Despite macroeconomic uncertainties, the communication/networking industry is well-positioned for growth due to the growing demand for connectivity, digital transformation, and cloud solutions.
Given this backdrop, it could be wise to invest in fundamentally strong software stocks Extreme Networks, Inc. (EXTR), Ceragon Networks Ltd. (CRNT), and Gilat Satellite Networks Ltd. (GILT), given their high growth potential.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the communication/networking industry is well-positioned for growth.
In light of the pandemic-induced shift to remote work and virtual interactions, the software industry is adapting to meet the increasing demand for strong networking and communication infrastructure.
Simultaneously, global enterprises are focusing on improving digital capabilities, streamlining operations, and addressing heightened requirements for productivity and customer management, which has boosted the demand for cutting-edge networking/communication solutions.
The Biden Administration has introduced the Public Wireless Supply Chain Innovation Fund, allocating $1.50 billion to promote the development of open and interoperable networks. This initiative aims to lead the way in implementing open and interoperable 5G radio access networks, fostering technological advancement in the United States.
Gartner's data reveals that global spending on communication services for the current year is projected to reach $1.45 trillion, signifying a 1.8% rise over the prior year. The subsequent year is expected to see spending at $1.50 trillion, marking a 3.3% year-over-year increase.
The accelerated deployment of 5G is expected to propel the demand for networking software and equipment. Moreover, security concerns arising out of investments in cloud-based applications and hybrid work are expected to drive the demand for network security solutions.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology - Communication/Networking picks, beginning with the third choice.
Stock #3: Extreme Networks, Inc. (EXTR)
EXTR provides software-driven networking solutions worldwide. It designs, develops, and manufactures wired, wireless, and software-defined wide area-network infrastructure equipment.
EXTR’s revenue grew at a CAGR of 11.5% over the past three years. Its levered FCF grew at a CAGR of 16.8% over the past three years. Moreover, its EBITDA grew at a CAGR of 97.5% over the past three years.
In terms of the trailing-12-month gross profit margin, EXTR’s 57.50% is 16.7% higher than the 49.27% industry average. Likewise, its 13.16% trailing-12-month levered FCF margin is 76.2% higher than the industry average of 7.47%. Furthermore, the stock’s 75.40% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.16%.
EXTR’s total net revenues for the fourth quarter ended June 30, 2023, increased 30.8% year-over-year to $363.90 million. The company’s non-GAAP operating income increased 136.8% year-over-year to $63.40 million. Its non-GAAP net income increased 123.4% year-over-year to $43.89 million. Also, its non-GAAP net income per share came in at $0.33, representing an increase of 120% year-over-year.
Street expects EXTR’s EPS and revenue for the quarter ended September 30, 2023, to increase 58.1% and 16.6% year-over-year to $0.32 and $347.04 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 37% to close the last trading session at $21.03.
EXTR’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Quality. Within the Technology - Communication/Networking industry, it is ranked #4 out of 46 stocks. To see EXTR’s Value, Momentum, Stability, and Sentiment ratings, click here.
Stock #2: Ceragon Networks Ltd. (CRNT)
Headquartered in Rosh HaAyin, Israel, CRNT provides wireless transport solutions for cellular operators and other wireless service providers. Its solutions use microwave and millimeter wave radio technology to transfer telecommunication traffic between base stations, small/distributed cells, and service provider's network.
On October 24, 2023, CRNT announced its acquisition of Siklu, a multi-Gigabit wireless connectivity provider. This move is expected to boost CRNT’s revenue by $25-$29 million in 2024 and improve gross margins.
CRNT’s CEO Doron Arazi predicts that the Siklu acquisition will accelerate growth, improve financial metrics, and expand its market share in millimeter wave bands. They also plan to enter PtMP technology and Fixed Wireless Access markets.
On May 16, 2023, CRNT announced a multi-year contract with the City of Cincinnati to upgrade its public safety network for up to $4.2 million. The upgrade plan includes a multi-technology, multi-service solution for modernized backhaul and routing, along with long-term maintenance and support.
CRNT’s revenue grew at a CAGR of 7.4% over the past three years. Its total assets grew at a CAGR of 2.7% over the past three years. Moreover, its EBITDA grew at a CAGR of 203% over the past three years.
