The Zacks Computer - Networking industry participants’ performance is expected to get a boost from increasing focus on cloud computing, network security, big data and cloud storage amid the rapid use cases of AI technology. Players in this space are focused on capitalizing on the multi-billion-dollar AI infrastructure opportunity. 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. The Wi-Fi 7 upgrade cycle will also act as a catalyst. This will spur demand for innovative networking products, favoring prospects of prominent industry players like Cisco Systems, Inc. CSCO, NETGEAR, Inc. NTGR and RADCOM Ltd. RDCM. Weak global economic conditions, weak demand from telco and cable customers and volatile supply-chain dynamics continue to be concerning. Also, client inventory reduction efforts are affecting some participants' performances.
Industry Description
The Zacks Computer - Networking industry comprises companies that offer networking and Internet-connected products, including wireless (Wi-Fi 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 Opening Business Avenues: The growing clout of Smart Home and Internet-connected products such as Smart TVs, game consoles, High Definition (HD) 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, as well as 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, which favor growth prospects.
Rapid Deployment of 5G to Boost Growth Prospects: The success of the 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.
Wi-Fi 7 Upgrade Cycle 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 for connecting 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. The rollout of Wi-Fi 7 bodes well for the companies in this space.
Macroeconomic Turmoil is Concerning: Global macroeconomic weakness and volatile supply-chain dynamics are persistent concerns. Inflation could affect spending across small and medium-sized businesses globally, and uncertainty in business visibility could dent the industry’s near-term performance.
Zacks Industry Rank Indicates Bright Near-Term Prospects
The Zacks Computer - Networking Industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #25, positioning it in the top 10% of more than 246 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright 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 two to one.
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 Outperforms S&P 500 & Sector
The Zacks Computer – Networking industry has outperformed the S&P 500 Composite and the broader Zacks Computer and Technology sector in the past year.
The industry has gained 28% over this period against the broader sector’s rally of 12.4%. The S&P 500 has appreciated 15.6% over the same time frame.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month price-to-earnings ratio (P/E), which is a common multiple for valuing Computer – Networking stocks, the industry is currently trading at 20.12X compared with the S&P 500’s 21.53X. It is also below the sector’s forward-12-month P/E of 24.41X.
In the past five years, the industry traded as high as 20.15X and as low as 12.42X, with media being at 15.22X, as the charts below show.
Forward 12-Month P/E Ratio
3 Computer - Networking Stocks to Add to Portfolio
Cisco: Headquartered in San Jose, CA, the company offers identity and access, advanced threat, and unified threat management solutions.
CSCO is benefiting from solid demand for its AI infrastructure solutions, with orders worth more than $700 million at the end of the first half of fiscal 2025. It remains on track to surpass $1 billion in AI infrastructure orders in fiscal 2025. The increasing deployment of AI-powered robotics and industrial security augurs well for CSCO’s industrial Internet-of-Things business. In the first half of fiscal 2025, orders grew more than 40%, along with growth of more than 50% in the second quarter of fiscal 2025 alone.
Cisco’s security business is being driven by robust demand for both Cisco Secure Access and XDR. Both solutions, on a combined basis, have amassed more than 1,000 customers in the trailing 12 months. Each of the products roughly has one million enterprise users.
Product orders rose 29% year over year (11% organically, excluding Splunk) in the second quarter of fiscal 2025. Annualized Recurring Revenues (ARR) of $30.1 billion jumped 22% on a year-over-year basis, with product ARR growth of 41%. Remaining performance obligations at the end of the second quarter of fiscal 2025 were $41.3 billion, up 16% year over year, reflecting robust prospects.
At present, CSCO carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for fiscal 2025 earnings is pegged at $3.71 per share, improved from an estimate of $3.65 per share in the past 30 days. Shares have gained 28.7% in the past year.
Price & Consensus: CSCO
NETGEAR: Headquartered in San Jose, CA, NETGEAR is a leading provider of advanced, high-performance and premium networking technologies and Internet-connected products for consumers, businesses and service providers.
Strength in the NETGEAR for Business (“NFB”) segment and the premium products portfolio within the Connected Home (“CHP”) business bodes well. Driven by ongoing momentum for ProAV managed switch products (which grew in double digits year over year), revenues from NFB segment jumped 14.9% and 2.9% sequentially to $80.8 million in the fourth quarter of 2024. Efforts to expand Wi-Fi LAN business is another tailwind.
Moreover, it completed a successful destocking plan across CHP and NFB, leading to a $86 million reduction in inventory in 2024. This is expected to help the company align sell-in with sell-through with channel partners, thereby increasing revenue predictability. NTGR also witnessed a 25% spike in recurring services revenues in the quarter under review. The company generated $35 million of recurring revenues in 2024. It now has 556,000 recurring subscribers. Increasing subscriber revenues are essential for long-term financial stability and cash flow generation. NETGEAR is confident to retain a competitive edge in new product introductions, based on the Wi-Fi 6 and 7 standards.
However, management highlighted that within the NFB segment, though demand for its ProAV line of managed switches remains robust, it is witnessing lengthy lead times for supply. This is likely to result in lower shipping of these products in the first quarter, leading to a muted revenue performance.
At present, NTGR carries a Zacks Rank #2. The Zacks Consensus Estimate for 2025 bottom line is pegged at a loss of 75 cents per share, which improved from a loss of 91 cents in the past seven days.
Price & Consensus: NTGR
RADCOM: This Tel Aviv, Israel-based company specializes in providing cloud-native, automated service assurance offerings for telecommunication operators for 5G networks.
The strength of the company’s cloud and Gen AI-based assurance solution bodes well. The company remains focused on innovation, AI and automation, continually investing in research and development to strengthen its leadership in 5G assurance, expand its solution offerings and support operators in their transition to next-generation networks.
In the last reported quarter, RDCM posted non-GAAP earnings of 23 cents per share, surpassing the Zacks Consensus Estimate by 21.1%. Revenues in the quarter were a record $16.3 million, beating the Zacks Consensus Estimate by 5.6%. Total revenues jumped 16.1% year over year.
Driven by healthy momentum, RDCM has provided revenue guidance for 2025. It expects full-year 2025 revenue growth between 12% and 15%, with a midpoint of $69.2 million. This implies a 13.5% increase from 2024. For 2024, the company recorded revenues of $61 million, marking an 18.2% year-over-year increase and the fifth consecutive year of revenue growth and increased profitability.
RADCOM carries a Zacks Rank #2. The Zacks Consensus Estimate for the company’s 2025 earnings is pegged at 92 cents per share, indicating an increase of 10.8% year over year.
Price & Consensus: RDCM
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