mage: Bigstock

Increasing focus on network security, cloud computing, big data, and cloud storage is expected to drive the Zacks Computer - Networking industry participants’ prospects.

Further, rapid deployment of 5G networking is aiding the proliferation of Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices, and 5G smartphones, which necessitates a future of robust networking infrastructure.

This has bolstered the demand for networking products, which favors the prospects of prominent industry players including NETGEAR (NTGR - Free Report), Lantronix (LTRX - Free Report), Extreme Networks (EXTR - Free Report), and Digi International (DGII - Free Report).

Thereby, the outlook for the Zacks Computer – Networking industry appears encouraging at the moment. Nevertheless, slowdown in IT spending and broader macroeconomic weakness due to the coronavirus crisis are likely to act as dampeners.

Industry Description

The Zacks Computer - Networking industry comprises companies that provide networking and Internet-connected products, including wireless (WiFi and LTE), Ethernet, and powerline, with a focus on reliability and ease-of-use.

Some of the industry players also provide business, and mission-critical IoT solutions and network security services to help customers create next-generation connected products with high levels of security, reliability, and performance.

Moreover, increased focus on development of IoT sensors, drones, and wearables, amid growing demand for cloud computing-based contact tracing applications, is driving the industry.

4 Trends Shaping the Future of the Computer – Networking Industry

Accelerated Deployment of 5G to Boost Growth Prospects: Coronavirus crisis-induced work-from-home and stay-at-home trends have triggered demand for network-intensive applications like video conferencing and cloud services. This is anticipated to accelerate 5G deployment through 2021. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Growing efforts to develop smart connected homes, hospitals, factories, buildings and cities, and self-driving vehicles bode well for the industry players. We believe prominent industry players, including Cisco Systems (CSCO - Free Report), NETGEAR, Infinera Corporation (INFN - Free Report) and Extreme Networks are well-poised to gain from this demand. In fact, the industry players are making significant investments in LTE, broadband, and fiber in order to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.

Uptick in Wi-Fi 6 Networking is Opening New Business Avenues: Brisk technological advancement, dynamic products, high-speed connectivity, low latency, and evolving industry standards are defining characteristics of the Computer Networking industry. For instance, growing clout of latest Wi-Fi 6 compliant residential gateways, Wi-Fi routers, set-top boxes, and wireless range extenders is a testament to the same. Notably, Wi-Fi 6 — the latest 802.11 wireless standard — is estimated to offer 30% faster network speed over 802.11ac (Wi-Fi 5). This is expected to boost top-line growth for industry participants, including Cisco and NETGEAR.

Innovation in Networking Technologies to Drive Adoption: 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 continues to drive innovations in networking. Moreover, easing shelter-in-place guidelines, as economies started to reopen, has led to growing clout of contact tracing, environment monitoring, automated equipment monitoring, and trailer tracking applications. Increase in production ramp of such IoT sensors is opening up new opportunities for industry participants. Rapid proliferation of IoT, increasing popularity of smart connected devices and growing adoption of cloud computing in network security are fueling demand for an efficient network support infrastructure. The advancements in areas like AI, ML and increasing adoption of cloud applications hold immense potential for the industry players. Moreover, enterprises are increasingly looking to manage fixed and wireless devices in a secured infrastructure. In a bid to address the demand, industry players are driving innovation in networking technologies, including network virtualization, and Software-Defined Networking (SDN), which favors growth prospects.

Coronavirus Crisis Induced Sluggish IT Spend to Hinder Growth: Slowdown in IT spending as estimated by IDC and broader macroeconomic weakness due to the pandemic have raised concerns regarding the industry’s near-term prospects. Moreover, the industry players have been bearing the brunt of the U.S.-China trade war for quite some time now. It has created an uncertain environment that is not conducive for investments. Also, shift in consumer buying patterns is likely to remain an overhang.

Zacks Industry Rank Indicates Bright Near-Term Prospects

The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #91, which places it at the top 36% 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 near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Jun 30, 2020, the industry’s earnings estimate for 2021 has improved 2.3%.

Before we present a few stocks that 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 Lags Sector and S&P 500

The Zacks Computer – Networking industry has underperformed the broader sector and the Zacks S&P 500 composite over the past year.

