3 Stocks to Consider From a Troubled Networking Industry

Heightened uncertainty over global macroeconomic conditions and volatile supply-chain dynamics, amid ongoing tariff troubles, continues to be concerning for the participants of the Zacks Computer - Networking industry in the near-term. Fierce competition is an overhang on pricing power and margin expansion. Over the long term, participants are expected to receive a boost from momentum in cloud computing, network security, big data and cloud storage, as well as next-gen connectivity, amid the rapid adoption of AI technology. 

Proliferation of AI workloads and hyperscale data centers is fueling investments in high-speed interconnects, optical networking and Ethernet switches. Players in this space are focused on capitalizing on the multi-billion-dollar AI infrastructure opportunity. The rapid deployment of 5G is fueling the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems, Augmented Reality/Virtual Reality (AR/VR) devices and 5G smartphones, driving demand for robust networking infrastructure. The Wi-Fi 7 upgrade cycle will also act as a catalyst.

Also, the explosion of AI workloads requires a major upgrade to observability infrastructure. There is a greater need for continuous monitoring of hybrid environments and tighter security amid rising attacks. This will spur demand for innovative networking products, favoring prospects for prominent industry players such as Cisco CSCO, Extreme Networks EXTR, and Radcom RDCM. 

Industry Description

The Zacks Computer - Networking industry comprises companies that offer networking and Internet-connected products, including wireless (Wi-Fi and Long-Term Evolution or LTE), Ethernet and powerline, focusing on dependability and ease of use. The products are available in numerous configurations to cater to the changing requirements of consumers in each geographic territory where it operates. Some industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products and implement and manage critical communications infrastructures in demanding environments with enhanced safety levels. Focus on developing IoT sensors, drones and wearables amid increasing demand for cloud computing-based contact tracing applications is driving the industry.

4 Trends Influencing the Industry's Future

Macroeconomic Turmoil Is Concerning: Global macroeconomic weakness and volatile supply-chain dynamics are persistent concerns. Tariff troubles, especially between the United States and China, remain an overhang on global supply chains. Inflation could affect spending across small and medium-sized businesses globally, and uncertainty in business visibility could dent the industry’s near-term performance.

The industry remains highly competitive, with a large number of established and new players vying for market share. As growth stabilizes, competition often intensifies, leading to pricing and margin pressure. 

Innovation in Networking Technologies Opening Business Avenues: The rapid proliferation of IoT, the increasing popularity of smart connected devices and the growing adoption of cloud computing in network security fuel the demand for an efficient network support infrastructure. The advancements in AI and ML, as well as the high adoption of cloud applications, hold immense potential for companies in the industry. Enterprises are striving to manage fixed and wireless devices in a secure infrastructure. To address the demand, industry firms are driving innovation in networking technologies, including network virtualization and Software-Defined Networking, which favor growth prospects.

Rapid Deployment of 5G to Boost Growth Prospects: The success of the 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Efforts to develop smart connected homes, hospitals, factories, buildings, cities and self-driving vehicles bode well for industry players. These firms invest heavily in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.

Wi-Fi 7 Upgrade Cycle to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards define the Computer - Networking industry. The growing clout of the latest Wi-Fi 6E-compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. The increasing demand for connecting more devices to the network has been driving demand for Wi-Fi 6E devices. Wi-Fi 6E addresses Wi-Fi spectrum shortage issues by providing continuous channel bandwidth to support a higher number of connected devices without compromising speed. The rollout of Wi-Fi 7 bodes well for the companies in this space.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The Zacks Computer-Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #188, positioning it in the bottom 23% of more than 243 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms the S&P 500

The Zacks Computer – Networking industry has outperformed the S&P 500 composite but is almost in line with the broader Zacks Computer and Technology sector in the past year.

The industry has gained 18.1% over this period compared with the broader sector’s rally of 18.2%. The S&P 500 has appreciated 14.1% over the same time frame.

One-Year Price Performance

Industry's Current Valuation

Based on the forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, the industry is currently trading at 21.85X compared with the S&P 500’s 22.52X. It is also down from the sector’s forward-12-month P/E of 25.17X.

In the past five years, the industry traded as high as 22.83X and as low as 17.97X, with the median being 20.7X, as the charts below show.

Forward 12-Month P/E Ratio

Forward 12-Month P/E Ratio

3 Computer-Networking Stocks to Add to Portfolio

Cisco Systems: Headquartered in San Jose, CA, the company offers identity and access, advanced threat and unified threat management solutions.

Last week, the networking giant posted second-quarter fiscal 2026 results wherein revenues jumped 10% year over year, driven by demand for AI Infrastructure and campus networking solutions. Product revenues were up 14%. 

Higher demand led to a 18% year over year increase in product orders. CSCO highlighted that the demand was “broad-based”, as even without hyperscalers, product orders went up 10% year over year.  AI infrastructure orders from hyperscalers stood at $2.1 billion in the reported quarter compared with $1.3 billion in the fiscal first quarter. The orders were equal to the total orders taken in fiscal 2025, underscoring robust demand for its silicon, systems and optics, added Cisco.

Within Networking, CSCO is seeing heavy demand for data center switching, campus switching, service provider routing, wireless, servers and industrial IoT products. Acacia business is also witnessing strong growth as hyperscalers deploy both 400G and 800G coherent optics, with 800G pluggables gaining significant traction. 

Buoyed by strong demand, CSCO now expects AI orders to reach more than $5 billion in fiscal 2026 and recognize more than $3 billion in AI infrastructure revenues from hyperscalers. For fiscal 2026, revenues are expected to be between $61.2 billion and $61.7 billion. 

CSCO returned $3 billion to its shareholders through repurchases and dividends in the last reported quarter. 

At present, CSCO carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

The Zacks Consensus Estimate for fiscal 2026 bottom line is pegged at $4.11, up 1 cent in the past seven days. Shares have gained 18.5% in the past year.

Price & Consensus: CSCO

Price & Consensus: EXTR

Price & Consensus: RDCM

 

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Cisco Systems, Inc. (CSCO): Free Stock Analysis Report
 
Extreme Networks, Inc. (EXTR): Free Stock Analysis Report
 
Radcom Ltd. (RDCM): Free Stock Analysis Report

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

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