rank #3.
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