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Industry Analysis: Wireless Networking
Value Line's Wireless Networking Industry is a collection of companies that facilitate mobile communications and data management. They develop software, manufacture devices and equipment, build infrastructure, and provide services to the fast-expanding wireless sector. Many companies within the Telecommunications Services and Telecommunications Equipment industries develop new wireless solutions and are customers of these businesses. Given the rapid pace of change and intense competition in the industry, it’s probably best that only aggressive investors, focused on short-term gains, consider a commitment.
The capital budget plans of telecom service providers and equipment makers is a critical variable that determines the Networking Industry’s near-term performance. In a weak macroeconomic environment, these customers will work down existing inventories and be cautious about placing new orders. When commercial and consumer demand for products and services strengthens, especially for high-end offerings, spending on equipment and infrastructure will notably ramp up. Managers must be keen observers of end-market trends.
Wireless solutions are popular, and the sector is in growth mode. Consumers have found mobile devices (e.g., smartphones) desirable for voice communication and data retrieval. Business customers have also adopted such devices, and utilized high-end equipment and infrastructure (amplifiers, antennas, server software) to satisfy their data collection and management requirements. Despite short-term volatility, historically, demand for networking has tracked higher over the long term.
Driving demand for networking devices and equipment are advances in infrastructure. The original, or first-generation (1G), infrastructure that delivered simple voice service was based on analog technology. Second-generation (2G) networks were digital, providing improved service. 3G systems offered more robust voice and data capabilities, including picture, music, video and ring tone downloads.
In the United States, digital technology has progressed from the second-generation solution, TDMA (time division multiple access), to CDMA (code division multiple access) to CDMA2000 to W-CDMA, a third-generation wide-band version of CDMA that is compatible with GSM (global system for mobile communication). GSM covers 80% of the global wireless market. Networking companies have had to keep up with this technology progression to stay competitive.
Yet another advanced infrastructure development is under way, that of 4G. LTE, or Long-Term Evolution, is an economical upgrade of 3G technology. Also, a capital-intensive, long-distance, 4G network is under construction. It’s called WiMax (worldwide interoperability for microwave access), an enhanced long-distance version of short-haul wireless fidelity (a.k.a., WiFi).
The wireless networking industry is competitive, with many companies selling to a concentrated number of carriers and manufacturers. As a result, large buyers have bargaining power over smaller sellers. Suppliers of equipment and services have to deal with changing technology and accelerated product cycles. Companies that are not up to speed with the latest developments run the risk of losing market share.
Handsets and infrastructure are the major segments of the wireless equipment market. New subscribers, with the greatest growth in developing countries, and the replacement cycle, which is most important in mature economies, drive demand for handsets. Carrier network build-out and upgrade cycles heavily influence sales of infrastructure equipment (switches, base stations and microwave antennas).
Key factors to consider, when analyzing a Wireless Networking company for investment, include competition, technology, management and finances. Investors need to ask: What is the current competitive landscape? Is the company gaining or losing share? How does the product portfolio measure up? Does management have the requisite experience and vision to guide the company through technological shifts and economic cycles? Is there a well-funded expansion strategy?
Analysis of a company’s financial statements is a critical part of the investment decision. Investors should examine the trends in sales, gross margin and research & development spending, as well as the amount of cash and debt on the balance sheet. Comparing sales growth to the industry average may reveal the company’s competitive standing. Gross margin will give an indication of the success of management’s pricing strategy and ability to control costs. These financial measures should be viewed across the historical business cycle, thereby allowing investors to gauge the prospects of a company.
Relevant valuation ratios for Wireless Networking stocks include price-to-earnings, price-to-sales, and price-to-cash flow. Each current measure ought to be compared against the company’s historical average and those of its peers.
Most of these equities can be classified as high-growth, volatile and risky. They often trade at elevated multiples, in anticipation of periods of rapid growth. Too, these issues usually have above-average Beta coefficients and low marks for Stock Price Stability. Financial Strength ratings are often below the average (B+). The industry is best suited to those seeking short-term trading vehicles.