3 Networking Stocks to Keep An Eye on in a Troubled Industry

Weak global economic conditions, inventory absorption by customers and volatile supply chain dynamics continue to be concerns. Also, weak demand from telco and cable service provider customers is affecting the performance of some of the participants of the Zacks Computer - Networking industry. Increasing focus on cloud computing, network security, big data and cloud storage is expected to boost the industry participants' performance in the long run. The accelerated deployment of 5G is driving the proliferation of the Internet of Things (IoT), Advanced Driver Assistance Systems (ADAS), Augmented Reality/Virtual Reality (AR/VR) devices and 5G smartphones, calling for solid networking infrastructure. This spurred the demand for networking products, favoring prospects of prominent industry players like Infinera Corporation INFN, NETGEAR Inc NTGR and Intrusion Inc INTZ.

Industry Description

The Zacks Computer - Networking industry comprises companies that offer networking and Internet-connected products, including wireless (WiFi and Long-Term Evolution or LTE), Ethernet and powerline, focusing on dependability and ease of use. The products are available in numerous configurations to cater to the changing requirements of consumers in each geographic territory where it operates. Some industry players also provide mission-critical IoT solutions and network security services to help clients build next-generation connected products and implement and manage critical communications infrastructures in demanding environments with enhanced safety levels. Focus on developing IoT sensors, drones and wearables amid increasing demand for cloud computing-based contact tracing applications is driving the industry.

4 Trends Influencing the Industry's Future

Innovation in Networking Technologies is Opening New Business Avenues: The growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition streaming players, security cameras, thermostats and smoke detectors continue to drive innovations in networking. The rapid proliferation of IoT, the increasing popularity of smart connected devices and the growing adoption of cloud computing in network security fuel the demand for an efficient network support infrastructure. The advancements in AI and ML and the high adoption of cloud applications hold immense potential for companies in the industry. Enterprises are striving to manage fixed and wireless devices in a secured infrastructure. To address the demand, industry firms are driving innovation in networking technologies, including network virtualization and Software-Defined Networking (SDN), which favor growth prospects.
Rapid Deployment of 5G to Boost Growth Prospects: Adopting a hybrid/flexible work model triggered the demand for network-intensive applications like video conferencing and cloud services. This accelerated 5G deployment globally. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support growth in data services. Efforts to develop smart connected homes, hospitals, factories, buildings, cities and self-driving vehicles bode well for industry players. These firms invest heavily in LTE, broadband and fiber to provide additional capacity and improve Internet and wireless networks. These initiatives hold promise.
The Uptick in Wi-Fi 6E Networking to Drive Momentum: Brisk technological advancement, dynamic products, high-speed connectivity, low latency and evolving industry standards define the Computer Networking industry. The growing clout of the latest Wi-Fi 6E-compliant residential gateways, Wi-Fi routers, set-top boxes and wireless range extenders is a testament to the same. The increasing demand to connect more devices to the network has been driving demand for Wi-Fi 6E devices. Wi-Fi 6E addresses Wi-Fi spectrum shortage issues by providing continuous channel bandwidth to support a higher number of connected devices without compromising speed. Moreover, the rollout of Wi-Fi 7 bodes well for the companies in this space.
Relative Slowdown in IT Spending Amid Economic Turmoil Concerning: Global macroeconomic weakness and volatile supply chain dynamics are persistent concerns. Inflation could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry's performance in the near term. Per a report from Gartner, worldwide IT spending is now projected to reach $5 trillion in 2024, calling for an increase of 6.8% from 2023 levels. This is below the earlier projection of 8%. The report also highlighted that although generative AI had enough hype, it will not yet have a material impact on IT spending in the near term.

Zacks Industry Rank Indicates Bleak Near-Term Prospects

The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank of 165, positioning it in the bottom 35% of more than 252 Zacks industries.
The group's Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak near-term 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.
Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry's recent stock-market performance and valuation picture.

Industry Underperforms S&P 500 and the Sector

The Zacks Computer – Networking industry has underperformed both the S&P 500 composite and the broader Zacks Computer and Technology sector in the past year.
The industry is down 7.2% over this period against the broader sector's rally of 42.8%. The S&P 500 has gained 27.2% over the same time frame.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, we see that the industry is currently trading at 15.26X compared with the S&P 500's 21.19X. It is also below the sector's forward-12-month P/E of 26.54X.
In the past five years, the industry traded as high as 20.33X and as low as 12.56X, with media being at 15.26X, as the charts below show.

Forward 12-Month P/E Ratio

Forward 12-Month P/E Ratio

3 Computer - Networking Stocks to Add to Watchlist

Intrusion: Headquartered in Plano, TX, Intrusion is a cybersecurity company. Intrusion's suite of security products helps businesses protect critical information assets by quickly detecting, analyzing and responding to network- and host-based attacks.
The company is witnessing strong momentum for its Shield products. INTZ added seven new logos in the fourth quarter of 2023 for its suite of Shield products. Management expects new clients and an improving sales pipeline to drive Intrusion Shield revenues in 2024. However, weakness is consulting revenues is concerning. In the last reported quarter, revenues declined 5% year over year to $1.4 million.
At present, INTZ carries a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for 2024 earnings is pegged at a loss of $2.68 per share, improved from loss of $7.80 in the past 60 days.

Price and Consensus: INTZ

NETGEAR: Headquartered in San Jose, CA, NETGEAR is a global telecommunications firm that offers innovative networking and Internet-connected products for seamless networking, broadband access, and network connectivity.
NTGR's performance is cushioned by robust demand for premium CHP products, like Orbi 8 and 9, tri and quad-band WiFi mesh products and 5G Nighthawk Mobile Hotspots. The company is likely to benefit from the WiFi 7 upgrade cycle and secular trends in the markets. Its profitability margins continue to benefit from disciplined expense management.  Frequent product launches augurs well in the long run.
Nonetheless, weakness in the SMB and CHP business segments due to continued channel inventory reductions amid a volatile macroeconomic environment and elevated interest rates are concerning. The company anticipates the retail portion of CHP business to experience a seasonal decline in the first quarter of 2024 following the holiday period.
At present, NETGEAR carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2024 earnings is pegged at 28 cents per share, unchanged in the past 30 days.

Price and Consensus: NTGR

Infinera Corporation: The San Jose, CA-based company offers Digital Optical Networking systems to telecommunications carriers, cable operators and other service providers globally. 
Infinera is witnessing increasing momentum in strategic deal wins with key service providers across the United States, Europe, India and Australia. In the last reported quarter, the GX Systems portfolio witnessed healthy performance. It won several design contracts with tier 1 companies in the global services sector.
The company also recently announced the commercial availability of 400 gig XR pluggables and also shipped its first Metro systems with vertically integrated pluggables. Management noted that the utilization of pluggables in its Metro systems will be an important driver of margin expansion in the latter half of 2024.
Management highlighted that these strategic deal wins combined with the design win funnel position it well for the robust second half of 2024.
However, the company anticipates a slow start in the first half of 2024. For the first quarter of 2024, it expects revenues in the range of $320-$350 million.
INFN carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for 2024 earnings stands at 24 cents per share.

Price and Consensus: INFN

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