3 Network Software Stocks to Watch From a Prospering Industry
The Zacks Communication-Network Software industry players like Frontier Communications FYBR, A10 Networks ATEN and Weave Communications WEAV are gaining from the ongoing digitalization efforts that include a shift to cloud computing and 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 Artificial Intelligence and machine learning to develop security solutions, thereby providing better threat protections systems. Nevertheless, challenging macroeconomic conditions and raging inflation are hurting industry participants. 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 participants.
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 (“VoIP”), 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 Bright Prospects
The Zacks Communication-Network Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #102, which places it in the top 40% 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.
There are a few stocks worth buying in this prosperous industry. But before we present these stocks, it is worth looking at the industry’s shareholder returns and current valuation first.
Industry Lags Sector and S&P 500
The Zacks Communication-Network Software industry has underperformed the Zacks S&P 500 composite and its sector in the past year.
The industry has declined 25.7% over this period against the Zacks Computer and Technology sector’s rise of 10.6% and the S&P 500’s increase of 6.6%.
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 1.90X compared with the S&P 500’s 3.51X and the sector’s 4.04X.
Over the past five years, the industry has traded as high as 3.77X and as low as 0.40X, with the median being 1.66X, as the charts below show.
EV/Sales Ratio (TTM)
3 Stocks to Watch Right Now
A10 Networks: Headquartered in San Jose, CA, this Zacks Rank #2 (Buy) company offers secure application services for on-premises, multi-cloud, and edge-cloud environments at hyperscale. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
It is benefiting from strong demand for networking solutions among service providers as network security and reliability gain precedence for multi-cloud transformation and 5G readiness. An expanding partner base and portfolio strength are helping it to navigate a challenging macroeconomic environment and supply chain constraints.
ATEN stock has declined 8.4% year to date. The Zacks Consensus Estimate for A10 Network’s 2023 earnings has increased by a penny to 81 cents per share over the past 30 days.
Price and Consensus: ATEN
Frontier: This Zacks Rank #3 (Hold) company is benefiting from its expanding fiber optic network. Frontier plans to expand its fiber footprint to at least 10 million locations by 2025. At the end of the second quarter of 2023, it crossed the halfway mark with six million fiber locations.
Norwalk, CT-based Frontier has declined 26.6% year to date. The Zacks Consensus Estimate for FYBR’s current-year earnings has increased from 3 cents to 16 cents per share over the past 30 days.
Price and Consensus: FYBR
Weave: This Zacks Rank #3 company is a leading provider of all-in-one customer communications and engagement software platforms for small and medium-sized businesses.
Weave has gained 128.6% year to date. The Zacks Consensus Estimate for WEAV’s current-year loss has narrowed from 29 cents per share to 25 cents in the past 30 days.
Price and Consensus: WEAV
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Frontier Communications Parent, Inc. (FYBR) : Free Stock Analysis Report
A10 Networks, Inc. (ATEN) : Free Stock Analysis Report
Weave Communications, Inc. (WEAV) : Free Stock Analysis Report
