As the pandemic continues to challenge the market, Argus will discuss their forecast for 2022 on Tuesday, December 14th at 2 pm Eastern Time.
Chicago, Illinois-November 30, 2021-Today, Zacks Equity Research discussed communications including Harmonic Inc. HLIT, Ooma, Inc. OOMA, and KVH Industries, Inc. KVHI.
Link: https://www.zacks.com/commentary/1832619/3-communication-stocks-set-to-beat-the-chip-shortage-blues
Due to supply chain disruptions and chip shortages, the Zacks Communications-component industry seems to be caught in uncertainty. Large-scale investment supports the transition to 5G. High R&D and raw material costs have further eroded profit margins. In addition, the tense Sino-US trade relationship and the return of a new variant of the coronavirus also present serious prospects for the future.
However, in the long run, Harmonic, Ooma, and KVH Industries may benefit, because the pent-up demand for seamless connectivity for scalable infrastructure rises as the speed of 5G deployment accelerates and the Internet of Things is widespread.
Zacks Communications-The component industry mainly includes companies that provide a variety of telecommunications products and services to develop scalable network architectures, demand-driven video solutions and broadband access equipment. These include various building blocks, such as small cells, routers, and antennas, which are integrated into equipment and facilities and then used by service providers to build networks for end users.
The product portfolio includes fiber and copper connection products, hybrid fiber coaxial equipment, edge routers, metro Wi-Fi, storage and distribution equipment for cable TV operators, modems, EMTA (embedded multimedia terminal adapters), gateways, set-top boxes, Analog and digital microphones, audio processors, glass substrates for LCD TVs and notebook computers, ceramic substrates for mobile and laboratory filtration products.
Chip shortage hurts operations: With the exponential growth of mobile broadband traffic and home Internet solutions, digital sustainability has become the norm today due to the increasing trend of working from home, and users' demand for coverage speed and quality has doubled increase. This has led to a large demand for advanced network architectures, which in turn forced service providers to spend more on routers and switches, as operators aim to upgrade their networks to support the surge in home data traffic.
In addition, network adjustments and optimizations are constantly required to maintain excellent performance standards, which creates a demand for the most advanced wireless products and services. However, continued chip shortages and the uncertainty of supply chain interruptions outside of semiconductors have weakened most companies' manufacturing operations, leading to shortened production plans.
This in turn has led to a serious imbalance between supply and demand, as the industry is facing shortages of basic fiber materials, transportation delays, and shortages of containers and other raw materials, affecting the expansion and deployment of new broadband networks. The extended delivery time of basic components has a negative impact on delivery schedules and increased costs, prompting multiple industry groups to urge the government to take immediate corrective measures.
As demand-driven business models gain momentum, profit issues persist: fiber optic networks are critical to the continuous deployment of small cells that bring networks closer to users and complement macro networks to provide wide coverage. Telecommunication service providers are increasingly inclined to use fiber optic cables to meet the growing demand for cloud-based business data and video streaming services. In addition, fiber-optic cable networks are critical to the backhaul and last-mile local loop required for wireless service providers to deploy 5G networks. The importance of using advanced routers to transfer data packets from one network to another has become increasingly prominent, and the most advanced antenna system is still an important architectural component for seamless connection.
By providing simple programmability and flexible automation, telecommunications companies are helping their customers move from economies of scale to a demand-driven operating model. The convergence of network technologies requires large investments from traditional operators (telecommunications and cable) and cloud service providers. Although these investments will ultimately help minimize service delivery costs to support broadband competition and wireless intensification, short-term profitability has been largely compromised.
Scalable infrastructure brings seamless connectivity: Consumer demand for faster Internet speeds and more capacity continues to grow at an ever-increasing rate, mainly due to the increase in video consumption. The widespread popularity of cloud network solutions has further led to an increase in storage and computing on the virtual plane. Since consumers and businesses are using the Internet, there is a huge demand for high-quality network equipment.
In addition, the demand for faster data transmission is driving the development of optical networks. The technology provided by industry players enables customers to cost-effectively manage this exponential bandwidth development through stable investments in the most advanced technologies. These include DOCSIS (Cable Data Service Interface Specification), DSL (Digital Subscriber Line) and next-generation PON (Passive Optical Network) platforms, which enable service providers to provide users with the highest bandwidth through any physical connection.
