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Computer Networking Industry Prospects Not So Bright

Zacks Equity Research

The Zacks Computer - Networking industry includes providers of networking and Internet connected products such as wireless (WiFi and LTE), Ethernet and powerline, with focus on reliability and ease-of-use.

Some of the companies provide business and mission-critical IoT products and services to help customers create next-generation connected products with high levels of security, reliability and assured performance.

Enhanced focus on cloud computing and cloud storage has set the industry on a growth trajectory.

Here are the three major themes in the industry:

  • The industry is characterized by brisk technological change, rapidly progressing products, high-speed connectivity, low latency and evolving industry standards. The advancement in areas like IoT, AI, ML and increased cloud applications are creating opportunity for industry players.
  • With IoT devices continuing to grow and enterprises increasingly adopting policies like bring-your-own device (BYOD), the number of network end-points is increasing rapidly. On the other side, the concept of shared resources in the cloud to be accessed by these devices has greatly increased the need for adequate security at the core. Consequently, the growing need for security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for industry participants.
  • Nevertheless, the ongoing trade war between the United States and China has created an uncertain environment that is not conducive for investments at least in the near term. Notably, the industry participants generate a significant portion of their revenues from China. As the direct revenue sources are now under the purview of tariffs, the concern over the prospects of the industry has increased in recent times. Moreover, rising U.S. protectionism is hurting growth prospects. However, a recent tweet from President Trump suggesting trade negotiations between the United States and China is instilling optimism regarding a plausible truce.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Computer - Networking industryis housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #166, which places it at the bottom 35% of 256 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats S&P 500 and Sector on Shareholder Returns

The Zacks Computer - Networking industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months.

The industry has gained 25.1% in the past 12 months as compared to the sector’s increase of 4.3% and the Zacks S&P 500 composite rise of 7.4%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of the forward 12-month P/E, which is a commonly used multiple for valuing computer networking stocks, we see that the industry is currently trading at 21.33X compared with the S&P 500’s 18.22X. It is also above the sector’s forward-12-month P/E of 20.97X.

Over the past five years, the industry has traded as high as 21.87X, as low as 11.89X and at the median of 15.18X, as the chart below shows.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Stocks in Focus

Increased focus on cloud computing, big data and cloud storage will continue to aid revenue growth for the industry participants. However, sluggishness in global economic growth and shift in consumer buying patterns are likely to act as dampeners.

Notably, none of the stocks in the industry currently holds a Zacks Rank #1 (Strong Buy). However, we present one stock carrying a Zacks Rank #2 (Buy) that is well positioned to gain amid the prevailing challenges.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Cisco Systems, Inc. (CSCO): The IP-based networking company carries a Zacks Rank #2. It has a long-term expected EPS growth rate of 7%. 

Price and Consensus : CSCO

There are also a few other stocks with a Zacks Rank #3 (Hold) that investors can hold on to.

Digi International Inc. (DGII): This provider of business and mission-critical IoT products and services carries a Zacks Rank #3. The company has a long-term expected EPS growth rate of 14.5%.

Price and Consensus : DGII

 

Infinera Corporation (INFN): The company provides Digital Optical Networking systems to telecommunications carriers, cable operators and other service providers worldwide. It has a Zacks Rank #3 and a long-term expected EPS growth rate of 8.8%.

Price and Consensus : INFN

NETGEAR, Inc. (NTGR): This provider of networking, storage and security solutions carries a Zacks Rank #3.

Price and Consensus : NTGR

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NETGEAR, Inc. (NTGR) : Free Stock Analysis Report
 
Infinera Corporation (INFN) : Free Stock Analysis Report
 
Digi International Inc. (DGII) : Free Stock Analysis Report
 
Cisco Systems, Inc. (CSCO) : Free Stock Analysis Report
 
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