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The Zacks Computer - Networking  industry includes providers of networking and Internet connected products such as wireless (WiFi and LTE), Ethernet and powerline, with a focus on reliability and ease-of-use.

Some of the companies also provide business and mission-critical Internet of Things (IoT) solutions and services to help customers create next-generation connected products with high levels of security, relentless reliability and assured performance.

Increased focus on cloud computing and cloud storage has set the industry on growth trajectory.

Here are the three major themes in the industry:

  • The industry is characterized by brisk technological change, rapidly progressing products, high-speed connectivity, low latency, and evolving industry standards. The advancements in areas like IoT, artificial intelligence ("AI"), machine learning ("ML") and increase of cloud applications are creating growth opportunity for the industry players.
  • With rapid growth in video and other bandwidth-intensive applications, the industry participants are making considerable investments in LTE, broadband and fiber in order to provide additional capacity and ramp up Internet and wireless networks. The impending 5G boom is likely to propel the industry to newer heights. The success of 5G technology hinges on substantial investments to upgrade infrastructure in the core fiber backhaul network to support anticipated growth in data services. This bodes well for the industry players.
  • Nevertheless, the ongoing trade war between the United States and China has created an uncertain environment that is not conducive for investments. Moreover, foreign exchange volatility, sluggishness in global economic growth and shift in consumers buying patterns is likely to dampen growth prospects of the industry participants.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer - Networking industry is housed within the broader Zacks Computer and Technology  sector. It carries a Zacks Industry Rank #87, which places it in the top 34% of more than 257 Zacks industries.

The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry's positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group's earnings growth potential. In the past year, the industry's earnings estimates for the current year have increased 6.7%.

Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.

Industry Beats S&P 500 and Sector on Shareholder Returns

The Zacks Computer - Networking industry has outperformed its own sector and the Zacks S&P 500 composite over the past 12 months.

The industry has gained 5.3% in the past 12 months against its sector's decline of 1.5%. Meanwhile, the Zacks S&P 500 composite has increased 0.9%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer networking stocks, we see that the industry is currently trading at 19.02X compared with the S&P 500's 17.26X. It is also above the sector's forward-12-month P/E of 18.91X.

Over the past five years, the industry has traded as high as 21.40X, as low as 11.84X and at the median of 14.93X, as the chart below shows.

Bottom Line

Increased focus on cloud computing, big data and cloud storage will continue to aid revenue growth for the industry participants. However, sluggishness in global economic growth and shift in consumers buying patterns are likely to act as dampeners.

Here, we present two stocks carrying a Zacks Rank #2 (Buy) that is well positioned to gain amid the prevailing challenges. There are also a couple of stocks with a Zacks Rank #3 (Hold) that investors could hold on to.

You can see  the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

NETGEAR, Inc.  (NTGR): This provider of networking, storage and security solutions carries a Zacks Rank #2.

Digi International Inc.  (DGII): This provider of business and mission-critical Internet of Things (IoT) products and services carries a Zacks Rank #2. The company has a long-term expected EPS growth rate of 14.5%.

Cisco Systems, Inc.  (CSCO): The IP-based networking company carries a Zacks Rank #3. It has a long-term expected EPS growth rate of 6.3%.

Extreme Networks, Inc.  (EXTR): The company offers a next generation of switching solutions that meet the increasing needs of enterprise local area networks internet service providers and content providers. It has a Zacks Rank #3 and a long-term expected EPS growth rate of 14%.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, wouldn't you like to know about our 10 finest buy-and-holds for the year?

From more than 4,000 companies covered by the Zacks Rank, these 10 were picked by a process that consistently beats the market. Even during 2018 while the market dropped -5.2%, our Top 10s were up well into double-digits. And during bullish 2012 - 2017, they soared far above the market's +126.3%, reaching +181.9%.

This year, the portfolio features a player that thrives on volatility, an AI comer, and a dynamic tech company that helps doctors deliver better patient outcomes at lower costs.

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NETGEAR, Inc. (NTGR): Free Stock Analysis Report

Extreme Networks, Inc. (EXTR): Free Stock Analysis Report

Digi International Inc. (DGII): Free Stock Analysis Report

Cisco Systems, Inc. (CSCO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of NASDAQ, Inc.

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