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Industry Description
The Zacks Wireless Equipment industry primarily comprises companies offering 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?
Comprehensive Service Bouquet: The majority of the industry participants offer mission-critical communication infrastructure, devices, accessories, software and services that enable their customers to run businesses with increased efficiency and safety for their mobile workforce. The comprehensive suite of services ensures continuity and reduces risks for constant critical communication operations. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.
5G, Fiber & Cloud Networking in Vogue: 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 enabling 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.
Short-Term Profitability Compromised: 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.
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.
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 #20, which places it in the top 8% 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 44.2% over this period compared with the S&P 500 and sector’s growth of 15.9% and 26.6%, 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 37.1X compared with the S&P 500’s 18.41X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 19.32X.
Over the past five years, the industry has traded as high as 37.1X, as low as 6.47X and at the median of 14.62X, as the chart below shows.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Wireless Equipment Stocks to Buy
Motorola: Based in Chicago, IL, Motorola is a leading communications equipment manufacturer with a strong market position in bar code scanning, wireless infrastructure gear and government communications. As a leading provider of mission-critical communication products and services worldwide, the company has ensured a steady revenue stream from this niche market. It intends to boost its position in the public safety domain by entering into strategic alliances with other players in the ecosystem. Motorola is witnessing a robust demand for video security products and services and remains well poised to maintain this growth momentum with a diversified portfolio. The Zacks Consensus Estimate for its current fiscal and next fiscal earnings has been revised 4.3% and 3% upward, respectively, since October 2024. This Zacks Rank #2 (Buy) stock has a long-term earnings growth expectation of 9.1%.
Price and Consensus: MSI
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This article originally published on Zacks Investment Research (zacks.com).
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