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Forget Arista (ANET), Buy these 4 Telecom Stocks Instead for 2020

Zacks Equity Research

Telecommunications is considered to be one of the most dynamic industries in the world with disruptive technological changes being the order of the day. Several such technological innovations like 5G, edge computing and IoT have redefined the broader industry metrics in 2019.

As we draw the curtains on an eventful year and step in to a new year, 5G is likely to be one of the biggest game-changing factors in our daily lives. According to a report from ResearchandMarkets.com, the 5G infrastructure market is anticipated to be valued at $784 million in 2019 and is projected to hit $47,775 million by 2027 at a CAGR of 67.1%. Ultra-low latency, faster download speed, burgeoning adoption of virtual networking architecture and rapid growth in mobile data traffic are some of the vital factors driving the 5G market. With the rapid deployment of 5G ecosystem around the world, major industry players are likely to benefit from promising business dynamics and sector strength.

However, Santa Clara, CA-based Arista Networks, Inc. ANET did not live up to the broader industry expectations and lost a quarter of its value after the release of third-quarter 2019 results. Despite 24% rise in earnings on 16.2% revenue growth year over year, this cloud networking company failed to impress investor sentiments due to its soft outlook for the December quarter.

Roadblocks Ahead for Arista

The datacenter pioneer suffered a record plunge in cloud demand in the third quarter due to a shift in the procurement strategy with a reduction in material demand from renowned cloud titan — Facebook, Inc. (FB). Consequently, the reduction in forecasts for the remainder of 2019 and 2020 resulted in significant share meltdown, which is worrisome for Arista.

The company projected revenues in the range of $540-$560 million with non-GAAP gross margin of 63-65% and non-GAAP operating margin of approximately 36% in the fourth quarter, reinforcing weak investor sentiments. Despite beating earnings estimates with a healthy balance sheet, management predicts significant volatility in demand from its cloud business. Shares of the Zacks Rank #4 (Sell) stock has lost 18.2% compared with industry’s decline of 3.3% in the past six months.



Our Recommendation

Amid such a scenario, we can consider the following four stocks instead of Arista to benefit from the healthy industry growth projections. These stocks are expected to record strong performance in 2020 driven by a favorable Zacks Rank, robust earnings growth expectations, positive estimate revision, and a healthy earnings surprise. These outperformers either carry a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy) or Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.

Qualcomm Incorporated QCOM: Based in San Diego, CA, Qualcomm designs, manufactures and markets digital wireless telecom products and services based on the Code Division Multiple Access technology. It is poised to retain its 5G leadership for its AI-powered chip business in 2020 backed by new product launches, including devices with 5G chipsets and growth in adjacent businesses.

Shares of the Zacks Rank #1 company have rallied 56.1% compared with industry’s rise of 23.2% in the year-to-date period. It has long-term earnings expectation of 14%. Qualcomm outpaced estimates in each of the trailing four quarters, the average positive earnings surprise being 8.7%. The Zacks Consensus Estimate for its current-year earnings has been revised 3.5% upward over the past 90 days.



Ubiquiti Inc. UI: Based in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. It offers network infrastructure for fixed wireless broadband, wireless backhaul systems and routing, machine-to-machine communication components and video surveillance products. Backed by healthy business dynamics, it expects to augment investments in R&D and inventory & operations management to maintain its dominant foothold in the industry in 2020.

Shares of the Zacks Rank #1 company have rallied 86.9% compared with industry’s rise of 23.2% in the year-to-date period. It has long-term earnings expectation of 9.4%. Ubiquiti surpassed estimates thrice in the trailing four quarters, the average positive earnings surprise being 16.1%. The Zacks Consensus Estimate for its current-year earnings has been revised 4.9% upward over the past 90 days.



Acacia Communications, Inc. ACIA: Based in Maynard, MA, Acacia manufactures and develops various optical interconnect products for cloud infrastructure operators and content and communication service providers. The Zacks Rank #2 stock has rallied 77.6% compared with industry’s rise 15.8% in the year-to-date period.

It has long-term earnings expectation of 30%. Acacia surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 27.2%. The Zacks Consensus Estimate for its current-year earnings has been revised 24.1% upward over the past 90 days.



T-Mobile US, Inc. TMUS: Based in Washington, DC, T-Mobile offers voice, messaging and data services to 83.1 million customers in the United States, Puerto Rico, and the United States Virgin Islands. It is reportedly offering the fastest network in the United States in terms of both download and upload speeds, and has also became the first telecom carrier to activate nationwide 5G network, covering nearly 200 million Americans in more than 5,000 cities and towns.

The Zacks Rank #3 stock has gained 21.7% compared with industry’s rise of 19.9% in the year-to-date period. It has a long-term earnings expectation of 12.4%. T-Mobile surpassed estimates in each of the trailing four quarters, the average positive earnings surprise being 20.4%. The Zacks Consensus Estimate for its next-year earnings has been revised 0.2% upward over the past 30 days.



Moving Forward

With large-scale deployment of 5G, coupled with the launch of various over-the-top streaming services, 2020 might be a promising year for the telecom industry. Unprecedented growth in high-speed mobile Internet traffic, predominantly with respect to wireless data and video, has transformed this industry into an evolving, inventive and highly competitive space. Also, IoT is becoming one of the most lucrative sources of revenues for the carriers, which is expected to grow further in 2020.

While various telco players have already embarked on a journey to become significant digital service providers, the sector remains susceptible to rapid shifts in terms of technology cycles, trade conflicts, competitor actions and customer needs. But, in spite of all these challenges, the sector remains poised to benefit from healthy market traction of fiber optics and burgeoning demand of data traffic, backed by robust business dynamics to attract new customers and retain the existing ones. These outperformers, therefore, are likely to cash in on the healthy growth potential and continue their winning run in 2020 as well.

Zacks Top 10 Stocks for 2020

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2020?

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QUALCOMM Incorporated (QCOM) : Free Stock Analysis Report
 
Arista Networks, Inc. (ANET) : Free Stock Analysis Report
 
Acacia Communications, Inc. (ACIA) : Free Stock Analysis Report
 
T-Mobile US, Inc. (TMUS) : Free Stock Analysis Report
 
Ubiquiti Inc. (UI) : Free Stock Analysis Report
 
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