In addition, some companies combine network-based video transcoding, packaging, storage, and compression technologies to provide new IP video formats and home gateways for connected devices inside and outside the home, and provide multiple ways to provide services.
Zacks Communications-The component industry is located in the broader Zacks computer and technology field. It is ranked 208th in the Zacks industry and is the bottom 18% of the 250+ Zacks industry.
The Zacks industry ranking of the group, which is basically the average of the Zacks rankings of all member stocks, indicates a bleak outlook. Our research shows that the top 50% of the Zacks industry outperforms the bottom 50%, a ratio of more than 2 to 1. The positioning of the industry in the bottom 50% of the Zacks ranking is the result of negative earnings and the overall outlook for the constituent companies.
Before we introduce a few communication component stocks that are expected to outperform the market based on strong earnings prospects, let us first take a look at the recent stock market performance and valuation chart of the industry.
In the past year, the Zacks Communications-Infrastructure industry lags behind the S&P 500 Index and the broader Zacks Computer and Technology industry.
Compared with the S&P 500 index and the industry's rise of 27.6% and 29% respectively, the industry has risen 15% during this period.
Based on the price-to-book ratio (P/B) of the past 12 months, the current trading price of the industry is 3.63 times, while the S&P 500 index is 7.03 times. It is also lower than the industry's price-to-book ratio of 9.84 times in the past 12 months.
In the past five years, the industry’s price-to-earnings ratio was as high as 4.21 times and as low as 1.31 times, with a median value of 2.86 times.
Harmonic Inc.: Headquartered in San Jose, California, Harmonic is a leading provider of virtualized wired access and video transmission solutions that enable media companies and service providers to provide consumers worldwide with ultra-high-quality video streaming and Broadcast service. The stock has risen 64.2% in the past year. In the past 90 days, Zacks’ consensus estimates of current and next fiscal revenue have been revised upwards by 23.1% and 8.5%, respectively.
Harmonic's video business is benefiting from 5G recycling projects and satellite-to-terrestrial IP fiber migration. The company has made steady progress in CableOS products, with more than 3.9 million cable modems in operation and 68 commercial deployments.
The management can also effectively deal with supply chain constraints through its leading edge in cable television broadband virtualization and a solid foundation in software and video subscription services. Harmonic ranks first in Zacks (Strong Buy). You can view the full list of today's Zacks #1 Rank stocks here.
Ooma Inc.: Ooma is headquartered in Sunnyvale, California, and provides cloud-based communication solutions, smart security and other connectivity services. Its intelligent software as a service and unified communications as a service (UCaaS) platforms act as hubs for seamless communications and network infrastructure applications. The stock has risen 24.5% in the past year. The Zacks consensus estimate of current and next fiscal revenue has been revised up by 87% in the past year.
Ooma focuses on small business customers. Its interface is simple and easy to use. It can quickly implement integrated business connectivity solutions without IT support, which may drive healthy growth. According to reports, its low-cost fixed-line network, which provides faster emergency access services, is expected to gain traction. At the same time, it may be fruitful to increase corporate market penetration through customized products. Ooma currently has a Zacks Rank #3 (remaining).
KVH Industries, Inc.: Located in Middletown, Rhode Island, KVH Industries is a leading supplier of mobile connectivity and inertial navigation systems for defense and commercial applications. In the past four quarters, this Zacks ranked second (buy) stock has delivered an average of 50% earnings surprises.
KVH Industries is driving growth and profit margin expansion by launching new products and migrating users to high-throughput satellites. It aims to decisively enter the autonomous driving transportation market with a strong balance sheet position and zero debt. If KVH Industries manages to effectively alleviate the supply chain difficulties, there may be room for further expansion of cash flow.
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Want the latest advice from Zacks Investment Research? Today, you can download the 7 best stocks for the next 30 days. Click to get this free report Harmonic Inc. (HLIT): Free Stock Analysis Report KVH Industries, Inc. (KVHI): Free Stock Analysis Report Ooma, Inc. (OOMA): Free Stock Analysis Report Read this on Zacks.com Click here for the article. Zacks Investment Research
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