The Zacks Communication-Network Software industry players are suffering from challenging macroeconomic conditions and steep inflation. Small and medium businesses have deferred capital spending on infrastructure buildout due to higher interest rates and inflation, which does not bode well for industry players. Nevertheless, industry players like Weave Communications WEAV and Ribbon Communications RBBN are gaining from the ongoing digitalization efforts that include a shift to cloud computing and the rapid deployment of 5G-based networks. The strong demand for network security benefits industry participants as a secure environment is required to run cloud-based applications. Industry players are leveraging AI and machine learning to develop security solutions, thereby providing better threat protection systems.

Industry Description

The Zacks Communication-Network Software industry comprises companies that provide software solutions supporting cloud, on-premise and hybrid environments, communication technology solutions, including broadband and Voice Over Internet Protocol, digital communication services delivered as software-as-a-service and telecom solutions, supporting the proliferation and the deployment of 5G and 6G networks of the future. There are a few companies that offer solutions based on the Open Radio Access Network standard. Others offer wireless connectivity solutions for mission-critical Industrial Internet applications and services. Solutions from these companies support a variety of industries, including telecommunications, technology, industrial, government, retail, financial, gaming and education.

3 Trends Shaping the Future of the Communication-Network Software Industry

Increased Adoption of Cloud-based Solutions: Rapid digitalization, driven by the disruption caused by the pandemic, has increased the demand for cloud-based applications, virtualized software and container-based software. Applications are being developed in the cloud, which is creating opportunities and, at the same time, challenges for industry participants in terms of performance and security. Rising cyber-attacks, including Distributed Denial of Service attacks and attacks using malware through Transport Layer Security and Secure Sockets Layer protocols, are redefining the cyber threat landscape. Enterprises are spending more on cloud-based security solutions. Moreover, the software-defined approach is increasingly getting preferred over legacy hardware-centric models due to the need for agility. 

Growing Importance of Automation Tools: The ongoing rapid transition to the cloud has increased the importance of automation tools. Enterprises are adopting automated tools to deploy and operate security and application services. This is improving performance monitoring and detection, reporting security anomalies and reducing overall costs. 

Rapid Evolution of 5G and 6G Networks: Industry participants are benefiting from a continued rise in demand for data-intensive bandwidth and the need for reduced latency associated with smartphones, tablets and machine-to-machine communication. The proliferation of data centers, big data, cloud-based services, streaming media content and IoT is a key catalyst. The rapid deployment of 5G networks is creating a massive growth opportunity for telecom providers who are using solutions provided by industry participants.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Communication-Network Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #166, which places it in the bottom 34% 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 dull 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. 

Given the dim prospects, there are a handful of stocks worth watching in this challenging industry. But, before we present these stocks, it is worth looking at the industry’s shareholder returns and current valuation first.

Industry Outperforms Sector and S&P 500

The Zacks Communication-Network Software industry has outperformed the Zacks S&P 500 composite and its sector in the past year.

The industry has appreciated 91.4% over this period compared with the Zacks Computer and Technology sector’s return of 40.3% and the S&P 500’s increase of 33.6%.

One-Year Price Performance

Industry's Current Valuation

On the basis of trailing 12-month EV/Sales, a commonly used multiple for valuing network software companies, we see that the industry is currently trading at 2.74X compared with the S&P 500’s 5.40X and the sector’s 7.19X.

Over the past three years, the industry has traded as high as 2.8X and as low as 1.48X, with the median being 1.99X, as the charts below show.

EV/Sales Ratio (TTM)

2 Stocks to Watch Right Now

Weave: This Zacks Rank #3 (Hold) company is a leading provider of all-in-one customer communications and engagement software platforms for small and medium-sized businesses. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.  

Weave is benefiting from the growing adoption of its solution, which is driving average revenue per user. Expanding footprint in the dental, optometry, veterinary and specialty medical markets has been a positive. Its total addressable market in the United States exceeds $7 billion, including specialty medical.

Lehi, UT-based Weave shares have gained 8.6% year to date. The Zacks Consensus Estimate for WEAV’s 2024 earnings has been steady at break even in the past 30 days.

Price and Consensus: WEAV

Ribbon: This Zacks Rank #3 company is benefiting from an expanding enterprise clientele driven by the modernization of communication infrastructure and usage of public cloud platforms. 

However, weakness in Eastern Europe due to the ongoing war in Ukraine is a headwind.

Plano, TX-based Ribbon has increased 8.6% year to date. The Zacks Consensus Estimate for RBBN’s 2024 earnings has been steady at 21 cents per share over the past 30 days.

Price and Consensus: RBBN

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Ribbon Communications Inc. (RBBN) : Free Stock Analysis Report

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