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Morgan Stanley upgraded Telecom & Networking Equipment industry view to In-Line from Cautious given more in-line valuations within the space.
Keysight Technologies (NYSE:KEYS) remains the analysts' Top Pick, with an Overweight rating, going into 2024 given valuation opportunity, as end-markets are approaching bottom, creating pathway to double-digit earnings growth as key top line drivers resume.
The firm's other Overweights remain Pure Storage (PSTG), Arista Networks (ANET), and Corning (GLW).
The analysts downgraded Coherent (COHR) to Equal-weight as they believe recent run/valuation captures near-term artificial intelligence/machine learning, or AI/ML, opportunity, leaving lack of catalyst across next year given macro/floating rate debt exposure.
Zebra Technologies (ZBRA) and Juniper Networks (JNPR) keep their Underweight rating at the firm.
The analysts also identified several players where they would look to be more positive on the year as headwinds lift. Given exposure to multi-cloud and AI, they would like to like Nutanix (NTNX), F5 (FFIV) and Ciena (CIEN).
The analysts said that networking industry has underperformed technology, media, and telecom, or TMT, meaningfully in 2023, now trading inline with traditional averages. Their networking coverage universe was down 3% against Nasdaq up about 40%, lagging every other industry within the technology sector. This is even as AI acted as a catalyst to the industry, with Arista (ANET) rising around 85% and Coherent (COHR) gaining about 20%.
The analysts noted that there were three reasons for such a large underperformance in the space — firstly, supply chain constraints turned into inventory accumulation across enterprises, service providers, and clouds; Secondly, service providers pulled back on spend as interest rate concerns grew, and Lastly, clouds and enterprises generally prioritized other investments (AI, optimization).
As they exit 2023, EPS estimates for 2024 are 25% lower, on average, than when it entered the year with (for core networking coverage), and valuations stand at ~19x P/E trough CY24 demand (about 14x CY'25), more in-line with traditional averages within the space, according to the analysts.
They upgraded the industry view to In-Line from Cautious to reflect this change. The reason they were not moving to Attractive, are valuation multiples are in-line with historical averages and timing of recoveries are staggered.
The analysts said they moved Keysight (KEYS) to their Top Pick with their Q4 preview on account of expectations for end-markets to be approaching bottom, which combined with attractive valuation created an attractive setup heading into FY'24.
The analysts are encouraged by fourth quarter results on the sequential pickup in orders across both business segments, and commentary that there was sequential stability in wireless orders and incremental strength in demand for network and data center applications.
In addition, the analysts said that even as they lowered their Electronics Industrial Solutions Group, or EISG, segment's outlook slightly for FY25, the weakness is largely in general electronics, with signs of life on the semi side of the business as fab pushouts and inventory gets worked through.
While ESI inclusion will be more complicated than thought and EISG cuts were slightly larger than expected, the analysts still think this represents an attractive entry point and fourth quarter represented the last cut given the diversity of growth drivers, keeping it their Top Pick. The analysts added that they could be too optimistic if EISG takes longer than expected to recover.
The analysts raised the price target of Coherent (COHR) to $45 from $39 but downgraded the shares to Equal-weight from Overweight. Juniper's (JNPR) price target was raised to $28 from $27, F5 (FFIV) to $165 from $175, Lumentum (LITE) to $52 from $45, Infinera (INFN) to $5.40 from $4.60, Motorola Solutions (MSI) to $335 from $300, Axon Enterprise (AXON) to $250 from $230, Arista Networks (ANET) to $240 from $220. Price target of KORE Group (KORE) was lowered to $0.60 from $0.70.
Keysight (KEYS) has a Hold rating at Seeking Alpha's Quant Rating system, which consistently beats the market. Meanwhile, the Seeking Alpha authors' average rating is also Hold, but the average Wall Street analysts' rating is more positive with a Buy.