Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the Zacks Computer - Networking industry participants’ performance amid the rapid proliferation 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 (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices and 5G smartphones, calling for solid networking infrastructure. The Wi-Fi 7 upgrade cycle will also act as a catalyst. This spurred the demand for networking products, favoring prospects of prominent industry players like Extreme Networks, Inc EXTR, NetScout Systems NTCT and Intrusion Inc. INTZ. Weak global economic conditions, weak demand from telco and cable customers and volatile supply-chain dynamics continue to be concerning. Also, client inventory reduction efforts are affecting some participants' performances.
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
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, and 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 secured 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: Adopting a hybrid/flexible work model triggered the demand for network-intensive applications like video conferencing and cloud services, accelerating 5G deployment globally. 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.
Macroeconomic Turmoil is Concerning: Global macroeconomic weakness and volatile supply-chain dynamics are persistent concerns. Inflation could affect spending across small and medium-sized businesses globally, and uncertainty in business visibility could dent the industry’s near-term performance.
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 #47, positioning it in the top 19% 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 bright 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries results from a positive aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, analysts are optimistic about this group’s earnings growth potential. The industry’s 2024 earnings estimates have improved to $2.70 from $2.68 as of July 31, 2024.
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 Underperforms S&P 500 & Sector
The Zacks Computer – Networking industry underperformed the S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.
The industry has gained 18.2% over this period against the broader sector’s rally of 36.3%. The S&P 500 has appreciated 29.4% 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 19.38X compared with the S&P 500’s 22.71X. It is also below the sector’s forward-12-month P/E of 27.55X.
In the past five years, the industry traded as high as 20.33X and as low as 12.56X, with media being at 15.39X, as the charts below show.
3 Computer - Networking Stocks to Keep an Eye on
NetScout Systems: This Westford, MA-based company provides performance management, cybersecurity and DDoS protection solutions. Demand trends for Service Assurance and Cybersecurity product lines for the long term remain healthy. NETSCOUT is well-poised to gain as carriers remain focused on their 5G initiatives locally and internationally. Though budget spending remains pressured, clients on the enterprise front are still advancing their digital transformation efforts, which bodes well for NTCT. Cybersecurity solutions continue to witness adoption amid a rapidly evolving threat landscape. Extensive cost-cutting efforts to manage discretionary spending bode well.
For fiscal 2025, the company expects revenues of $800-$830 million and non-GAAP earnings per share of $2.10-$2.30. The GAAP loss per share is forecast to be $5.22-$5.01 due to goodwill impairment and restructuring charges incurred in the first half of fiscal 2025, and anticipated charges for the third quarter of fiscal 2025. Earlier, the company guided the GAAP net loss per share between $5.28 and $5.03.
NTCT currently flaunts a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $2.21 per share, improving from $2.20 in the past 60 days.
Price & Consensus: NTCT
Intrusion: Headquartered in Plano, TX, this is a cybersecurity company. Intrusion’s suite of security products helps businesses protect critical information assets by quickly detecting, analyzing and responding to network and host-based attacks.
Strong uptake of its premium Intrusion Shield technology is driving growth and innovation for INTZ. The company expects continued deployment to new customers over the next few quarters to enhance its financial performance, advancing its growth and profitability goals. In third quarter of 2024, INTZ’s revenues rose 2.5% year over year to $1.5 million, driven by 49% sequential growth in Intrusion Shield revenues.
It recently unveiled Shield Sentinel, a high-performance cybersecurity monitoring solution for large enterprises and carriers. Designed to tackle complex network environments, Shield Sentinel delivers advanced capabilities, including bi-directional monitoring of fiber trunks at speeds of up to 100 Gbps, continuous domain name system, and traffic flow logging and robust forensic analysis.
INTZ currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for 2024 earnings is pegged at a loss of $1.64 per share, improving from a loss of 1.87 per share in the past 60 days.
Price & Consensus: INTZ
Extreme Networks: Based in Morrisville, NC, the company provides AI-driven cloud networking solutions. Momentum in its cloud management platform, which is enhanced with advanced AI tools, is driving SaaS annual recurring revenues (ARR). In first quarter of fiscal 2025, ARR rose 23% year over year. However, market volatility is concerning. For the second quarter of fiscal 2025, EXTR expects revenues of $273-$283 million.
EXTR recently introduced Extreme Platform ONE, which combines AI, networking and security solutions. The platform’s AI-driven automation is tailored to speed up the efficiency of networking, security and business teams.
At present, EXTR carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at 76 cents per share, unchanged in the past 30 days.
Price & Consensus: EXTR
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