In this article we present the 10 best communication equipment / 5G stocks to buy now. Communications equipment powers the global connectivity, which is thriving on the back of rising internet penetration, social media use, e-commerce and cloud computing. You can skip our detailed discussion of the reasons of investing in communication stocks and read 5 Best Communication Equipment /5G Stocks to Buy Now.
The technology revolution is spreading rapidly worldwide, with no slowdown in sight, as 47% of the world’s population still remains without the internet. Communications equipment lies at the center of this connectivity revolution. Every individual or business in the world that is using some kind of connectivity medium to connect with others is a consumer of the communications equipment industry. The communications equipment industry makes all kinds of devices that make it possible for us to connect with others — routers, public switches, analog switches, transmission equipment, optic fiber, mobile devices, LAN devices and wires. According to CSIMarket, the communications industry’s revenue growth as of the end of the fourth quarter of 2020 jumped about 1217% on a year-over-year basis, above the industry average. Sequentially, revenue grew by 21.54%. The industry achieved the highest revenue growth within the technology sector.
Growth Catalysts for Communications Equipment Stocks
A report by ResearchAndMarkets report titled “Communications Equipment – Global Market Outlook” estimates that the global communications equipment market is expected to reach $2,231.18 billion by 2027, growing at a CAGR of 17.8%. The key drivers for the industry are cellular stations and a growing demand of next-generation equipment for 5G networks.
Another key driver of growth in communications equipment stocks is the dramatic rise of smartphone connectivity. People worldwide prefer to buy smartphones to remain connected with their friends and family. As the usage of social media apps like Tic Toc, Facebook, Twitter and Instagram reaches record levels, the demand for telecom equipment will increase. The global telecom equipment market is expected to rise at a CAGR of 11.23% during the 2019 through 2025. Telecom equipment includes home networking devices, carrier IP telephony, microwave transmission & mobile backhaul, mobile radio access network, optical transport, routers & carrier ethernet switches, and wireless packet cores.
Defense Sector
The defense sector is also a major customer of communications equipment companies. As militaries around the world race to update their technology, the demand for the communication devices will rise. According to a report, the defense communications equipment market is expected to grow at 10% annually from 2019 to 2029.
Emerging Markets
One of the biggest markets for communications equipment is Asia and Africa, where internet penetration is rising and governments need telecom equipment for large infrastructure projects. Increasing buying power, interest in smartphones and other technology items are also fueling this growth.
5G Revolution
But the North American market is also ripe for growth. North America has the biggest market share in the telecom equipment market, reaching a value of $66.38 billion. The market is expected to register a CAGR of 10.25% through 2025. 5G has been the biggest reason of this expected growth, as U.S. will be one of the pioneers of the 5G revolution that will eventually reach emerging markets.
Accompanying the technology revolution is volatility in financial markets. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Communications equipment companies in the U.S. will the biggest beneficiaries of the upcoming 5G boom, as they export technology and connectivity equipment across the globe. Data shows that telecommunications equipment exports from the U.S. reached about $35.79 billion in 2019.
EvgeniiAnd/Shutterstock.com
Let’s start analyzing the 10 best communication equipment stocks in an ascending order. Our ranking criteria is based on financial health, growth catalysts and hedge fund sentiment around top communications equipment companies in the United States.
Illinois-based Cambium wireless technology systems for companies, including enterprise Wifi, switching solutions, IoT systems, wireless broadband systems and networking technologies. In October, Cambium shares gained value after the company raised its guidance. Cambium now expects GAAP revenues of $73 million, versus its previous outlook of $64 million – $67 million. The company said a strong demand for both fixed wireless broadband products and cloud-powered enterprise Wifi solutions triggered the hike.
Cambium ranks 10th on the list of 10 best communication equipment stocks to buy now, as 6 hedge funds tracked by Insider Monkey reported owning positions in the company, as of the end of the third quarter.
Sweden-based Ericsson is a communications equipment and telecom giant, having a market cap of $36 billion. The company offers products and services for telecom operators, governments and software companies. It sells IP networking equipment, mobile and fixed broadband, operations and business support services, cable television, IPTV and video systems. Ericsson is one of the leaders in the 5G market, mainly because of its sterling multiple-input and multiple-output, or MIMO, technology.
Israel Englander’s Millennium Management is one of the 23 hedge funds having stakes in Ericsson as of the end of the third quarter. The fund owns 1,328,328 shares of the company, worth $14.46 million.
Calix stands 8th on the list of 10 best communications equipment / 5G stocks to buy now. The California-based company provides systems and devices for unified access networks and smart premises systems. In October, the stock rallied about 11% after the company posted better-than-expected Q3 results. Revenue in the quarter jumped 31.4% year over year to $150.5 million, while adjusted gross margins came in at 51.5%, versus a guidance of 48% – 50% range. In the fourth quarter, the company expects a revenue of $157 million to 161 million, way ahead of the consensus of $134.6 million.
