In today’s increasingly digital world, the need for fast and reliable connectivity is paramount. Hence, the companies facilitating faster and more reliable connectivity are likely to witness solid growth in the long term.
Given this backdrop, it could be wise to ride the momentum in fundamentally strong tech stocks Extreme Networks, Inc. (EXTR), Gilat Satellite Networks Ltd. (GILT), and Ceragon Networks Ltd. (CRNT), given their high growth potential.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the technology-communication industry is well-positioned for growth.
Despite susceptibility to broader macroeconomic uncertainties, the tech industry is showing an impressive readiness to overcome these challenges. Tech companies are focused on resilience, ensuring their stability in the near future.
Since the arrival of the pandemic, people all over the world have made active adjustments to their work styles and personal routines to better fit in with virtual worlds. The need for robust networking and communication infrastructure has grown as remote work and virtual interactions become more common.
Recently, the Biden Administration launched the Public Wireless Supply Chain Innovation Fund, injecting $1.50 billion into the development of open and interoperable networks. This funding aims to spearhead the implementation of open and interoperable 5G radio access networks, thereby advancing technological progress within the United States.
Furthermore, according to Gartner, global expenditure on communication services for the current year is expected to reach $1.46 trillion, reflecting a 2.7% increase compared to the previous year, with spending in the following year anticipated to reach $1.52 trillion, marking a 3.8% year-over-year increase.
Also, the global industrial communication market is expected to grow at a CAGR of 10.9% between 2022 and 2027.
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)
Headquartered in Morrisville, North Carolina, 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 17.8% higher than the 48.82% industry average. Likewise, its 13.16% trailing-12-month levered FCF margin is 82.7% higher than the industry average of 7.20%. Furthermore, the stock’s 75.40% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.01%.
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 ending 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 94.3% to close the last trading session at $24.35.
EXTR’s stock is trading above its 10-day and 200-day moving averages of $24.10 and $21.52, respectively.
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 #6 out of 50 stocks. To see EXTR’s Value, Momentum, Stability, and Sentiment ratings, click here.
Stock #2: 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 June 20, 2023, GILT announced that a Tier 1 global telecommunications operator had chosen GILT for satellite connectivity services for a major utility company in Western Europe. They use GILT's SkyEdge II-c platform for mission-critical IoT telemetry across remote sites on the utility's national network.
On May 1, 2023, GILT announced receiving a multimillion-dollar order for VSATs to expand an advanced disaster response network in Asia. The equipment supports a national initiative to enhance disaster prevention and administration by providing secure voice, video, emergency alerts, and data services for effective disaster response.
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 90.2% higher than the 4.51% industry average. Its 13.27% trailing-12-month EBITDA margin is 45% higher than the 9.15% industry average. Likewise, its 5.49% trailing-12-month Return on Total Capital is 157.7% higher than the industry average of 2.13%.
For the second quarter ended June 30, 2023, GILT’s revenues 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 ending 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 17.6% to close the last trading session at $6.29.
GILT’s stock is trading above its 100-day and 200-day moving averages of $6.15 and $5.81, respectively.
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. Within the same industry, it is ranked #5. In total, we rate GILT on eight different levels. Beyond what we stated above, we also have given GILT grades for Value, Momentum, Stability, and Quality. Get all the GILT ratings here.
Stock #1: 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 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. CRNT’s future-proof plan includes a multi-technology, multi-service solution that provides a robust, modernized backhaul and routing solution, as well as a long-term maintenance and support plan.
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 34.9% higher than the 2.42% industry average. Likewise, its 1.08x trailing-12-month asset turnover ratio is 75.1% higher than the industry average of 0.62x.
CRNT’s revenues for the second quarter ended June 30, 2023, 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 gained 21.12% to close the last trading session at $1.95.
CRNT’s stock is trading above its 10-day and 200-day moving averages of $1.92 and $1.92, respectively.
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 and Sentiment and a B for Value. It is ranked #4 in the Technology - Communication/Networking industry. To see CRNT’s Momentum, Stability, and Quality ratings, click here.
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EXTR shares were trading at $24.18 per share on Thursday afternoon, down $0.17 (-0.70%). Year-to-date, EXTR has gained 32.06%, versus a 13.73% 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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