3 Communication Stocks Set to Benefit From Industry Strength

The Zacks Communication - Infrastructure industry is poised to benefit from an increasing user propensity to stay abreast of the latest digital innovations, leading to fiber densification and extensive 5G deployment. However, high capital expenditures for infrastructure upgrades, unpredictable raw material prices, supply-chain disruptions and high customer inventory levels amid a challenging macroeconomic environment are threats.

Nevertheless, CommScope Holding Company, Inc. COMM, IHS Holding Limited IHS and Bandwidth Inc. BAND are likely to gain from solid demand for scalable infrastructure for seamless connectivity with the wide proliferation of IoT, transition to fiber, cloud and next-gen technologies, and accelerated 5G rollout.

Industry Description

The Zacks Communication - Infrastructure industry players provide various infrastructure solutions for core, access and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions across Internet protocol, asynchronous transfer mode and time-division multiplexed architecture in both wireline and wireless network applications. Their product portfolio encompasses optical fiber and twisted-pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed wireless antenna systems and hardened optical terminating enclosures.

What's Shaping the Future of the Communication - Infrastructure Industry?

Seamless Transition to Cloud: With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are considerably investing in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks while facilitating a seamless transition to the cloud. These companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. The industry participants are also focusing on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. All these efforts have particularly helped firms in the industry cater to the surge in data demand.

Depleting Profits: Although supply chain woes have declined progressively, the industry is facing a dearth of chips, which are the building blocks of various equipment used by telecom carriers. Moreover, high raw material prices due to inflation, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have affected profitability. In addition, latent U.S.-China tensions relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country have 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: 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. 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 Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #17, which places it in the top 7% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 couple of communication infrastructure 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 broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.

The industry has surged 113.9% over this period compared with the S&P 500 and the sector’s growth of 16.3% and 26.9%, respectively.

One-Year Price Performance

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 7.08X compared with the S&P 500’s tally of 18.74X. It is also trading below the sector’s trailing 12-month EV/EBITDA of 19.84X.

Over the past five years, the industry has traded as high as 9.82X, as low as 2.12X and at the median of 6.66X, as the chart below shows.

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

3 Communication - Infrastructure Stocks to Watch

CommScope: Headquartered in Hickory, NC, CommScope is a premier provider of infrastructure solutions, including wireless and fiber optic solutions, for the core, access and edge layers of communication networks. Since its inception in 1976, the company has created a niche market for itself, helping customers scale network capacity, delivering better network response time and performance, and simplifying technology migration. CommScope continues to benefit from stringent cost-cutting measures and a focus on core operations. The company is actively pruning its non-core businesses while focusing on inorganic growth to boost its portfolio strength and remain at the forefront of technological innovation. The Zacks Consensus Estimate for current-year earnings has been revised upward by 355.6% to $1.64 per share since December 2024, while that for the next fiscal is up 102.8% to $2.17. The stock has surged 256.5% in the past year. CommScope sports a Zacks Rank #1 (Strong Buy).  You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: COMM

IHS Holding: Based in London, the United Kingdom, IHS Holding is one of the largest independent owners, operators and developers of shared communications infrastructure in the world by tower count. It has more than 37,000 towers across seven markets — Brazil, Cameroon, Colombia, Nigeria, Côte d’Ivoire, South Africa and Zambia. The company’s open-access, shared infrastructure approach ensures a robust and scalable fiber network that multiple operators can utilize. The connectivity of towers enables the extension of fiber infrastructure into key metropolitan areas, facilitating the delivery of digital services to residences, businesses and public entities in collaboration with its clients. The stock has gained an impressive 128% in the past year. The Zacks Consensus Estimate for current-year earnings has been revised upward by 41.8% to 78 cents per share since December 2024, while the same for 2026 is up 3.6% to 58 cents. It has a VGM Score of A. IHS Holding carries a Zacks Rank #2 (Buy).

Bandwidth: Headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service (CPaaS) provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface (API) platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. Bandwidth believes that its evolving portfolio and accretive customer base are the cornerstones of long-term growth across a diverse set of markets. It enables enterprises to rapidly scale communications functionalities to various applications and devices with its easy-to-use software APIs. Continuous innovation on CPaaS offerings allows enterprise customers to have direct access to Bandwidth’s comprehensive suite of products and services. This Zacks Rank #3 (Hold) stock supports high user volumes without affecting deliverability and cost-effectively eliminates performance degradation. It has a VGM Score of A.  

Price and Consensus: BAND

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CommScope Holding Company, Inc. (COMM): Free Stock Analysis Report
 
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Bandwidth Inc. (BAND): Free Stock Analysis Report

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

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