The players in the Zacks Communication-Network Software industry are suffering from challenging macroeconomic conditions and steep inflation. Small and medium businesses have postponed capital expenditure on infrastructure construction due to higher interest rates and inflation, which does not bode well for industry players. Nevertheless, industry players like this Weave communication WEAV and Ribbon communication RBBN is benefiting from ongoing digitalization efforts, including a shift to cloud computing and the rapid rollout of 5G-based networks. The strong demand for network security benefits industry participants as a secure environment is required to run cloud-based applications. Industry players are using AI and machine learning to develop security solutions to provide better threat protection systems.
Industry description
The Zacks Communication-Network Software industry includes companies that provide software solutions to support cloud, on-premise and hybrid environments, communications technology solutions including broadband and Voice Over Internet Protocol, digital communications services delivered as software-as-a-service and telecom solutions, to support the proliferation and deployment of 5G and 6G networks of the future. There are a few companies offering solutions based on the Open Radio Access Network standard. Others provide wireless connectivity solutions for mission-critical industrial Internet applications and services. These companies’ solutions support a variety of industries, including telecommunications, technology, industrial, government, retail, finance, gaming and education.
3 trends shaping the future of the communications network software industry
Increased adoption of cloud-based solutions: Rapid digitalization, driven by the disruption caused by the pandemic, has increased the demand for cloud-based applications, virtualized software and container-based software. Applications are developed in the cloud, creating opportunities and simultaneously challenges for industry participants in terms of performance and security. Increasing cyber attacks, including Distributed Denial of Service attacks and attacks using malware via the Transport Layer Security and Secure Sockets Layer protocols, are redefining the cyber threat landscape. Companies are spending more on cloud-based security solutions. Furthermore, the software-defined approach is increasingly preferred over older hardware-centric models due to the need for flexibility.
Growing importance of automation tools: The continued rapid transition to the cloud has increased the importance of automation tools. Enterprises are adopting automated tools to deploy and operate security and application services. This improves performance monitoring and detection, reports security anomalies and reduces overall costs.
Rapid evolution of 5G and 6G networks: Industry participants are benefiting from a continued increase in demand for data-intensive bandwidth and the need for reduced latency associated with smartphones, tablets and machine-to-machine communications. The proliferation of data centers, big data, cloud-based services, streaming media content and IoT are key enablers. The rapid rollout of 5G networks creates enormous growth opportunities for telecom providers using solutions offered by industry participants.
Zacks Industry Rank Indicates Poor Outlook
The Zacks Communication-Network Software industry is housed within the broader Zacks Computer And Technology sector. It has a Zacks Industry Rank #165, which puts it in the bottom 34% of the 250+ Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all member stocks, suggests a bleak near-term outlook. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a more than two-to-one margin.
Given the bleak outlook, there are a handful of stocks worth watching in this challenging sector. But before we present these stocks, it’s worth looking at the sector’s shareholder returns and current valuation.
Industry outperforms sector and S&P 500
The Zacks Communication-Network Software industry has outperformed the Zacks S&P 500 composite and its sector over the past year.
The sector has risen 35.1% in the period, compared with the Zacks Computer and Technology sector’s return of 32.3% and the S&P 500’s gain of 25.6%.
Current valuation of the sector
Based on 12-month EV/Sales, a commonly used multiple for valuing network software companies, we see that the sector is currently trading at 2.74x, compared to the S&P 500’s 5.43x and the sector’s 7.61x .
Over the past three years, the sector has traded as high as 2.8x and as low as 1.48x, with a median of 1.99x, as the charts below show.
2 stocks to watch now
Weaving: This Zacks Rank #2 (Buy) company is a leading provider of all-in-one customer experience and payment software platforms for small and mid-sized healthcare practices. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Weave benefits from growing adoption of its solution, which increases average revenue per user. The total addressable market in the United States is over $7 billion, including dental, optometry, veterinary and specialty medical verticals.
Shares of Lehi, UT, Weave are up 41.3% in the past twelve months. The Zacks Consensus Estimate for WEAV’s 2024 earnings has held steady at 4 cents per share over the past 30 days.
Ribbon: This Zacks Rank #3 (Hold) company benefits from a growing enterprise customer base, driven by the modernization of communications infrastructure and the use of public cloud platforms. The growing footprint in the federal and defense domain is positive.
However, weakness in Eastern Europe due to the ongoing war in Ukraine is a headwind.
Plano, TX-based Ribbon is up 43.8% in the past 12 months. The Zacks Consensus Estimate for RBBN’s 2024 earnings has held steady at 21 cents per share over the past 30 days.
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Weave Communications, Inc. (WEAV): Free Stock Analysis Report
Ribbon Communications Inc. (RBBN): Free Stock Analysis Report
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