3 Wireless Stocks Likely to Beat Coronavirus-Led Industry Woes
The Zacks wireless equipment industry appears to be mired in uncertainty amid coronavirus-induced market turmoil, with significant investment and margin erosion due to price wars. In addition, the strained bilateral trade relations between the United States and China have painted a relatively bleak picture for the near future.
Even so, Qualcomm Incorporated (QCOM), Ericsson (ERIC), and Motorola Solutions, Inc. (MSI) are likely to benefit in the long run from the increasing demand for cutting-edge wireless products and services with widespread adoption of IoT, driven by a faster pace of 5G deployment .
The Zacks wireless device industry consists primarily of companies that provide a variety of network solutions, wireless telecommunications products, and related services for wireless voice and data communications over scalable modular platforms. Companies in this industry are driving global businesses' transition to intelligent virtual networks by creating an integrated network for all services and bringing together mobile and fixed broadband, IP routing and optical networks with software and services to manage them. The product portfolio includes integrated circuits (chips) and system software for wireless voice and data communication, analog and digital radio equipment, satellite telecommunications, wireless network and signal processing devices as well as end-to-end mobility solutions for companies. In addition, the companies offer a wide range of routing, switching and security products, as well as video surveillance and machine-to-machine communication components that secure VPN appliances, enable intrusion detection and prevent data theft for seamless transmission.
The industry participants are making it easier for users to migrate their telecommunications networks to the latest 5G standards, including new use cases such as IoT, public safety and fixed wireless access. In addition to practical field service operations through to remote network operations, the companies offer IT managed services for the administration of applications and data centers, while network design and optimization services develop and expand user networks as required. Not only do companies offer scalable networks that securely connect everyone and everything to the cloud, but they also help customers transform their operations and reduce the complexity of the business. Some companies in the industry even offer electronic warfare, avionics, robotics, advanced communications, and maritime systems to the defense industry. Some industry participants provide air traffic management solutions for the civil aviation industry and analytics for global and space situational awareness and earth observation missions. Some notable companies in the industry are Qualcomm, Juniper Networks Inc. (JNPR), and Motorola.
What is Shaping the Future of the Wireless Device Industry?
Hostile Relationships Between China and the United States: The majority of industry participants offer mission-critical communications infrastructures, devices, accessories, software and services that customers can use to run businesses with greater efficiency and security for their mobile workers. However, trade hostility related to various restrictions imposed by two of the world's most powerful economic powers has hurt the industry's profitability and shrouded uncertainty. The strained relationship between China and the US has also impacted the supply chain management of various companies, resulting in the loss of businesses. The strained bilateral relationship remains a grave threat as the Trump administration continues its tireless efforts to safeguard national interests and protect American data from being siphoned off through illegal access. The White House is seeking a ban on Chinese apps that are supposedly used as cyber espionage tools to gain access to sensitive American data. The Trump administration is also working to remove Chinese apps from American mobile app marketplaces. At the same time, it prevents Chinese hardware manufacturers from pre-installing popular American apps on their devices.
Short-term profitability hurt: The continued use of 5G technology around the world is likely to propel the industry to new heights. In addition, 5G is expected to improve the scalability, security, and universal mobility of the telecommunications industry, which should drive the widespread adoption of the Internet of Things. Industry participants make it easier for their customers to transition from a cost-effective network operating model to on-demand operation and seamless migration to 5G by offering easy programmability and flexible automation through constant infrastructure investments. Although these investments will ultimately help minimize the cost of providing services to support broadband competition and wireless densification, short-term profitability has been largely affected. Margins are likely to be affected by the high cost level of first generation 5G products, profitability issues in China, and price pressures on early 5G deals.
Avant-garde network architecture has some catching up to do: With the exponential growth of the mobile broadband network, user demand for coverage speed and quality has increased many times over. This has created a huge demand for advanced network architecture, which in turn leads service providers to spend more on routers and switches. Therefore, these companies are likely to benefit from the higher spending patterns of network operators to upgrade their networks and support the incremental growth in traffic. Also, to maintain superior performance as traffic increases, there is a constant need for network optimization and optimization, which increases the demand for cutting-edge wireless products and services. In addition, in the long term, industry participants should benefit from the expansion of media coverage, increasing demand for reliable access and fast data services, expanding the customer base and generating higher revenues for the entire industry.
