3 Wireless Stocks Set to Ride on Inherent Sector Strength

The Zacks Wireless Equipment industry is poised to capitalize on the healthy demand trends driven by a fast-track 5G deployment and transition to cloud and fiber network infrastructure upgrades. However, large-scale investments for seamless 5G evolution, margin erosion due to price wars, higher customer inventory levels, inflated raw material costs due to macroeconomic challenges, geopolitical conflicts and uncertain business conditions stemming from tariff wars might erode profitability. 

Nevertheless, Ericsson ERIC, Ubiquiti Inc. UI and InterDigital Inc. IDCC are likely to profit from solid growth dynamics owing to the widespread proliferation of IoT, continued fiber densification and shift to cloud services.

Industry Description

The Zacks Wireless Equipment industry primarily comprises companies providing 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?

Fiber Optic Network in Vogue: To maintain superior performance standards, there is a continuous need for network tuning and optimization, which creates demand for state-of-the-art wireless products and services. Moreover, 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 by carriers to support their 4G LTE and 5G wireless standards, as well as wireline connections, are likely to act as tailwinds. Fiber networks are also essential for the growing deployment of small cells that bring the network closer to the user and supplement macro networks to provide extensive coverage. The industry participants are facilitating its 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.

Lingering Margin Woes: 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, pose another headwind for the companies.

High Demand for Quality Networking Equipment: 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. These systems drive demand for additional device sales, software upgrades, infrastructure overhaul and expansion, as well as additional services to maintain, monitor and manage these complex networks and solutions. The comprehensive suite of services ensures continuity and reduces risks for constant critical communication operations. The wide proliferation of cloud networking solutions is further resulting in increased storage and computing on a virtual plane. As both consumers and enterprises use the network, there is tremendous demand for quality networking equipment.

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 #54, which places it in the top 22% 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 43.2% over this period compared with the S&P 500 and sector’s growth of 8.2% and 6.3%, 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 22.56X compared with the S&P 500’s 16.31X. It is also trading above the sector’s trailing 12-month EV/EBITDA of 15.3X.

Over the past five years, the industry has traded as high as 36.73X, as low as 6.77X and at the median of 15.18X, as the chart below shows.

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

3 Wireless Equipment Stocks to Buy

Ericsson: Headquartered in Stockholm, Sweden, Ericsson is a leading provider of communication networks, telecom services and support solutions. It is much in demand among operators to expand network coverage and upgrade networks for higher speed and capacity. It is the world’s largest supplier of LTE technology with a significant market share and has established a large number of LTE networks worldwide. Ericsson is focusing on 5G system development and has undertaken many notable endeavors to position itself for market leadership on 5G. The company believes that standardization of 5G is the cornerstone for the digitization of industries and broadband. The Zacks Consensus Estimate for the current fiscal earnings has been revised 14% upward since April 2024. It has a long-term earnings growth expectation of 2.4% and has a VGM Score of A. The stock has gained 60% in the past year. Ericsson 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: ERIC

Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. The company maintains a proprietary network communication platform committed to reducing operational costs by using a self-sustaining mechanism for rapid product support and dissemination of information. Ubiquiti aims to benefit from significant growth opportunities in both emerging and developed economies. These include a relentless pursuit by emerging countries to stay connected with the world through the adoption of wireless networking infrastructure as developed economies aim to bridge the demand-supply gap for higher bandwidth. This Zacks Rank #2 stock has gained 44.2% over the past year. The Zacks Consensus Estimate for the current fiscal and next fiscal earnings has been revised 16.9% and 25.8% upward, respectively, since April 2024. It has a VGM Score of B.

InterDigital: Headquartered in Wilmington, DE, InterDigital is a pioneer in advanced mobile technologies that enable wireless communications and capabilities. The company engages in designing and developing a wide range of advanced technology solutions for digital cellular and wireless products and networks. IDCC’s global footprint, diversified product portfolio and ability to penetrate different markets are impressive. Apart from the company’s strong portfolio of wireless technology solutions, the addition of technologies related to sensors, user interface and video to its offerings is likely to drive significant value, considering the massive size of the market it licenses. Furthermore, the company remains committed to pursuing acquisitions to drive its product portfolio and boost organic growth. This Zacks Rank #2 stock has gained 92.8% over the past year. The stock has a long-term earnings growth expectation of 15% and delivered an earnings surprise of 158.4%, on average. The Zacks Consensus Estimate for the current fiscal and next earnings has been revised 59.4% and 36.8% upward, respectively, since April 2024.

Price and Consensus: IDCC

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Ericsson (ERIC): Free Stock Analysis Report
 
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This article originally published on Zacks Investment Research (zacks.com).

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