In terms of the trailing-12-month Capex/Sales margin, CRNT’s 3.26% is 35.4% higher than the 2.41% industry average. Likewise, its 1.08x trailing-12-month asset turnover ratio is 75.1% higher than the industry average of 0.62x.
For the second quarter ended June 30, 2023, CRNT’s revenues increased 21.9% year-over-year to $86.15 million. Its non-GAAP gross profit increased 41.2% year-over-year to $30.40 million. The company’s non-GAAP operating income rose significantly year-over-year to $7.36 million.
In addition, its non-GAAP net income came in at $4.40 million, compared to a non-GAAP net loss of $2.47 million in the year-ago quarter. Also, its non-GAAP net income per share came in at $0.05, compared to a non-GAAP net loss per share of $0.03 in the prior-year quarter.
Analysts expect CRNT’s revenue for the quarter ending September 30, 2023, to increase 7.5% year-over-year to $84.55 million. Likewise, its EPS for the quarter ending March 31, 2024, is expected to increase 25% year-over-year to $0.05. Over the past six months, the stock has declined 9.4% to close the last trading session at $1.64.
CRNT’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Growth, Value, and Sentiment. It is ranked #2 in the same industry. Click here to see CRNT’s Momentum, Stability, and Quality ratings.
Stock #1: Gilat Satellite Networks Ltd. (GILT)
Headquartered in Petah Tikva, Israel, GILT and its subsidiaries provide satellite-based broadband communication solutions in Israel, the United States, Peru, and internationally. It operates in three segments: Satellite Networks, Integrated Solutions, and Network Infrastructure and Services.
On August 1, 2023, Satcom Direct and GILT partnered to develop ultra-low profile electronically steered antennas (ESA) optimized for OneWeb's low earth orbit (LEO) constellation, enhancing in-flight connectivity. These antennas, optimized for OneWeb's LEO constellation, will be available from 2025, improving connectivity for business, government, and defense customers.
GILT’s CEO, Adi Sfadia, expressed his honor and excitement to partner with Satcom Direct to develop a next-generation ESA to meet the connectivity demands of business aviation, emphasizing GILT’s expertise and global IFC leadership in commercial aviation.
On June 20, 2023, GILT announced that a Tier 1 global telecommunications operator selected them for satellite connectivity services to support mission-critical IoT telemetry across remote sites for a major utility company in Western Europe, using GILT's SkyEdge II-c platform.
GILT’s EBITDA grew at a CAGR of 30.1% over the past three years. Its EBIT grew at a CAGR of 63.7% over the past three years. Moreover, its revenue grew at a CAGR of 4.5% over the past three years.
In terms of the trailing-12-month EBIT margin, GILT’s 8.58% is 74.8% higher than the 4.91% industry average. Its 13.27% trailing-12-month EBITDA margin is 44.6% higher than the 9.17% industry average. Likewise, its 5.49% trailing-12-month Return on Total Capital is 124.6% higher than the industry average of 2.44%.
GILT’s revenues for the second quarter ended June 30, 2023, increased 21.9% year-over-year to $67.59 million. Its non-GAAP gross profit increased 29.1% year-over-year to $25.63 million. The company’s non-GAAP operating income increased 152% year-over-year to $6.06 million.
In addition, its non-GAAP net income rose 247.6% year-over-year to $4.93 million. Its non-GAAP EPS came in at $0.09, representing an increase of 200% year-over-year. Also, its adjusted EBITDA came in at $9.18 million, representing an increase of 73.5% year-over-year.
For the quarter ended September 30, 2023, GILT’s revenue is expected to increase 12.6% year-over-year to $67.94 million. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 13.3% year-over-year to $0.34. Over the past six months, the stock has gained 18.5% to close the last trading session at $5.76.
It’s no surprise that GILT has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and Sentiment and a B for Value. Within the Technology - Communication/Networking industry, it is ranked first. In total, we rate GILT on eight different levels. Beyond what we stated above, we also have given GILT grades for Momentum, Stability, and Quality. Get all the GILT ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
EXTR shares were trading at $21.01 per share on Wednesday morning, down $0.02 (-0.10%). Year-to-date, EXTR has gained 14.75%, versus a 11.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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