Are networking stocks worth paying attention to? An article to understand the industry outlook and investment opportunities

Why Have Network Communication Stocks Become the New Favorite in Capital Markets? The Logic Behind Industry Cycles

Against the backdrop of global economic transformation and upgrading, network communication infrastructure has become a key investment focus for governments worldwide. The Biden administration announced a $42 billion investment to advance nationwide high-speed broadband coverage, while the seven major industrial countries in the EU plan to invest $600 billion to ensure household internet speeds reach 1G before 2030. These policy dividends have directly ignited investment enthusiasm for network communication stocks.

In 2023, the overall performance of network communication stocks has been impressive, with gains exceeding 35%, far outperforming the broader market. According to the latest data from Dell’Oro, the global communication equipment market size in 2022 approached $102 billion, maintaining growth for five consecutive years, and is expected to surpass $120 billion by 2025. What does this number represent? It signifies industry upgrades driven by emerging technologies such as 5G and the Internet of Things, with network communication stocks being the direct beneficiaries of this wave of upgrades.

What Qualifies as a Network Communication Stock?

Network communication (abbreviated as “netcom”) involves hardware devices and technological ecosystems related to internet connectivity. Common network communication devices include routers, set-top boxes, switches, etc. Network communication stocks refer to publicly listed companies involved in the network communication field.

The industry chain ecosystem is quite complete: upstream includes communication terminal component suppliers (microprocessors, network ICs, etc.); midstream comprises network equipment manufacturers (router and switch producers); downstream covers wireless communication devices, wired communication infrastructure, telecom service providers, and other end applications.

With the rapid penetration of 5G and IoT, the entire industry chain is ushering in growth opportunities. This also explains why network communication stocks have performed remarkably in recent years.

Leading Network Communication Stocks in the US Market: Five Companies to Watch

The trend of US network communication stocks has diverged in recent years, but the fundamentals of quality leaders remain stable. Here are five market-recognized giants:

Cisco(CSCO)：Transforming the Network Equipment Empire with AI

As a leader in global network equipment, Cisco mainly sells network software and hardware, with switches and routers as core products. The latest quarterly report shows that in Q2 2023, revenue was $15.2 billion, up 16% year-over-year, with profits exceeding expectations.

A key transformation is the rapid growth of AI orders. Investors are optimistic about Cisco’s potential in AI infrastructure, driving its stock price to surge over 16% since the beginning of the year.

Arista Networks(ANET)：Rising Star Elevated by the AI Wave

Arista supplies multi-layer switches and related software. In Q2 2023, revenue reached $1.46 billion, with EPS of $1.58, both surpassing expectations. Notably, nearly 50% of its revenue comes from Microsoft and Meta, directly benefiting from these tech giants’ AI infrastructure expansion. Its stock price has skyrocketed over 50% this year.

T-Mobile(TMUS)：Dark Horse Among Telecom Operators

T-Mobile, the third-largest telecom operator in the US, mainly provides communication services and mobile phone sales. In Q2, it added 760,000 phone users, surpassing market expectations and outperforming competitors AT&T and Verizon. Although its stock price has experienced volatility in 2023, its solid fundamentals leave room for future growth.

Broadcom(AVGO)：Absolute Leader in Communication Chips

Broadcom dominates key segments such as Ethernet switch chips and Wi-Fi chips. According to Linley, in 2021, Broadcom held a 70% market share in Ethernet switch chips. Its revenue in Q2 2023 and expected revenue for Q3 both exceeded expectations. Since the start of the year, its stock has surged over 55%, making it one of the most direct beneficiaries of the AI wave.

Qualcomm(QCOM)： Leader in Mobile Communications

Qualcomm focuses on designing and manufacturing chips for smartphones, tablets, and mobile devices. Despite some performance pressure causing stock consolidation this year, its leadership in 5G remains intact. Notably, Qualcomm and Meta plan to apply generative AI in mobile phones in 2024, which could help the stock rebound along with this wave of AI development.

Overview of Leading US Network Communication Stocks:

(Data as of August 2023)

Taiwan Network Communication Stocks: Five Top Performers to Follow

Taiwan’s network communication industry enjoys natural advantages—robust industry foundation and strong manufacturing capabilities. In 2023, Taiwan’s communication network index has risen over 35%, reflecting the overall strength of local network communication stocks.

Chunghwa Telecom(2412)：“Deposit Stock” as a Stable Choice

Taiwan’s largest telecom company, covering fixed-line, mobile, and broadband internet services. In Q2, EPS was NT$1.28, with a half-year total of NT$2.52, reaching a six-year high. Investors also value its 26-year record of continuous dividend payments, with a cash dividend of NT$4.7 in June, making it a “deposit stock” favored by retail investors.