Zacks' industry rank indicates dire prospects
The Zacks wireless device industry is part of the broader Zacks computing and technology systems sector. It has a Zacks Industry Rank # 196, which is below 22% of more than 250 Zacks Industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates weak prospects. Our research shows that the top 50% of Zacks industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the bottom 50% of the industries Zacks rated is the result of negative earnings outlook for individual companies as a whole. Looking at the revisions to the aggregate earnings estimate, analysts appear to be losing confidence in the earnings growth potential of this group. While the industry's earnings estimates for the current year fell 1.1% last year, they fell 5.7% for 2021.
Before we discuss some of the stocks of wireless devices that are well positioned to outperform the market due to their strong earnings outlook, let's take a look at recent stock market performance and the industry's valuation picture.
Industry lag sector, Trump's S&P 500
The Zacks wireless devices industry lagged behind the broader Zacks computer and technology systems sector, but outperformed the S&P 500 composite last year.
The industry is up 22.2% over the period compared to the S&P 500 and the sector's rally of 14.7% and 36.2%, respectively.
Annual price development
Current evaluation of the industry
Based on the 12-month trailing Enterprise Value to EBITDA (EV / EBITDA) ratio, which is the most appropriate multiple for valuing telecommunications stocks, the industry is currently trading at 27.78X compared to the S & S's 14.7X P 500. It is also above the sector's 12 month EV / EBITDA trailing 14.76X.
Over the past five years, the industry has hit a high of 29.46X and a low of 9.84X and a median of 17.24X, as the graph below shows.
Subsequent ratio of enterprise value to EBITDA (EV / EBITDA) after 12 months
3 Wireless Device Stocks To Watch Out For
Qualcomm Incorporated: Headquartered in San Diego, California, Qualcomm develops, manufactures, and markets integrated circuits (chips) and system software for wireless voice, data and GPS products. This stock of Zacks Rank # 3 (Hold) is up 56.6% over the past year, compared to an industry growth of 25.6%. The Zacks consensus estimate for the result for the current year has been revised upwards by 7.1% in the last 90 days. Qualcomm is one of the largest manufacturers of wireless chipsets based on baseband technology. Focused on maintaining leadership in the 5G, chipset and cellular markets with several technological achievements, the company has set new standards for the masses with a groundbreaking 5G chipset for low-cost smartphones. The full list of today's Zacks # 1 Rank (Strong Buy) stocks can be found here.
Price and consensus: QCOM
Ericsson: Ericsson was founded in 1876 and is headquartered in Stockholm, Sweden. The company is a leading provider of communications networks, telecommunications services and support solutions. This Zacks Rank # 3 stock is up 32.5% over the past 12 months. The Zacks consensus estimate for the result for the current year has been revised upwards by 9.8% in the last 90 days. The company is seeing healthy momentum in its business thanks to the R&D investments that have made it a leader in 5G. Ericsson benefits from 5G deployments in Northeast Asia and currently has 109 commercial 5G contracts with operators (59 of which will be publicly announced), including 61 live 5G networks in 32 countries.
Price and consensus: ERIC
Motorola Solutions Inc .: Chicago-based IL Motorola is a leading manufacturer of communications equipment with strong market positions in barcode scanning, wireless infrastructure equipment, and government communications. This stock of Zacks Rank # 3 is up 18.8% over the past three months. The Zacks consensus estimate for the result for the current year has been revised upwards by 0.9% in the last 90 days. As the world's leading provider of mission-critical communications products and services, Motorola has ensured a steady stream of revenue from this niche market. The communications equipment manufacturer intends to strengthen its position in the public safety arena by entering into strategic alliances with other players in the ecosystem.
Price and consensus: MSI
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