The COVID-19 pandemic has accelerated the pace of digitization worldwide. Among the key trends that have come to the fore is increased adoption of cloud computing services as companies seek operational flexibility. A new strain of COVID-19 has led to most European nations to renew lockdowns in recent weeks. So, it appears that work-from-home conditions are here to stay for a while longer at least. As a result, firms have been increasing their investments in data centers and network infrastructure. According to Gartner, by 2021 global companies could spend more than 14% of their IT budgets on shifting their operations to the cloud. Another report by Gartner expects global data center infrastructure spending to increase 6% year-over-year to $200 billion in 2021.
Even after the pandemic has departed, there will likely be network infrastructure opportunities as the 5G rollout will boost the adoption of artificial intelligence (AI). This technology requires particular network infrastructure and many countries have accelerated their pace of building this infrastructure. Also, the U.S.-China trade war comes as a blessing for U.S. network infrastructure companies–the U.S. has banned China’s information and communications technology (ICT) infrastructure firm Huawei Technologies, thereby improving the market opportunity for U.S. firms. Even Berkshire Hathaway Chairman Warren Buffett has accepted the future potential of the cloud and has invested $735 million in Snowflake (SNOW), a cloud-data platform.
The coronavirus pandemic has driven many tech stocks to advance by leaps and bounds. The S&P 500 Index advanced 16% last year, while the Nasdaq Composite Index climbed 42.9%, led by Amazon (AMZN) and Zoom Video Communications (ZM). But some lesser-known stocks like VeriSign (VRSN), Silicon Laboratories (SLAB), and Acacia Communications (ACIA) underperformed the market last year, returning 12%, 6.6%, and 7%, respectively. We believe these stocks have the potential to grow in 2021 and beyond driven by growing spending in network infrastructure.
VeriSign, Inc. (VRSN)
Established in 1995, Reston, Virginia-based VRSN has a market cap of $24.7 billion. It provides network infrastructure and cybersecurity services. There are 13 root servers around the world for Internet traffic and VRSN operates two of them. VRSN is the world’s only authorized registry for numerous generic top-level domains including .net and .com. The coronavirus pandemic came as a blessing in disguise for the company, which saw a 4% year-over-year rise in domain name base to 163.7 million in the third quarter of 2020.
The COVID-19 pandemic caused massive job losses last year as the global economy came to a standstill. Consequently, thousands of people worldwide started their own businesses. Since lockdowns restricted people to staying at home, many have had no choice but to run their businesses online. This led to 10.9 million new domain-name registrations for VRSN in the third quarter, compared to 9.9 million in the previous year quarter. The company’s revenue rose 3.1% to $318 million and net income increased 11% to $171 million on the back of higher registrations.
The work-from-home trend will boost VRSN’s revenues as the new strain of the virus will continue to keep people at home. Wall Street analysts expect the company’s revenue to rise 5% year-over-year to $1.3 billion in 2020 and 7% to $1.4 billion in 2021.
Our POWR Ratings for VRSN supports analyst expectations. The stock is rated
A for Trade Grade
A for Buy & Hold Grade
B for Peer Grade
A for overall POWR Rating
VRSN is ranked #1 of 37 stocks in the Internet-Services industry.
Silicon Laboratories, Inc. (SLAB)
SLAB, which was founded in 1996, has a market cap of $5.6 billion. The Austin, Tex.-based semiconductor and software firm sells its products in network infrastructure and automotive markets. It manufactures broadcast devices, digital isolation devices, wireless systems on chips, sensors, timing devices, microcontrollers, and software stacks.
In the third quarter ended October 31, SLAB’s revenue surged 6.7% year-over-year to hit $221.3 million as the pandemic increased the adoption of Internet-of-Things (IoT) products. The fear of a new strain of COVID-19preventing people from stepping out is reinforcing their reliance on Internet of Things (IoT) products for their day-to-day activities. The company expects revenue to surge another 3% to $226 million in the fourth quarter.
The growth that began with the pandemic-induced work-from-home culture will accelerate with the proliferation of 5G and IoT devices. This is reflected in Wall Street analysts’ estimates. They expect SLAB’s revenue growth to increase from nearly 4% in 2020 to over 10% in 2021.
SLAB is rated a Strong Buy in our POWR Ratings. It holds a straight “A” in Trade Grade, Peer Grade and Buy & Hold Grade, and a “B” for Industry Rank. It is the #22 ranked stock in the Semiconductor & Wireless Chip industry.
Acacia Communications, Inc. (ACIA)
Founded in 2006, Maynard, Mass,-based ACIA is an optical networking technology firm that connects content and cloud providers. The company’s products facilitate consumers demand for data, which has reached historical highs since the onset of the COVID-19 pandemic. ACIA has a market cap of $3.1 billion.
During the third quarter of 2020, ACIA’s revenue grew 31.7% year-over-year to $158.5 million as demand for cloud services increased following the pandemic. Its net income rose 61% to $24.3 million. Despite such strong revenue growth, the stock rose 7.6% last year. This year, the stock would ride on the ever-increasing demand for data.
Wall Street analysts expect ACIA’s revenue to surge more than 25% year-over-year to $581.8 million in 2020. The figure is likely to rise another 13% to surpass $657 million in 2021.
Our Strong Buy POWR Ratings for ACIA supports the outlook. It also has an “A” for Trade Grade, Peer Grade and Buy & Hold Grade, and a “B” for Industry Rank. In the 52-stock Technology – Communication/Networking industry, the stock is ranked #7.
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VRSN shares were trading at $214.47 per share on Monday morning, down $1.93 (-0.89%). Year-to-date, VRSN has declined -0.89%, versus a -1.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Puja Tayal
Puja is a seasoned writer working with financial publishing companies like Motley Fool Canada and Market Realist. With over 13 years of experience in the field of fundamental research, she brings a blend of comprehensive, well-researched insights into her articles. More...
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