Delta Electronics(2308)：A Winner with Multiple Concepts

Taiwan’s leading power supply manufacturer, active in power supplies, components, automation, and communication infrastructure. It is also a stock with multiple concepts—network communication, AI, and electric vehicles—driving richer growth drivers.

In Q2 2023, revenue exceeded NT$100 billion, up 11.7% year-over-year; net profit after tax NT$15.056 billion, up 10%. CEO Zheng Ping expects stable growth in Q3. Strong fundamentals have pushed its stock up over 20% since the start of the year.

FarEasTone(4904)：Direct Beneficiary of 5G Dividend

One of Taiwan’s three major telecoms, mainly engaged in telephone services, wireless communication equipment, and parts sales. In Q2 2023, revenue was NT$21.7 billion, up 4.7%; net profit NT$2.8 billion, up 19.7%, benefiting from the 5G upgrade wave. Its 24-year record of dividend payments is well recognized, with a NT$3.25 dividend in July. Its stock has risen over 7% since the beginning of the year.

ZhiBang(2345)：Switch Manufacturer’s Performance Soars

A leading manufacturer of network switches, with about 70% of revenue from switch products, serving many international giants. In H1 2023, EPS reached a record NT$7.67, with both revenue and profit growing. As 400G switch shipments increase, market expectations suggest sustained high performance. Its stock price has skyrocketed 93% YTD, making it a star in the network communication sector.

Qihui(6285)：Direct Target of US Infrastructure Theme

A major satellite communication company, mainly engaged in network communication, automotive modules, and antenna solutions. The US market accounts for 66%, making it a direct beneficiary of US infrastructure investment plans.

In Q2 2023, revenue hit NT$26.63 billion, up 31.98%, setting a new record. As European and American telecom demands grow, future revenue is expected to further expand. Its stock has surged over 60% since the start of the year.

Summary of Taiwan Network Communication Stocks:

(Data as of August 2023)

Investment Logic for Network Communication Stocks: Opportunities and Risks Coexist

Core Advantages of Investing in Network Communication Stocks

Long-term Policy Support for Redundant Growth

Governments worldwide regard broadband infrastructure as strategic foundational facilities, launching massive subsidy programs. This provides a policy bottom line for long-term growth of network communication stocks, reducing systemic risks.

Stable Operations and Ample Cash Returns

Traditional network communication giants are less affected by economic cycles, with relatively cyclical-resistant revenues, enabling stable dividends. Stocks like Chunghwa Telecom and FarEasTone have become core holdings for many investors.

Growth Potential from Multiple Concepts

Many network communication stocks are also associated with 5G and AI concepts. When these emerging technologies take off, stocks will gain additional valuation premiums.

Risks to Watch Out For

Relatively Low Growth Ceiling

Unlike concepts like AI with huge imagination space, growth in network communication is limited. Major global markets’ infrastructure is largely saturated; the pace of 5G and 6G upgrades is slow, constraining long-term growth potential for individual stocks.

Increasing Industry Competition

The industry has many participants, and companies often have to lower prices to secure orders, which pressures profit margins. Intensified competition may erode the moat of leading companies.

Smart Investment Strategies for Network Communication Stocks

Strategy 1: Focus on Multi-Concept Stocks

Prioritize stocks with multiple concept tags such as 5G and AI. These companies often have richer growth drivers and tend to outperform single-concept stocks. Delta Electronics is a typical example.

Strategy 2: Diversify Risks via ETFs or Funds

For investors with limited risk appetite, choosing ETFs or mutual funds tracking the network communication industry is a safer approach. Examples include Global Future Communications ETF(00861) and iShares US Telecom ETF(IYZ).

Strategy 3: Short-term Opportunities in High-Volatility Stocks

For risk-tolerant investors, using CFDs(CFD) to invest in network communication stocks can amplify returns. CFDs have zero commission, offer leverage over 10x, and allow participation with low capital. For example, investing in Broadcom(AVGO) via CFD with 10x leverage requires only about $85 for one share. A 10% stock increase could yield a 100% return on the position.

Note: High leverage entails high risk. Always set stop-loss, take-profit, and trailing stop orders to manage risk within acceptable limits.

Conclusion

Network communication stocks are currently in a period of policy redirection and technological upgrade. On a macro level, global broadband infrastructure investments provide stable demand; on a meso level, the application of 5G and AI accelerates industry upgrades; on a micro level, companies like Cisco, Broadcom, Arista in the US, and ZhiBang, Qihui, Delta in Taiwan demonstrate solid or impressive performance.

Moderate allocation to network communication stocks, especially those with multiple growth drivers, is a current investment approach worth considering. Whether seeking stable cash flow or capital appreciation, opportunities abound in the network communication sector.