3 wireless stocks that can benefit despite the industry crisis – May 28, 2024

The Zacks wireless equipment industry is likely to be deterred by large-scale investments aimed at smooth 5G evolution, margin erosion due to escalating price wars, higher customer inventory levels and inflated raw material costs in a challenging macroeconomic environment, prolonged geopolitical conflicts and uncertain business conditions. However, the rapid deployment of 5G, the shift to the cloud and the modernization of fiber network infrastructure should help the industry in the long run.

Despite short-term difficulties, Qualcomm Company (QCOM – Free report), Motorola, Inc. Solutions (MSI – Free Report) i Ubiquiti Inc. (User Interface – Free Report) are likely to benefit from the massive adoption of IoT, continued fiber densification, and the gradual shift to cloud services.

Industry description

The Zacks Wireless Equipment industry primarily consists of companies that provide a variety of networking solutions, wireless telecommunications products and related wireless voice and data services via scalable modular platforms. Their product portfolio includes integrated circuit devices (chips) and system software for wireless voice and data communications, analog and digital two-way radio communications, satellite telecommunications, wireless networks and signal processing, and end-to-end enterprise mobility solutions. The companies also offer a wide range of routing, switching and security products, video surveillance and machine-to-machine components that secure VPN devices, enable intrusion detection and prevent data theft. Some companies even provide electronic warfare, avionics, robotics, advanced communications and maritime systems to the defense industry.

What is shaping the future of the wireless equipment industry?

Decreasing demand: Efforts to offset significant capital expenditures on network infrastructure upgrades by increasing fees steadily reduce demand as customers tend to switch to cheaper alternatives. Moreover, the high degree of technological obsolescence of most products has resulted in increased operating costs with constant investments in research and development. High customer inventory levels, resulting from a challenging macroeconomic environment and high market volatility, pose another hurdle for companies.

Rapid development of fiber optics, cloud networks: To maintain the highest performance standards, there is a constant need to tune and optimize networks, which creates demand for cutting-edge wireless products and services. Moreover, the faster pace of 5G deployment is expected to enhance the scalability, security and ubiquitous mobility of the telecommunications industry, and fuel the wide spread of the Internet of Things. Operators’ expansion of fiber networks to support their 4G LTE and 5G wireless standards, as well as wired connections, is likely to have a negative impact. Industry participants are making it easier for their customers to move away from economies of scale to demand-driven network operating models and seamlessly migrate to 5G by offering easy programming and flexible automation through ongoing infrastructure investments. The rapid development of cloud networking solutions further increases the amount of mass storage and computing power in the virtual plane. With both consumers and businesses using the network, there is a huge demand for high-quality networking equipment.

Short-term margin violation: While higher infrastructure investments will ultimately help minimize service delivery costs to support broadband competition and wireless densification, short-term viability has been largely compromised. Margins are likely to be impacted by the high costs of first-generation 5G products, profitability challenges in China, the protracted Russia-Ukraine war and the Israel-Hamas conflict. Chip shortage uncertainty (albeit to a lesser extent) and supply chain disruptions leading to shortages of essential fiber materials, delivery delays and shortages of other raw materials due to geopolitical unrest are expected to impact the expansion and deployment of new broadband networks. Extended delivery times for core components can also harm delivery schedules and increase production costs.

The Zacks Industry Rank indicates bearish trends

The Zacks Wireless Equipment industry falls within the broader Zacks Computer and Technology sector. It has a Zacks Industry Rank of 181, which puts it in the bottom 28% of over 250 Zacks industries.

The group’s Zacks Industry Rank, which is essentially an average of the Zacks Rank of all member companies, indicates a bleak outlook. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we highlight some wireless equipment stocks that are well-positioned to outperform the market based on strong earnings prospects, let’s take a look at the recent stock performance and valuation picture for this industry.

The industry is outperforming the S&P 500 as a sector

Over the last year, the Zacks Wireless Equipment industry has outperformed the S&P 500 Index and the broader Zacks Computer & Technology sector.

During this period, the industry grew by 50% compared to the S&P 500 and the sector grew by 26.1% and 36.2%, respectively.

Price performance within one year

Current industry valuation

Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), which is the most appropriate valuation multiple for telecom stocks, the industry is currently trading at 29.39X compared to 14.65X in the S&P 500 Index. It is also trading above 12-month trailing sector EV/EBITDA of 14.45X.

Over the past five years, the industry has traded at a high of 37.31X, a low of 11.89X and a median of 21.79X, as the chart below shows.

The ratio of enterprise value to EBITDA (EV/EBITDA) over a 12-month period

3 wireless stocks to watch

Qualcomm: Qualcomm, headquartered in San Diego, California, designs, manufactures and markets digital wireless telecommunications products and services based on Code Division multiple access technology. The company is well positioned to achieve its long-term revenue goals, driven by solid 5G traction, improved visibility and a diversified revenue stream. It is increasingly focused on a seamless transition from a wireless communications company for the mobile industry to a company that produces processors connected to intelligent edge devices. Buyout of Veoneer, Inc. gave Qualcomm a stronger position in the emerging market for driver assistance technologies. Year to date, the Zacks Consensus Estimate for current and future fiscal earnings has been revised upwards by 8.2% and 7.9%, respectively. It expects long-term earnings growth of 10.4% and delivered an earnings surprise of 7.5% on average over the next four quarters. It has a VGM score of B. It gained 90.7% last year. Qualcomm has a Zacks Rank #3 (Hold). You can see see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and consensus: QCOM

Motorola: Headquartered in Chicago, Illinois, Motorola is a leading communications equipment manufacturer with strong market positions in barcode scanning, wireless infrastructure equipment and government communications. It develops and services both analog and digital two-way radio, voice and data products and systems for private networks, wireless broadband systems, and comprehensive enterprise mobility solutions for a wide range of corporate markets. The company expects long-term earnings growth of 9.5% and has achieved earnings surprises averaging 7.5% in the next four quarters. Shares of this Zacks Rank #3 company have gained 28.1% over the past year. Motorola expects to see strong demand for video services and security, launch radio communications products and related software, while benefiting from a solid foundation. A comprehensive suite of services ensures continuity and reduces the risks associated with critical communications operations. It has a VGM Score of B. The Zacks Consensus Estimate for current fiscal earnings has been revised upward by 7% over the past year.

Price and consensus: MSI

Ubiquiti: Headquartered in New York, Ubiquiti offers a comprehensive portfolio of networking products and solutions for service providers and enterprises. Its service provider product platforms offer carrier-grade network infrastructure for fixed wireless broadband, wireless backhaul and routing, while its enterprise product platforms provide wireless local area network infrastructure, video surveillance products and machine-to-machine communications components. Ubiquiti’s superior global business model, which is flexible and adaptable to evolving market developments, helps you overcome challenges and maximize growth. The Zacks Rank #2 (Buy) stock’s operating model is powered by a rapidly growing and highly engaged community of service providers, distributors, value-added resellers, system integrators and enterprise IT professionals (called the Ubiquiti community).

Price and consensus: user interface

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