Communications stocks truly have been a mixed bag over the past few years. In fact, the split nature of the sector echoes that of the market as a whole.
Low-growth, large-cap value stocks generally have underperformed. Think infrastructure plays like Cisco Systems (NASDAQ:CSCO) or Juniper Networks (NYSE:JNPR), cellular provider AT&T (NYSE:T), or satellite operator DISH Network (NASDAQ:DISH).
Meanwhile, growth stocks and small-cap names have done well. Cambium Networks (NASDAQ:CMBM), with a market capitalization of $630 million, has been the best equipment stock of the past year, rising 178%. Twilio (NYSE:TWLO) and Pinterest (NYSE:PINS) both have more than tripled over the last twelve months, showing that communications stocks can soar on the back of growth whether they serve the front end or the back end.
It remains to be seen whether 2021 sees the long-awaited rotation from growth back to value for communication stocks and the market as a whole. Regardless, the sector does have some intriguing names for all investors and across multiple end markets. Here are seven of those potential winners:
- Ericsson (NASDAQ:ERIC)
- Ubiquiti (NYSE:UI)
- Netgear (NASDAQ:NTGR)
- Cable One (NYSE:CABO)
- Applied Optoelectronics (NASDAQ:AAOI)
- Infinera (NASDAQ:INFN)
- Snap (NYSE:SNAP)
8 Communications Stocks: Ericsson (ERIC)
I’ve been recommending ERIC stock for some time now and still see a bullish outlook for 2021 and beyond.
After all, we know that 5G (fifth-generation) wireless will be a worldwide catalyst for cellular equipment providers like Ericsson. And in a three-company market, Ericsson seems far and away the most likely big winner.
China’s Huawei is fighting uphill against political pressure from the U.S. and other western countries. Meanwhile, Nokia (NYSE:NOK) continues to flounder and appears to be trailing Ericsson in 5G deployment.
Ericsson seems set for years of growth. But at 17x the 2021 consensus earnings estimate, ERIC stock still isn’t priced as such. A 37% rally over the past year incorporates some of the company’s potential, but Ericsson stock should still have more gains ahead.
Ubiquiti stock isn’t cheap. But it shouldn’t be.
Simply put, this is one of the best businesses in tech. Ubiquiti’s networking products have gobbled up market share for years now, thanks to performance that is simply top of the line.
As a result, UI stock has been one of the best stocks in tech — or anywhere else. Since its 2011 initial public offering, UI has returned nearly 1,500%.
The next eight-plus years likely won’t see the same level of returns. In 2021, UI could struggle to match the 47% it gained in 2020. A 32x forward price-to-earnings multiple incorporates at least some of the good news.
Still, Ubiquiti’s end markets are expanding, as is its market share. That combination has made Ubiquiti stock a huge winner so far, and that trend should continue going forward.
Netgear is another networking play, albeit one that skews more to the value side than Ubiquiti. The well-known and (mostly) consumer-focused provider of routers, modems, and other equipment has some potential growth catalysts ahead.
Ever-increasing bandwidth demand for streaming video, gaming, and even applications like sports betting should drive higher revenue. Perhaps more importantly, that bandwidth demand should boost profit margins as consumers move toward higher-end products (and Netgear has among the best).
As always, there are risks. Competition is stiff, including tech giants Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN), the latter via its acquisition of Eero. NTGR stock looks cheap, but it generally always looks cheap. So do many fellow equipment manufacturers. Even accounting for the spin-off of Arlo Technologies (NYSE:ARLO), returns in Netgear stock have lagged the market.
Still, there’s an intriguing case here, and a 13x forward P/E multiple prices in little, if any, growth. At this point in the broad market’s trajectory, there are certainly worse plays on growing data demand than NTGR.
Cable One (CABO)
Another route to play data demand is to look at cable companies. But there are a few problems with that strategy.
First, thanks to industry consolidation, there simply aren’t that many choices in the U.S. One of them is Comcast (NASDAQ:CMCSA), but that company is dealing with cord-cutting pressure on its cable networks as well as pandemic-driven declines in theme park visitation. At the right price, CMCSA looked like a buy, but after a recent rally, the case there looks thinner.
That leaves the pure-plays. Charter Communications (NASDAQ:CHTR) is an intriguing pick, particularly with a recent pullback, but CABO stock shouldn’t be ignored. The smaller provider has been one of the best-managed business not just among communications stocks, but in the entire market.
An acquisition by Charter or Comcast could make sense at some point. And Cable One wisely is focusing on stickier and higher-margin data revenue, while letting video subscribers leave amid still-rising per-subscriber affiliate fees.
CABO isn’t cheap, particularly relative to net earnings. But with a 10% pullback over the last few sessions, it seems likely cheap enough.
Applied Optoelectronics (AAOI)
AAOI stock is not for the faint of heart. The company has disappointed for years now. Heavy reliance on Amazon turned into a significant risk when the e-commerce giant cut its orders, sending AAOI from 2017 highs briefly above $100 to the single digits by 2019. Another rally last year reversed quickly, as the stock dropped by more than half between August and November.
Meanwhile, Applied Opto remains unprofitable, and the optical networking space is notoriously competitive and difficult.
All that said, the AAOI story isn’t necessarily over. The company has returned to growth in 2020, with improved margins as well. Applied Opto has achieved a few wins with 400G transceivers, and that market should grow along with cloud demand going forward.
It’s worth repeating: this remains a high-risk play, particularly with a recent rally. But if the company finally can find solid footing, few communications stocks have the same potential upside.
Infinera is another optical networking play amongst communications stocks, with a slightly better story, and as a result a slightly higher valuation.
Infinera certainly isn’t a turnaround story in the way that Applied Opto is. In fact, the company has solid reach among major Internet service providers. And the company is moving to 800G transceivers, which can boost speeds without the need for telecom companies to lay additional fiber.
INFN stock has been a roll in recent months, and at least one analyst has raised valuation concerns. But the stock isn’t necessarily expensive against its potential, and a solid third quarter earnings report (including a surprise profit on an adjusted basis) provided a catalyst. With a pullback below $10, INFN has the potential to rally nicely from here as 2021 rolls on.
Coming into 2020, I thought SNAP stock had the potential to be one of the best growth stocks in the market. 2021 could be a bright year as well.
Certainly, this year’s performance is not likely to match last year’s 207% rally. But there’s still a case for upside — because from a broad standpoint, the story is still somewhat the same.
Snap is still adding users: daily active users rose 18% year-over-year in the third quarter. More importantly, it’s getting far better at monetizing those users, with ARPU (average revenue per user) climbing 28% in Q3.
There’s plenty of room for improvement on both fronts: ARPU across the user base is still less than $1 per month. And the nature of a platform business is that incremental revenue drops to the bottom line at huge margins.
Relative to near-term earnings, SNAP stock looks ridiculously expensive, at 219x this year’s consensus earnings per share estimate. But years of growth will bring that multiple down in a hurry over the long term. Rising forecasts of that growth should move SNAP stock higher before then.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.