A total of 24 hedge funds tracked by Insider Monkey held long positions in Calix entering the fourth quarter, up from 17 funds a quarter earlier.
Jim Simons’ Renaissance Technologies is one of the 28 hedge funds having stakes in Colorado-based EchoStar, which provides satellite communication and internet services. The hedge fund owns 3,810,901 shares of the company, worth $94.85 million. In November, the company smashed the Wall Street estimates for its Q3 results, posting a revenue of $473.5 million, $10.45 million higher than the forecasts. Adjusted EBITDA in the period jumped 9% to $166.7 million. Echostar shares are down over 11% in the last 6 months.
Steel City Capital outlined its bullish SATS thesis in its 2020 Q3 investor letter:
The company’s business is very simple – it derives the vast majority of its revenue from the sale of satellite-based broadband internet services to consumers and enterprises across the Americas. As of 6/30/2020, SATS had 1.5 million subscribers, of which 1.2 million are located in the U.S. To a lesser extent, the company generates revenue from the sale of equipment to government and commercial customers.
The average consumer is unlikely to be familiar with SATS offering. While more than 100 million U.S. households have broadband internet access, EchoStar and its main competitor, ViaSat, only serve a combined 1.8 million subscribers. Most American households rely on terrestrial service from cable or fiber. The small minority of households that rely on satellite connectivity do so because it is too costly to run a terrestrial line to their location. These households tend to be located in geographies with very limited population density. Specifically, more than half of SATS consumer subscribers are located in areas with five or fewer houses per square kilometer. In areas like this, it just doesn’t make sense for the local cable company to run a line to the house – they’ll never earn an adequate return on their investment.
SATS is currently valued at ~3.5x EV/EBITDA (MRQ annualized) and has reasonable growth prospects ahead of it. Specifically, the company will launch its Jupiter 3 satellite in the second half of 2021, resulting in a combination of additional subscribers and the availability of higher speed and capacity for existing customers. The new satellite should begin contributing to profitability sometime in 2022. In addition to its core satellite business, the company owns a grab bag of other assets whose value could be monetized in the future. The most interesting are the S-Band spectrum licenses being used to develop new commercial service offerings (i.e. Internet of Things).
At 3.5x EV/EBITDA, SATS valuation is an outlier in the satellite communication industry. Its closest North American peer – ViaSat – currently trades at 8.0x EV/EBITDA, consistent with its historical premium. The reasons for this premium confound me – SATS is the clear leader in North America (1.2 million subs vs. 600,000 subs) and has far less exposure to the in-flight connectivity business which has been battered by the pandemic. As another point of reference, a consortium of private equity investors acquired European-based Inmarsat in 2019 at an implied EV/EBITDA multiple of ~9.0x.
SATS is also an outlier with respect to the strength of its balance sheet. The company carries no net debt, with its $2.4 billion cash balance completely offsetting outstanding borrowings. Comparatively, ViaSat’s net leverage sits around 3.75x. It is utterly insane that EchoStar’s lower quality competitor carries leverage at a level fully in excess of EchoStar’s total valuation.
In the absence of accretive investment opportunities, the company could simply repay debt, reducing its interest burden by $160 million annually. With current run-rate EBITDA of $660 million and maintenance capital expenditures in the realm of $400 million, SATS is poised to generate in excess of $250 million of annual cash flow if it does nothing else but repay its outstanding debt. And as a reminder, EBITDA should begin to grow in 2022, following the launch of the Jupiter 3 satellite. At today’s market capitalization of ~$2.4 billion, SATS offers a compelling free cash flow yield slightly in excess of 10%. Considering the company’s leading market position in an effective duopoly, high barriers to entry in the markets it serves (low density rural areas), good prospects for growth, and recurring revenue streams, SATS is a compelling bargain in today’s low interest rate world.”
Ciena is a Maryland-based communications equipment company that makes network switches, optimal network devices, routing platforms and undersea devices for telecommunications industry and Cloud companies. In December 2020, Ciena stock price target was hiked by B. Riley Securities analyst Dave Kang to $51.50 from $46. The firm kept a Neutral rating on the shares following the company’s fiscal Q4 results which missed the Wall Street’s estimates by $0.05.
Of the 816 hedge funds tracked by Insider Monkey, 29 were bullish on Ciena entering the fourth quarter, down from 32 funds a quarter earlier.
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Disclosure: None. 10 Best Communications Equipment Stocks To Buy Now is originally published at Insider Monkey.
