3 Communication Stocks Likely to Beat Industry Conundrums

The Zacks Communication - Components industry appears mired in raw material price volatility due to elevated inventory levels amid a challenging macroeconomic environment, uncertain market conditions and geopolitical conflicts. Moreover, high capital expenditure for infrastructure upgrades for 5G deployment, inflated equipment costs, higher global tariff rates and margin erosion have dented the industry’s profitability.

Nevertheless, Corning Incorporated GLW, Viavi Solutions Inc. VIAV and Ooma, Inc. OOMA are likely to gain in the long run as demand for scalable infrastructure for seamless connectivity rises with the widespread proliferation of IoT, fiber densification, transition to cloud and accelerated 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. Their 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?

Waning Margins: The exponential growth of mobile broadband traffic and home Internet solutions has resulted in massive demand for advanced networking architecture, forcing service providers to spend more on routers and switches as carriers aim to upgrade their networks. 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 toward placing orders for high-value items remain other headwinds for the industry. Extended lead times for basic components are expected to adversely impact the delivery schedule and escalate production costs. In addition, a slew of proposed tariffs on imported goods from major trading partners and allies has eroded margins to a large extent and affected the global supply chain mechanism.

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers prefer to switch to lower-priced alternatives. In addition, the latent tension between the United States and China, relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country, has dented the industry’s credibility, leading to a loss of business. The industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios.

Network Convergence: 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. The industry is benefiting from a software-driven, data-centric approach that helps customers build their cloud architecture and enhance the cloud experience. The industry participants are well-positioned for growth in the data-driven cloud networking business with proactive platforms and predictive operations. 

Soaring Operating Costs: The industry is facing a dearth of chips, which are the building blocks of various telecom carrier equipment. Moreover, high raw material prices due to Middle East tensions, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected the operation schedule of various firms. High technological obsolescence of most products has escalated operating costs, while high customer inventory levels and a conservative approach toward placing orders for high-value items remain headwinds.

Zacks Industry Rank Indicates Bearish Prospects

The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #162, which places it among the bottom 34% 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. 

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 rallied 66.1% over this period compared with the S&P 500 and sector’s rise of 20% and 28.9%, 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 4.13X compared with the S&P 500’s 7.37X. It is also below the sector’s trailing 12-month P/B of 10.68X.

Over the past five years, the industry has traded as high as 4.13X, as low as 1.73X and at the median of 2.78X, as the chart below shows.

Trailing 12-Month price-to-book (P/B) Ratio

3 Communication Components Stocks to Watch

Corning: New York-based Corning produces advanced glass substrates that are used in various applications across multiple markets, such as display technologies, optical communications, environmental technologies, specialty materials and life sciences businesses. The stock has surged 69.1% over the past year. The Zacks Consensus Estimate for the current and next fiscal earnings has been revised 6.6% and 7.2% upward, respectively, over the past year. It has a long-term earnings growth expectation of 18.2% and delivered an earnings surprise of 4.7%, on average, in the trailing four quarters.

Corning continues to focus on developing state-of-the-art cover materials, which have been deployed on more than 8 billion devices. It offers several products focused on the data center, with a portfolio consisting of optical fiber, hardware, cables and connectors, enabling it to create optical solutions to meet evolving customer needs. The growing adoption of innovative optical connectivity products for generative artificial intelligence (AI) applications is expected to be a key growth driver for the company. Corning 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: GLW

Viavi: Headquartered in San Jose, CA, Viavi is a leading provider of network test, monitoring and service enablement solutions that offer end-to-end network visibility and analytics to help build, test, certify, maintain and optimize complex physical and virtual networks. It also offers high-performance thin film optical coatings for light-management solutions used in anti-counterfeiting, 3D sensing, electronics, automotive, defense and instrumentation markets. 

This Zacks Rank #3 (Hold) stock has gained 35% in the past year. The Zacks Consensus Estimate for the current earnings has moved up 27.8% since August 2024. It delivered an earnings surprise of 17.3%, on average, in the trailing four quarters. Viavi’s wireless and fiber test solutions are in the early stages of a multi-year investment cycle fueled by the transition to superfast 5G networks. The healthy growth traction is further demonstrated by the upside in wireless & fiber test, 3D sensing products, optical transport, Ethernet, broadband access, video test and storage network testing markets. 

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 platforms serve as a hub for seamless communications and networking infrastructure applications. It delivered an earnings surprise of 18%, on average, in the trailing four quarters. It has a VGM Score of A. 

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 expected to bear fruit. This Zacks Rank #3 stock has gained 31.5% in the past year. It delivered an earnings surprise of 13.9%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current earnings has moved up 22.7% since August 2024.  

Price and Consensus: OOMA

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Corning Incorporated (GLW): Free Stock Analysis Report
 
Viavi Solutions Inc. (VIAV): Free Stock Analysis Report
 
Ooma, Inc. (OOMA): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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