3 Wireless Stocks Likely to Benefit From Solid Cloud, Fiber Traction

The Zacks Wireless Equipment industry is poised to benefit from healthy demand trends driven by a fast-track 5G deployment and transition to cloud and fiber network infrastructure upgrades. However, large-scale investments for seamless 5G evolution, margin erosion due to price wars, higher customer inventory levels, inflated raw material costs due to macroeconomic challenges, geopolitical conflicts and uncertain business conditions stemming from tariff wars might erode profitability. 

Nevertheless, Ubiquiti Inc. UI, InterDigital Inc. IDCC and Clearfield, Inc. CLFD are likely to profit from solid growth dynamics owing to the widespread proliferation of IoT, continued fiber densification and shift to cloud services.

Industry Description

The Zacks Wireless Equipment industry primarily comprises companies providing various networking solutions, wireless telecom products and related services for wireless voice and data communications through scalable modular platforms. Their product portfolio encompasses integrated circuit devices (chips) and system software for wireless voice and data communications, analog and digital two-way radio, satellite telecommunications, wireless networking and signal processing and end-to-end enterprise mobility solutions. The firms also provide a broad range of routing, switching and security products, video surveillance and machine-to-machine communication components that secure VPN appliances, enable intrusion detection and thwart data theft. Some firms even provide electronic warfare, avionics, robotics, advanced communications and maritime systems to the defense industry.

What's Shaping the Future of the Wireless Equipment Industry?

Network Convergence: 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. These investments are likely to help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification in the long run. The industry players 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.

Short-Term Profitability at Stake: 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. Margins are likely to be affected by the high cost of first-generation 5G products, profitability challenges in China, the prolonged Russia-Ukraine war and Middle East tensions. Uncertainty regarding chip shortage (albeit to a lesser extent) and supply-chain disruptions owing to tariff wars (leading to a dearth of essential fiber materials), shipping delays and scarcity of other raw materials due to geopolitical unrest are expected to affect the expansion and rollout of new broadband networks. Extended lead times for basic components might also hurt the delivery schedule and escalate production costs. High customer inventory levels, owing to a challenging macroeconomic environment and intense market volatility due to higher tariffs, pose another headwind for the companies.

Fiber, Cloud Networking Traction Act as Tailwinds: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, a faster pace of 5G deployment is expected to augment the telecommunications industry's scalability, security and universal mobility and propel the wide proliferation of IoT. Expansion of fiber optic networks to support 4G LTE and 5G wireless standards, as well as wireline connections, is likely to act as a tailwind. The industry participants are facilitating their customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation through steady infrastructure investments. The exponential growth of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.

Zacks Industry Rank Indicates Bullish Trends

The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #96, which places it in the top 39% 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 wireless equipment 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 Wireless Equipment industry has outperformed the S&P 500 composite and the broader Zacks Computer and Technology sector over the past year.

The industry has surged 34.9% over this period compared with the S&P 500 and sector’s growth of 17.2% and 22.8%, respectively.

One-Year Price Performance

Industry's Current Valuation

On the basis of 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 25.07X compared with the S&P 500’s 17.85X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 18.23X.

Over the past five years, the industry has traded as high as 34.54X, as low as 6.47X and at the median of 14.43X, as the chart below shows.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 Wireless Equipment Stocks to Buy

Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. The company maintains a proprietary network communication platform committed to reducing operational costs by using a self-sustaining mechanism for rapid product support and dissemination of information. Ubiquiti aims to benefit from significant growth opportunities in both emerging and developed economies. These include a relentless pursuit by emerging countries to stay connected with the world through the adoption of wireless networking infrastructure, as developed economies aim to bridge the demand-supply gap for higher bandwidth. The stock has gained 160.3% over the past year. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 44.9% and 33.6% upward, respectively, since July 2024. Ubiquiti sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: UI

InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company engages in designing and developing a wide range of advanced technology solutions for digital cellular and wireless products and networks. IDCC’s global footprint, diversified product portfolio and ability to penetrate different markets are impressive. Apart from the company’s strong portfolio of wireless technology solutions, the addition of technologies related to sensors, user interface and video to its offerings is likely to drive significant value, considering the massive size of the market it licenses. Furthermore, the company remains committed to pursuing acquisitions to drive its product portfolio and boost organic growth. This Zacks Rank #2 (Buy) stock has gained 87.6% over the past year. The stock has a long-term earnings growth expectation of 15% and delivered a trailing four-quarter earnings surprise of 160.1%, on average. The Zacks Consensus Estimate for the current fiscal and next earnings has been revised 111.2% and 48% upward, respectively, since July 2024.

Clearfield: Headquartered in Minneapolis, MN, Clearfield is a leading provider of fiber optic products, deploying more than a million fiber ports each year. The company is benefiting from solid demand in its Clearfield operating segment. Its connected home offerings, such as home deployment kits, which incorporate all necessary equipment for a fiber-to-the-home installation, are witnessing strong momentum. The kit is gaining popularity among service providers because it significantly speeds up the deployment process by reducing the number of truck rolls and boosting technician efficiency. Clearfield is also benefiting from a sharp uptick in regional service provider verticals, backed by an improvement in demand and reduced inventory levels. Regional service providers’ move toward aggressive network build-up can boost Clearfield’s prospects in the upcoming quarters. This Zacks Rank #3 (Hold) stock has gained 12.1% over the past year. The stock delivered a trailing four-quarter earnings surprise of 90.5%, on average.

Price and Consensus: CLFD

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InterDigital, Inc. (IDCC): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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