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3 Communication Stocks Likely to Gain Despite Industry Gloom

The Zacks Communication - Infrastructure industry appears mired in raw material price volatility due to elevated inventory levels amid a challenging macroeconomic environment, uncertain market conditions and incessant inflationary pressure. Moreover, high capital expenditure for infrastructure upgrades for 5G deployment, inflated equipment costs, geopolitical conflicts, supply chain adversities albeit at diminishing pace and margin erosion have dented the industry’s profitability.

Nevertheless, Anterix Inc. ATEX, Bandwidth Inc. BAND and DZS Inc. DZSI are likely to benefit from higher demand for scalable infrastructure for seamless connectivity amid the wide proliferation of IoT, transition to cloud and next-gen technologies and accelerated 5G rollout.

Industry Description

The Zacks Communication - Infrastructure industry players provide various infrastructure solutions for the core, access and edge layers of communication networks. Leveraging proprietary modeling and simulation techniques to optimize networks, the firms offer high-speed network access solutions across Internet protocol, asynchronous transfer mode and time division multiplexed architecture in both wireline and wireless network applications. Their product portfolio encompasses optical fiber and twisted-pair structured cable solutions, infrastructure management hardware and software, network racks and cabinets, fiber-to-home equipment like hardened connector systems, wireless network backhaul planning and optimization products, couplers and splitters, indoor, small cell and distributed wireless antenna systems and hardened optical terminating enclosures.

What's Shaping the Future of the Communication - Infrastructure Industry?

Demand Erosion: Efforts to offset substantial capital expenditure for upgrading network infrastructure by raising fees have reduced demand, as customers prefer to switch to lower-priced alternatives. Moreover, efforts to build resilient infrastructure facilities to withstand natural catastrophes such as hurricanes and floods add to operating costs. In addition, the latent tension between the United States and China, relating to trade restrictions imposed on the sale of communication equipment to firms based in the communist country, has dented the industry’s credibility, leading to a loss of business. The industry is battling hard-to-mitigate operating risks stemming from volatility in demand, an unpredictable business environment and challenging geopolitical scenarios.

Investments for Capacity Ramp Up: With exponential growth in video and other bandwidth-intensive applications owing to the wide proliferation of smartphones and increased deployment of superfast 5G technology, the industry participants are considerably investing in LTE, broadband and fiber to provide additional capacity and ramp up the Internet and wireless networks while facilitating a seamless transition to the cloud. These companies are rapidly transforming from legacy copper-based telecommunications firms to technology powerhouses with capabilities to meet the growing demand for flexible data, video, voice and IP solutions. The industry participants are also focusing on leveraging wireline momentum, expanding media coverage, improving customer service and achieving a competitive cost structure to generate higher average revenue per user while attracting new customers. All these efforts have particularly helped firms in the industry cater to the surge in data demand.

Inflated Production Costs: Although supply chain woes have declined progressively, the industry is facing a dearth of chips, which are the building blocks of various equipment used by telecom carriers. Moreover, high raw material prices due to inflation, the Israel-Hamas conflict, the prolonged Russia-Ukraine war and the consequent economic sanctions against the Putin regime have escalated production costs. The demand-supply imbalance has crippled operations and largely affected profitability due to inflated equipment prices.

Short-Term Margins Compromised: With operators moving toward converged or multi-use network structures, combining voice, video and data communications into a single network, the industry is increasingly developing solutions to support wireline and wireless network convergence. Although these investments will eventually help minimize service delivery costs to adequately support broadband competition and expand rural coverage and wireless densification, short-term profitability has been compromised. Nevertheless, the industry players have enabled enterprises to rapidly scale communications functionalities to a vast range of applications and devices with easy-to-use software application programming interfaces. The firms support high user volumes without affecting deliverability and cost-effectively eliminate performance degradation.

Zacks Industry Rank Indicates Bearish Trends

The Zacks Communication - Infrastructure industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #169, which places it in the bottom 32% 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 bleak prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a negative earnings outlook for the constituent companies in aggregate.

Before we present a few communication infrastructure 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 S&P 500 & Sector

The Zacks Communication - Infrastructure industry has lagged the broader Zacks Computer and Technology sector and the S&P 500 composite over the past year.

The industry has declined 46.1% over this period against the S&P 500 and the sector’s growth of 12.2% and 33.4%, respectively.

One Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), which is the most appropriate multiple for valuing telecom stocks, the industry is currently trading at 3.62X compared with the S&P 500’s and the sector’s tally of 12.69X each.

Over the past five years, the industry has traded as high as 12.05X, as low as 3.56X and at the median of 8.07X, as the chart below shows.

Trailing 12-Month enterprise value-to-EBITDA (EV/EBITDA) Ratio

3 Communication - Infrastructure Stocks to Watch Out For

Anterix: Headquartered in Woodland Park, NJ, Anterix is a premier wireless communications firm. It reportedly holds the largest licensed spectrum in the 900 MHz band, with coverage throughout the United States, Alaska, Hawaii and Puerto Rico. Anterix expects to monetize its spectrum assets to generate long-term value. The stock delivered an earnings surprise of 37.1%, on average, in the trailing four quarters. Anterix carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: ATEX



Bandwidth: Founded in 2000 and headquartered in Raleigh, NC, Bandwidth operates as a Communications Platform-as-a-Service provider, offering avant-garde software application programming interfaces for voice and messaging services. It is the only application programming interface platform provider that owns a Tier 1 network with enhanced network capacity, primarily catering to business enterprises. With 8,800 on-net rate centers, it delivers unparalleled network quality and proactively monitors network operations 24/7 to resolve quality issues, capitalizing on an efficient cost structure for seamless connectivity and speed-to-market. The Zacks Consensus Estimate for current-year and next-year earnings has been revised upward by 8.1% and 43.9%, respectively, since November 2022. This Zacks Rank #3 stock delivered an earnings surprise of 175.9%, on average, in the trailing four quarters.

Price and Consensus: BAND



DZS Inc.: Founded in 1996 and based in Plano, TX, DZS offers network access solutions and communications platforms for service provider and enterprise networks in the United States, Canada, Latin America, Europe, the Middle East, Africa, Korea and other Asia Pacific countries. The company is likely to benefit from the secular trend of 5G deployment across the globe with healthy traction in the fiber LAN ecosystem. With better visibility and solid order trends, the company is aiming to gain cost efficiencies and introduce products to the market. The stock carries a Zacks Rank #3.

Price and Consensus: DZSI

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Anterix Inc. (ATEX) : Free Stock Analysis Report

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