3 Communication Stocks Likely to Sail With Industry Tailwinds

The Zacks Communication - Components industry appears well poised to benefit from healthy demand trends and an increasing user propensity to stay abreast of the latest digital innovations. However, volatility in prices due to elevated customer inventory levels, high capital expenditure for infrastructure upgrades, margin erosion, geopolitical conflicts and tariff wars has dented the industry’s profitability.

Nevertheless, Corning Incorporated GLW, Ciena Corporation CIEN 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, and ceramic substrates for mobile and laboratory filtration products.

What's Shaping the Future of the Communication Components 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 with steady R&D investments 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. 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.

Fiber Optics, Cloud Networking Traction: The firms are likely to benefit from a software-driven, data-centric approach that helps customers build their cloud architecture and enhance the cloud experience. The industry participants are well-poised for growth in the data-driven cloud networking business with proactive platforms and predictive operations. Fiber networks are essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. Telecom service providers are increasingly leaning toward fiber optic cable to meet the burgeoning demand for cloud-based business data and video streaming services by individuals. Moreover, the fiber-optic cable network is vital for backhaul and last-mile local loops, which are required by wireless service providers to deploy the 5G network.

Healthy Demand Trends: As both consumers and enterprises are using networks more extensively, there is tremendous demand for quality networking components. Additionally, data consumption patterns are changing, with a growing propensity to consume more video content, creating the need for faster data transfer. Since optical networks are more efficient and most existing networks are copper-based, the demand for optical solutions is strong. The industry firms offer several products focused on the data center, with a typical portfolio consisting of optical fiber, hardware, cables and connectors, enabling them to meet the evolving customer requirements and bridge the digital divide across the United States.

Waning Margins: 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. 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. In addition, a slew of proposed tariffs on imported goods from major trading partners and allies has eroded margins.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Communication - Components industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #30, which places it among the top 12% 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 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 106% over this period compared with the S&P 500 and sector’s rise of 22.3% and 36.4%, 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 6.12 compared with the S&P 500’s 7.49X. It is also below the sector’s trailing 12-month P/B of 11.85X.

Over the past five years, the industry has traded as high as 6.16X, 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 85% over the past year. The Zacks Consensus Estimate for the current and next fiscal-year earnings has been revised 8.7% and 11.2% upward, respectively, over the past year. It has a long-term earnings growth expectation of 18.2% and delivered an earnings surprise of 4.1%, 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 sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: GLW

Ciena: Headquartered in Hanover, MD, Ciena is a leading provider of optical networking equipment, software and services. This Zacks Rank #1 company has gained 199.7% in the past year. It has a long-term earnings growth expectation of 47.6% and delivered an earnings surprise of 13.9%, on average, in the trailing four quarters. Increased network traffic, higher demand for bandwidth and adoption of cloud architectures remain key growth drivers, as the company expects to improve its profitability with a balanced mix of new and existing customers. Ciena’s portfolio, including WaveLogic, RLS, Navigator and Interconnect Solutions, remains a recognized industry standard.

The company has been diversifying its footprint in data center connectivity. This has enhanced its reach into a broader end-to-end optical and data equipment market. It is increasingly investing in the data and optical fiber market to cash in on the tremendous growth opportunity led by bandwidth demand from network service providers. Ciena is one of the leading suppliers of 40G and 100G optical transport technology. Fiber Deep technology represents a big opportunity for the company, driven by the strong adoption of its products among all major cable operators in the global market. 

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 15.9%, 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 (Hold) firm delivered an earnings surprise of 15.9%, on average, in the trailing four quarters. The Zacks Consensus Estimate for the current year earnings has moved up 33.3% since November 2024.  

Price and Consensus: OOMA

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Corning Incorporated (GLW): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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