The industry has fallen 4.4% over this period against the S&P 500 and the broader sector’s growth of 17.3% and 39.9%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio (P/E), which is a commonly used multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 14.72X compared with the S&P 500’s 22.65X. It is also below the sector’s forward-12-month P/E of 27.47X.

Over the past five years, the industry has traded as high as 19.13X and as low as 11.23X, with media being at 15.48X, as the charts below show.

Forward 12-Month P/E Ratio

Forward 12-Month P/E Ratio

4 Computer – Networking Stocks to Snap Up Now

We present four Computer – Networking stocks that are positioned to grow at least in the near-term. Moreover, all of these stocks currently carry a Zacks Rank #2 (Buy).

Investors can count on NETGEAR, which is well-poised to benefit from robust demand for its new products based on WiFi 6 standards and focus on leveraging latest technological innovation to drive growth. Notably, it holds nearly 44% and 49% of the share in U.S. retail WiFi and switch markets, respectively.

Moreover, solid subscriber base and growing clout of connected home products in the wake of growing work-from-home trend hold promise. Markedly, San Jose, CA-based NETGEAR ended third-quarter of 2020 with 369,000 paid subscribers. The next-gen products are likely to enhance the efficiency of hybrid cloud access network, thereby strengthening its market position.

Notably, shares of NETGEAR have appreciated 33% in the past year. The Zacks Consensus Estimate for 2020 earnings for the company has improved by 3.1% to $2.73 per share over the past 60 days, indicating year-over-year growth of 46%. This reflects on bullish sentiments for the stock.

Price and Consensus: NTGR

Domiciled in San Jose, CA, Extreme Networks offers software-driven networking solutions for enterprise, data center, and service provider customers. Increasing deployment of 5G base stations on accelerated demand for 5G networking is expected to boost growth prospects.

Although the company's stock has declined 17% in the past year, its product refreshment cycle of Brocade's products in the growing 5G wireless market is encouraging. Moreover, strength in its highly differentiated technology across one-fabric/one-network enhances business prospects.

The Zacks Consensus Estimate for fiscal 2021 earnings for the company has improved by 11.1% to 40 cents per share over the past 30 days, indicating year-over-year growth of 300%.

Price and Consensus: EXTR

Hopkins, MN-based Digi International (DGII - Free Report) is gaining from robust uptick in its advanced IoT connectivity products.

Demand recovery across cellular routers/gateways and solid pipeline for SmartSense solutions, which is poised to grow, hold promise. Notably, SmartSense’s critical-environment monitoring solution aimed at protecting patients is well poised for incremental adoption with accelerating COVID-19 vaccine-delivery process. In fact, SmartSense technologies are gaining traction across 28,000 retail pharmacy locations and supporting distribution centers, with collection of more than 10 million sensor readings per day.

Additionally, synergies from Opengear buyout positions it well to address the demand for secure IT infrastructure products.

Shares of the company have gained 1.9% in a year’s time. The Zacks Consensus Estimate for fiscal 2021 earnings for the company has improved by 13.2% to 43 cents per share over the past 30 days, indicating year-over-year growth of 53.6%.

Price and Consensus: DGII

Irvine, CA-based, Lantronix (LTRX - Free Report) is anticipated to benefit from growing clout of latest Connectivity Services, which connects IoT fleets and remote infrastructure.

Also, strength in the company’s diversified product portfolio that includes modules, gateways and consoles, enhanced by acquisitions of Maestro, Intrinsyc and FALCOM, remains a key catalyst.

Recently, the company announced that its Open-Q 626 Micro System on Module (µSOM), based on Qualcomm's APQ8053-Pro System on Chip (SoC), was adopted by Italy-based wearable electronics and IoT devices maker — Youbiquo, in the development of Talens Holo Augmented Reality Smart Glasses.

Shares of Lantronix have returned 30.1% in a year’s time. The Zacks Consensus Estimate for the company’s fiscal 2021 earnings stands at 19 cents per share, unchanged over the past seven days, indicating year-over-year growth of 111.1%.

Price and Consensus: LTRX