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Buy 5 Communication Components Stocks with Robust Demand

Zacks Equity Research

One of the key attributes of the telecommunications industry is that it is a major infrastructure product for both emerging and developed nations. The telecommunications industry benefits from an improving global economy which makes the overall macro-outlook buoyant. Significant technological inventions also make a mature market like the United States lucrative for telecom operators.

Huge government expenditures, including those on U.S. broadband infrastructure development program and similar structural subsidies in China and India, have been a boon to telecom service providers and communication components manufacturers. However, the major thrust for the telecommunications sector is coming from within the industry as a result of continuous network and product upgrade and inventions by industry players. Consequently, communication components manufacturers too have flourished.

Strong Wireless Infrastructure Market

The wireless network infrastructure industry continues to expand on the back of increased investments by mobile operators. Notably, the operators have increased investments in Heterogeneous Network or HetNet infrastructure.

The spending will be allocated to small cells, carrier Wi-Fi and DAS (Distributed Antenna Systems) and 5G NR (New Radio) rollouts — beginning 2019, to cope with the increasing capacity and coverage requirements. Further, mobile operators are keen on shifting toward a C-RAN (Centralized RAN) architecture.  

Per reports from SNS Research, the wireless or mobile network infrastructure industry is expected to grow at a rate of 2% over the next three years. Per projections, the market will witness an annual spending of $56 billion by 2020, up from $53 billion in 2017.

4G LTE Thriving

By the end of 2020, C-RAN, small cells, DAS and carrier Wi-Fi, together with their fronthaul and backhaul segments, will account for more than 45% of total infrastructure spending. With increasing demand for LTE (Long-Term Evolution) and its latest updated versions LTE, LTE-Advanced and LTE-Advanced Pro networks are expected to generate more than $950 billion in service revenues annually by 2020.

New market players are striving to strengthen foothold as mobile operators continue transition to virtualized network infrastructure. Notably, carriers are opting for a wider range of hardware and technologies in order to upgrade their networks. (Read: Can Wireless Network Infrastructure Market Sustain Momentum?)

Growing Demand for Fiber Optic Network

Fiber optic cable is a vital infrastructure in order to meet the growing need for cloud-based business data, along with more video-streaming services by individuals. Moreover, fiber-optic cable network is vital for backhaul and last mile local loop, which are needed by wireless service providers for their upcoming 5G network.

Dark fiber provides abundant bandwidth which is of utmost necessity for the smooth functioning of super-fast wireless networks such as 4G and 5G. Dark fiber based wireless backhaul provides scalability and efficiency to bandwidth management. This will eventually lead the company to significantly reduce its backhaul costs. Fiber networks are essential for the growing deployment of small cells. The increase in adoption of small cells is because of the inconvenience in installing large towers in inaccessible areas.

DOCSIS 3.1 Gains Momentum

DOCSIS (Data Over Cable Service Interface Specification) is a communications protocol that allows cable MSOs (multi service operators) to provide high-speed broadband connections. This technology was especially designed as the cable TV industry’s answer to high-speed wireless and fiber-based wireline networks of telecom operators. The old-generation DOCSIS 3.0 technology has helped cable TV operators compete in the race for the fastest internet speed available in the market.

The technology is also backward compatible, allowing the present hybrid fiber-coaxial cable lines to allow such high internet speed by simply switching to a DOCSIS 3.1 compatible modem. Although FTTH has the advantage of providing unlimited bandwidth, backward compatibility is a major advantage of DOCSIS 3.1.

This allows cable MSOs to provide high-speed Gigabit broadband to customers, without having to incur additional digging or other cable-laying costs, unlike FTTH providers. This is sure to boost margins of cable MSOs.

Solid Demand for Service Provider Routers

Massive growth in mobile device usage has increased transportation of data traffic substantially. In order to manage this burgeoning demand for photo, video and online data services, telecom operators are required to install more routers to ensure smooth transfer of data packets.

Routers are telecom infrastructure devices used to deliver data packets from one network to another. These are located at gateways, places where two or more networks connect. The success is primarily attributed to strong demand from cloud service providers and the digital transformation imperative.  In the United States, majority of demand for service provider router and carrier Ethernet switch are from large cloud service operators like Amazon Web Services of Amazon.com Inc., Microsoft Azure of Microsoft Corp. and Alphabet Inc.

Our Top Pick

Given this scenario, we suggest five stocks that are poised to benefit the most from the growing demand of various communications components. Importantly, each of these stocks carries a favourable Zacks Rank.

ARRIS International plc ARRS: Headquartered in Suwanee, GA, the company is an IP, video and broadband technology solutions developers. It offers video infrastructure, delivery networks, home and business connectivity and devices as well as related products. ARRIS currently holds a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For 2018, the Zacks Consensus Estimate for earnings per share (EPS) is pegged at $2.95, reflecting year-over-year growth of 13.45%. The consensus estimate for revenues is $6.85 billion, up 3.34% year over year.

Arista Networks Inc. ANET:  Headquartered in Santa Clara, CA, the company is engaged in providing cloud networking solutions for data centre and cloud computing environments. It offers Ethernet switches, pass-through cards, transceivers, cards, and enhanced operating systems, host adapter solutions and networking services. Arista currently holds a Zacks Rank #1.

For 2018, the Zacks Consensus Estimate for EPS is pegged at $6.09, reflecting year-over-year growth of 14.31%. The consensus estimate for revenues is $2.05 billion, up 25.26% year over year.

Westell Technologies Inc. WSTL: Headquartered in Aurora, IL, the company designs, manufactures and services a broad range of digital and analog products used by telcos to deliver services primarily over existing copper telephone wires that connect end users to a carrier’s central office. Westell currently holds a Zacks Rank #1.

For 2018, the Zacks Consensus Estimate for EPS is pegged at $0.23, unchanged year over year. The consensus estimate for revenues is $69.07 million, up 6.62% year over year.

Aerohive Networks Inc. HIVE: Headquartered in Milpitas, CA, the company designs and develops a cloud-managed mobile networking platform that enables enterprises to deploy a mobile-centric network edge. Its cloud-managed mobile networking platform comporises four components: Cloud Services Platform, HiveOS operating system, client management software and its portfolio of hardware products. Aerohive currently holds a Zacks Rank #2 (Buy).

For 2018, the Zacks Consensus Estimate for EPS is pegged at $0.05, reflecting year-over-year growth of a whopping 146.67%. The consensus estimate for revenues is $171 million, up 9.13% year over year.

TESSCO Technologies Inc. TESS: Headquartered in Hunt Valley, MD, the company is a leading provider of the services, products and solutions required to build, operate, maintain and use wireless voice, data, messaging, location tracking and Internet systems. TESSCO currently holds a Zacks Rank #2.

For 2018, the Zacks Consensus Estimate for EPS is pegged at $0.51, reflecting year-over-year growth of 6.25%. The consensus estimate for revenues is $578.80 million, up 3.14% year over year.

Charts Look Attractive

The chart below shows that all the above-mentioned stocks have outperformed the industry in the past six months.


Bottom Line

Telecommunications is one of the few industries to have seen rapid technological improvement even during the recession. Owing to the significance of this service as an infrastructure product, we expect the overall economic dynamics to shift in favor of the industry. At this stage, we believe that these five stocks with a favorable Zacks Rank are poised to capitalize on the growing opportunities.

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ARRIS International PLC (ARRS) : Free Stock Analysis Report
TESSCO Technologies Incorporated (TESS) : Free Stock Analysis Report
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