Infrastructure

5 Stocks to Buy Benefiting From Skyrocketing Demand for Fiber Delivery

Lee Jackson

We have all heard it before so much it sounds cliched: “We need more bandwidth.” The bottom line is that expression is really just a product of incredible rising demand. That demand principally comes from:
  1. More and more users, growing daily
  2. The surge in latency demanding applications like video and cloud usage
  3. Rising machine-to-machine traffic

The introduction of the iPhone in 2007 started a trend that was continued with the iPad and other tablets, as users started devouring ever more cloud-based data and content. The bottom line? The Internet is like a freeway in L.A., and getting worse.

A new research piece by the communications technology analysts at UBS pretty much says that the only way to create more lanes on the highway is to create more roads via fiber delivery. To show how much demand has increased, the UBS team points out that cloud and Web services have become so prevalent that aggregate capital expenditure spending by a basket of Web 2.0 companies has increased from $8 billion in 2007 to $41 billion in 2014. That number is expected to continue to grow.

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Here are five companies that UBS sees benefiting the most from a continued and massive fiber deployment.

Alcatel-Lucent S.A. (NYSE: ALU) has started to rise again after so many years of struggling with an ill-fated merger, and it has finally started to pull itself off the deck and get earnings back on track. Alcatel-Lucent is providing products and innovations in IP and cloud networking, as well as ultra-broadband fixed and wireless access to service providers and their customers, and to enterprises and institutions throughout the world.

Driving the industrial transformation from voice telephony to high-speed digital delivery of data, video and information is Bell Labs, an integral part of the company and one of the world’s foremost technology research institutes that became what was the old Lucent prior to the merger. The Thomson/First Call consensus price target for the company, which may be one of the best sub $5 investments, is $4.69. The stock closed on Wednesday at $3.19. Trading to the target would be a gigantic 47% gain.

Calix Inc. (NYSE: CALX) could be a big winner and is rated Buy at UBS. The company provides broadband communications access systems and software for fiber and copper-based network architectures that enable communications service providers to connect to their residential and business subscribers in North America.

The company’s Unified Access portfolio of broadband communications access software, systems and services enables communications service providers worldwide to transform their networks and become the broadband provider of choice to their subscribers. UBS has an $11 price target for the stock. The consensus target is $12.33. Shares closed Wednesday at $9.40.

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Ciena Corp. (NYSE: CIEN) is a company that many analysts including the UBS team believe could be the top beneficiary of an increase in wireless spending. Ciena management is optimistic about its prospects in the United States and in markets such as Brazil and India, where it has landed Tier 1 design wins. Recently, it also won a contract from Cablevision Argentina, which is a leading cable TV and Internet services provider in Argentina, to enhance its broadband network countrywide.

The company is rapidly reducing its losses, and the earnings growth outlook for the next five years is also quite promising, despite a poor earnings performance last quarter. According to Yahoo! Finance, investors can expect Ciena’s earnings to improve at an annual rate of 16.7% for the next five years. The UBS price target is $27. The consensus estimate stands lower at $26.35. Ciena closed Wednesday at $17.91.

Corning Inc. (NYSE: GLW) may be poised for a big second half of the year as bandwidth and latency needs in the Internet are pressing the limits of what is currently available. In addition, big demand for the company’s Gorilla Glass, which Apple uses, is up as much as 30% year-over year as new smartphones hit the market.

While the company is well known for being a leading manufacturer of glass substrates for LCDs in consumer electronics, it generates close to 30% of its revenue from its Optical Communication segment. In 2013, the Optical Communication division revenue grew 9.2% to reach $2.3 billion. Investors are paid a 2% dividend. The consensus price target is $22.03. Corning closed Wednesday at $20.19.

TE Connectivity Ltd. (NYSE: TEL) wraps up the top stocks to buy at UBS. The company designs and manufactures products at the heart of electronic connections for the world’s leading industries, including automotive, energy and industrial, broadband communications, consumer devices, health care, and aerospace and defense.

TE has a long-standing commitment to innovation and engineering excellence that helps its customers solve the need for more energy efficiency, always-on communications and ever-increasing productivity demands. Investors are paid a 1.9% dividend. The UBS price target is $68, and the consensus target is $68.91. Shares closed Wednesday’s trading at $59.65.

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Carrier spending from the likes of AT&T and Verizon is always a wildcard, as the capital expenditures can fluctuate as earnings do. The fact of the matter is we need more latency and bandwidth to accommodate current and future demands.