The Zacks Wireless Equipment industry appears to be mired in uncertainties amid the coronavirus-induced market turmoil, with significant capital expenditures and margin erosion due to price wars. In addition, tense bilateral trade relations between the United States and China have rendered a relatively grim picture for the near future.
Nevertheless, Qualcomm Incorporated (QCOM), Ericsson (ERIC) and Motorola Solutions, Inc. (MSI) are likely to benefit in the long run due to increasing demand for state-of-the-art wireless products and services with wide proliferation of IoT driven by faster pace of 5G deployment.
The Zacks Wireless Equipment industry primarily comprises companies that provide various networking solutions, wireless telecom products and related services for wireless voice and data communications through scalable modular platforms. The firms within this industry are driving the transition of global enterprises to smart virtual networks by creating an integrated network for all services, converging mobile and fixed broadband, IP routing and optical networks with software and services to manage them. Their product portfolio encompasses integrated circuit devices (chips) and system software for wireless voice and data communications, analog and digital two-way radio, satellite telecommunications, wireless networking and signal processing equipment and end-to-end enterprise mobility solutions. In addition, the firms provide a broad range of routing, switching and security products along with video surveillance and machine-to-machine communication components that secure VPN appliances, enable intrusion detection and thwart data theft for seamless transfer.
The industry participants facilitate users to shift their telecom networks to the latest 5G standards, including new use cases like IoT, public safety and fixed wireless access. Along with hands-on field service operations to remote network operations, the firms offer IT managed services for the management of applications and data centers, while network design and optimization services develop and expand user networks, per demand. Apart from offering scalable networks that securely connect everyone and everything to the cloud, the firms help customers transform their operations and reduce the complexity of business. Some firms within the industry even provide electronic warfare, avionics, robotics, advanced communications and maritime systems to the defense industry. A few industry participants offer air traffic management solutions for the civil aviation industry and analytics for global and space situational awareness and Earth observation missions. Some notable firms within the industry are Qualcomm, Juniper Networks Inc. (JNPR) and Motorola.
What’s Shaping the Future of Wireless Equipment Industry
Hostile Sino-U.S. Relations: Majority of the industry participants offer mission-critical communication infrastructure, devices, accessories, software and services that enable customers to run businesses with increased efficiency and safety for their mobile workforce. However, trade hostilities related to various restrictions by two of the most powerful economic powerhouses of the world have dented the profitability of the industry, and shrouded it in uncertainty. Tense Sino-U.S. relations have also affected the supply chain management of various firms and led to loss of businesses. The strained bilateral relationship remains a potent threat as the Trump administration continues its relentless pursuit to safeguard national interests and protect American data from being siphoned off through unlawful access. The White House is seeking a ban on Chinese apps that are allegedly being used as cyber espionage tools to gain access to sensitive American data. The Trump administration is further aiming to remove Chinese apps from American mobile app marketplaces. At the same time, it is also preventing Chinese hardware manufacturers from pre-installing popular American apps on their devices.
Near-Term Profitability Compromised: The continued deployment of 5G technology across the globe is likely to propel the industry to newer heights. Moreover, 5G is expected to augment the scalability, security and universal mobility of the telecommunications industry, which is expected to propel the wide proliferation of IoT. The industry participants are facilitating its customers to move away from an economy-of-scale network operating model to demand-driven operations and seamlessly migrate to 5G by offering easy programmability and flexible automation through steady infrastructure investments. Although these investments will eventually help minimize service delivery costs to support broadband competition and wireless densification, short-term profitability has largely been compromised. Margins are likely to be affected by high cost level associated with the first generation 5G products, profitability challenges in China and pricing pressure in early 5G deals.
Pent-Up Demand for Avant Garde Networking Architecture: With the exponential growth of mobile broadband, user demand for coverage speed and quality has increased manifold. This has resulted in huge demand for advanced networking architecture, which in turn, is leading service providers to spend more on routers and switches. Hence, these companies are likely to benefit from the higher spending pattern among carriers to upgrade their networks to support the incremental growth in data traffic. Further, to maintain superior performance as traffic increases, there is also a continuous need for network tuning and optimization, creating demand for state-of-the-art wireless products and services. Also, the industry participants are likely to benefit in the long run from expanding media coverage, increasing demand for reliable access and fast-data services, thereby broadening customer base and translating into higher revenues for the overall industry.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Wireless Equipment industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #196, which places it at the bottom 22% 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 dim 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing faith in this group’s earnings growth potential. While the industry’s earnings estimates for the current year have decreased 1.1% over the past year, the same for 2021 has declined 5.7%.
Before we present a few wireless equipment stocks that are well positioned to outperform the market based on a strong earnings outlook, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector, Trumps S&P 500
The Zacks Wireless Equipment industry has lagged the broader Zacks Computer and Technology sector, but surpassed the S&P 500 composite over the past year.
The industry has gained 22.2% over this period compared with the S&P 500 and sector’s rally of 14.7% and 36.2%, respectively.
One-Year Price Performance
Industry’s Current Valuation
On the basis of trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 27.78X compared with the S&P 500’s 14.7X. It is also above the sector’s trailing-12-month EV/EBITDA of 14.76X.
Over the past five years, the industry has traded as high as 29.46X and as low as 9.84X and at the median of 17.24X, as the chart below shows.
Trailing 12-Month enterprise value-to EBITDA (EV/EBITDA) Ratio
3 Wireless Equipment Stocks to Keep a Close Eye on
Qualcomm Incorporated: Headquartered in San Diego, CA, Qualcomm designs, manufactures and markets integrated circuits (chips) and system software for wireless voice and data communications as well as GPS products. This Zacks Rank #3 (Hold) stock has gained 56.6% in the past year compared with the industry’s growth of 25.6%. The Zacks Consensus Estimate for current-year earnings has been revised 7.1% upward over the past 90 days. Qualcomm is one of the largest manufacturers of wireless chipset based on baseband technology. The company is focusing to retain its leadership in 5G, chipset market and mobile connectivity with several technological achievements and has set a new benchmark with a game-changing 5G chipset for low-cost smartphones for the masses. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: QCOM
Ericsson: Founded in 1876 and headquartered in Stockholm, Sweden, Ericsson is a leading provider of communication networks, telecom services and support solutions. This Zacks Rank #3 stock has gained 32.5% in the trailing 12 months. The Zacks Consensus Estimate for current-year earnings has been revised 9.8% upward over the past 90 days. The company is witnessing healthy momentum in its business, courtesy of R&D investments that have established it as a leader in 5G. Ericsson is benefiting from 5G deployments in North-East Asia and currently has 109 commercial 5G agreements with operators (of which 59 are publicly announced), including 61 live 5G networks in 32 countries.
Price and Consensus: ERIC
Motorola Solutions Inc.: Based in Chicago, IL Motorola is a leading communications equipment manufacturer and has strong market positions in bar code scanning, wireless infrastructure gear and government communications. This Zacks Rank #3 stock has gained 18.8% in the past three months. The Zacks Consensus Estimate for current-year earnings has been revised 0.9% upward over the past 90 days. As a leading provider of mission-critical communication products and services worldwide, Motorola has ensured a steady revenue stream from this niche market. The communications equipment maker intends to boost its position in the public safety domain by entering into strategic alliances with other players in the ecosystem.
Price and Consensus: MSI
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