Our theme of Internet Infrastructure stocks, which includes companies that supply hardware and software that underpins the Internet, including processors, memory, fiber-optic cables, and switches, has declined by roughly 17% year-to-date. The decline is in line with the sell-off in the broader Nasdaq-100, amid rising interest rates, surging inflation, and the ongoing war between Russia and Ukraine.
However, despite the current issues, we see a couple of trends that could help the stocks in our theme. The shift from on-premise IT infrastructure to the cloud has gained much traction through the Covid-19 pandemic. For instance, Gartner estimates that about 51% of all corporate IT spending within key segments will shift to the cloud by 2025, overtaking traditional IT spending. The big public cloud players are also spending big on their infrastructure. For instance, Microsoft’s overall capital expenditures rose by a solid 33% over the last 12 months, with a majority of it likely dedicated to its cloud operations. The massive shift to the cloud could, in turn, drive demand for internet infrastructure products. The ongoing transition to 5G wireless networks is also likely to drive up demand for fiber optic and wireline networks for the mobile backhaul, which needs to support more bandwidth. Besides the rising demand, valuations for the theme also appear quite reasonable. Excluding GPU major Nvidia (NASDAQ:NVDA), the average stock in our theme trades at a price to sales multiple of just about 3x. It’s possible that these stocks could find favor if investors continue to move into value stocks with below-market multiples as interest rates rise.
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Within our theme, Juniper Networks (NYSE:JNPR), a company that sells networking products including routers, switches, and network management software, has been a relative outperformer, with its stock down by just about 4% year-to-date. On the other side, Nvidia, a semiconductor company best known for its graphic processing units (GPUs) that are increasingly used in servers for machine learning and artificial intelligence, has been the worst performer, with its stock declining by about 24% year-to-date.
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