5G is here. The new digital wireless technology first started to make waves in 2017, with connectivity tests in Argentina, Norway, and Poland. By late 2018, active 5G networks were starting to appear on a limited basis in various urban areas, and in 2019 the first nationwide networks went into operation in the US and China. As 2020 matures, industry analysts expect to see these networks expand, as providers move into the mid- and high-frequency bands.
Looking ahead at the landscape 5G companies will have to navigate, Roth Capital’s Scott Searle writes, “5G represents a multi-year product cycle that will drive multiple investable opportunities including incremental dollar content, the emergence and enablement of private networks and Industry 4.0, and incremental bandwidth/applications such as fixed wireless access…”
The companies involved in the multiple aspects of the ongoing 5G rollout are going to attract plenty of attention in the coming months. But not all of them are going to bring investors the returns to justify the investment. We’ve opened up the TipRanks database to find two stocks positioned to gain in the 5G world, and also one that may be too risky to try.
Viavi Solutions (VIAV)
Our first stock is a provider of measurement and fiber test devices for network systems and providers. The company offers business intelligence consulting, custom analytics, installation and integration, field and lab testing, and operational assistance for its networking products. In addition to digital tech, Viavi also offers services in light management and optical coatings to banknote manufacturers.
As 5G networks expand from their current phase, enter operation in new areas, and boost performance to the full potential of the technology, Viavi’s products will find increased demand. The company has been involved in 5G since the earliest days of the technology’s design, on the validation, verification, and visibility ends. While not directly involved in installation or hardware of the new networks, Viavi’s position in the 5G chain is essential.
Viavi entered 2020 after a particularly strong year in calendar 2019. The company showed four consecutive quarters of rising earnings that consistently beat expectations. Calendar year Q4, which is usually VIAV’s strongest, saw the company post EPS of 19 cents, 18.8% above the forecast.
The first quarter of 2020, however, was different. First off, the calendar year first quarter (the company’s fiscal Q3) is typically VIAV’s weakest. Second, the COVID-19 pandemic hit hard at revenues. The top line came in at $256.2 million, down 3.4% year-over-year, and well below VIAV’s previously published guidance numbers. The company’s Network and Service Enablement segment led the declines, while Optical Security and Performance Products showed stronger results. EPS for 1Q20 came in at 9 cents, 11% below the forecast – and also 11% below the year-ago quarter.
That’s the bad news. The good news is that Viavi has a clear path forward, especially as economic restrictions are lifted in the second half of this year. Writing on the company from
Northland Securities analyst Tim Savageaux maintains his Outperform rating on Viavi shares “given continued strength in 5G and 400G optical lab development at equipment OEMs and the overall positive impact of increased carrier network traffic.” The analyst added, “…we believe network traffic and subscriber growth may provide offsets in addition to likely easing of lockdowns driving resumed network maintenance and subscriber deployments… We also believe the shares are likely to be supported by VIAV’s strong cash flow generation.”
Savageaux’s Outperform rating is backed by a $14 price target, which implies a healthy upside potential of 31% for the next 12 months. (To watch Savageaux’s track record, click here)
Overall, it would appear that Wall Street agrees with Savageaux’s assessment of VIAV. The stock has 7 recent reviews, breaking down in a 6 to 1 split of Buy versus Hold. The average price target, $15.14, is actually more bullish than Savageaux’s, and suggests room for 42% upside growth from the current trading price of $10.68. (See Viavi stock analysis on TipRanks)
Cohu, Inc. (COHU)
The second stock on our list, Cohu, is a designer and manufacturer of test and inspection equipment in the semiconductor chip sector. COHU shares had been gaining in Q4 and Q1, as demand for semiconductor chips, fueled in part by the expansion of 5G networks. In the six months prior to the current bear cycle, COHU shares posted a gain of 86%. Since the bear cycle began, however, COHU shares have underperformed. The stock is still down 45% from its peak in early February.
Cohu’s Q1 results, while rocky, were in-line with analyst expectations. The losses in the earnings report were attributed to slack demand due to the general economic situation – but that is seen as a temporary factor. As economies reopen, latent projects – including 5G network construction – will restart. Cohu’s products essential in the production of the new 5G chips, and are likely to see demand resume soon enough.
Krish Sankar, 5-star analyst with Cowen, sees COHU shares as a buying opportunity. The analyst opined, “The 5G adoption (over 50% of mobility bookings) is benefiting the company and coupled with an eventual Auto recovery should drive a strong earnings profile in CY21.” The analyst added, “We like the stock – the upcoming 5G cycle (and eventual Auto recovery) should benefit COHU. Despite the uncertain environment, we do not see any liquidity risk.”
To this end, Sankar reiterated a Buy rating on Cohu shares, along with a $20 price target. That target implies a solid upside potential of 48%. (To watch Sankar’s track record, click here)
COHU shares have a unanimous analyst consensus rating of Strong Buy, based on 5 recent Buy reviews. Shares are selling for a discounted $13.55, while the average price target of $19.60 indicates a robust one-year upside potential of 45%. (See Cohu stock analysis on TipRanks)
Netscout Systems (NTCT)
The third stock today, Netscout. The company provides solutions for application and network performance management, an important niche in today’s digital and/or cloud-based office world. The importance of Netscout’s products in the 5G ramp is manifest, but does not necessarily outweigh the current market headwinds.
NTCT shares lost heavily in the bear cycle’s initial fall, but in volatile trading had regained most of the loss. That was derailed by a mixed fiscal Q4 earnings report.
At the top line, results for the fiscal fourth quarter and FY20 were down from one year ago. Quarterly revenues came in at $229.4 million, down from last year’s $235 million. FY revenue slipped from fiscal 2019’s $909.9 million to $891.8 million. Netscout posted a net loss in fiscal 2020, of $2.8 million. From an investors’ perspective, the worst part of the earnings report was the forward guidance: the company withdrew it “given the rapidly evolving COVID-19 situation.”
Covering this stock for Piper Sandler, analyst James Fish maintained a Sell rating. Simply put, Fish does not see Netscout regaining pre-pandemic business quickly enough to make a solid recovery. He writes, “The company saw some deals occur later in the quarter than anticipated, with others pushed into April… As a reminder, NetScout had pulled forward revenue from FQ4 into FQ3 related to a Tier-1 NA carrier deal and was unable to ‘re-fill’ the bucket… The company is seeing increased demand related to fixed line with carriers, but not on the mobile side.”
Fish’s $21 price target predicts a downside to NTCT, of 9%. (To watch Fish’s track record, click here)
Wall Street is evenly split on this stock. NTCT shares have received 1 Buy, 1 Hold, and 1 Sell rating in recent weeks, making the analyst consensus view a Hold. Shares are priced at $23.04, and the average price target of $25.33 suggests room for a 10% growth. (See Netscout stock analysis on TipRanks)
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