3 Networking Stocks to Consider Amid Industry Headwinds

Heightened uncertainty prevailing over global macroeconomic conditions and volatile supply-chain dynamics amid tariff troubles continue to be concerning for the Zacks Computer - Networking industry participants. Some telecom operators are reducing or delaying capital expenditures due to economic uncertainty. Fierce competition is an overhang on pricing power and margin expansion. Short-term troubles aside, this industry is expected to get a boost from increasing focus on cloud computing, network security, big data and cloud storage amid the rapid use cases of AI technology. Players in this space are focused on capitalizing on the multi-billion-dollar AI infrastructure opportunity. 

The accelerated deployment of 5G is driving 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. This will spur demand for innovative networking products, favoring prospects of prominent industry players like Cisco Systems, Inc. CSCO, Extreme Networks EXTR and NETGEAR, Inc. NTGR.

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.

Innovation in Networking Technologies Opening Business Avenues: The growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition (HD) streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in networking. 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 #147, positioning it in the bottom 40% of more than 244 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 S&P 500 & Sector

The Zacks Computer – Networking industry has outperformed the S&P 500 Composite and the broader Zacks Computer and Technology sector in the past year.

The industry has gained 35% over this period compared with the broader sector’s rally of 13%. The S&P 500 has appreciated 12.7% 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 19.90X compared with the S&P 500’s 21.82X. It is also below the sector’s forward-12-month P/E of 25.79X.

In the past five years, the industry traded as high as 20.34X and as low as 15.86X, with media being at 18.73X, as the charts below show.

Forward 12-Month P/E Ratio

3 Computer - Networking Stocks to Add to Portfolio

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

Cisco is one of the largest players in the networking space. The company has a strong presence in the router and switch market. Its AI push and growing security dominance, as reflected by the recently concluded third quarter of fiscal 2025 results, bode well. 

Cisco is embedding AI across Security and Collaboration platforms and developing Agentic capabilities across the portfolio. It is leveraging Agentic AI to boost customer experience. The launch of Renewals Agent, an Agentic AI-driven solution co-developed with Mistral, and a new Assistant to help customers digitize and de-risk Network Change Management have been notable developments in this regard. Cisco’s security business is gaining from solid demand for both Cisco Secure Access, Hypershield and XDR. On a combined basis, these solutions added more than 370 customers in the last reported quarter. The buyout of Snap Attack augments Splunk’s capability.

The company boosted its portfolio by unveiling AI factory architecture developed in association with NVIDIA. This is expected to boost Cisco’s AI-driven revenues. Cisco had AI infrastructure orders worth more than $600 million in the third quarter of fiscal 2025, exceeding Cisco’s $1 billion annual target a quarter ahead of schedule.

However, challenging macroeconomic conditions, as well as stiff competition in the networking and security domain, is expected to hurt Cisco’s prospects in the near term.

At present, CSCO carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. 

The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $3.78 per share, improved from an estimate of $3.72 per share in the past 60 days. Shares have gained 35.7% in the past year. 

Price & Consensus: CSCO

Price & Consensus: NTGR

Price & Consensus: EXTR

 

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Cisco Systems, Inc. (CSCO): Free Stock Analysis Report
 
NETGEAR, Inc. (NTGR): Free Stock Analysis Report
 
Extreme Networks, Inc. (EXTR): Free Stock Analysis Report

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

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