The 2 Best Tech Stocks and the 2 Worst Although the technology industry has been under pressure due to macroeconomic headwinds, the industry is poised to witness substantial growth amid innovation and robust demand in the foreseeable future. While...
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Although the technology industry has been under pressure due to macroeconomic headwinds, the industry is poised to witness substantial growth amid innovation and robust demand in the foreseeable future. While we think tech stocks Jabil (JBL) and Encore Wire (WIRE) could be wise additions to your portfolio in 2023, fundamentally weak Snowflake (SNOW) and Western Digital (WDC) could be avoided. Read on.
The technology industry has been under pressure due to the multi-decade high inflation, aggressive rate hikes by the Fed, and massive layoffs. The tech-heavy Nasdaq Composite has lost 14.6% over the past year.
However, the industry's long-term prospects look bright amid advancements and robust demand. The global information technology market is forecasted to grow from $8.18 trillion in 2022 to $12 trillion in 2027 at a CAGR of 7.9%.
Also, according to Gartner, IT spending remains recession-proof. Worldwide IT spending is projected to total $4.50 trillion in 2023, an increase of 2.4% from 2022.
"While inflation is devastating consumer markets, contributing to layoffs at B2C companies, enterprises continue to increase spending on digital business initiatives despite the world economic slowdown," said John-David Lovelock, Distinguished VP Analyst at Gartner.
Over the past month, the Technology Select Sector SPDR Fund (XLK) has gained 10.4%, outperforming the S&P 500's gains of 3.4% over the same period, reflecting investors' interest in tech stocks.
Against this backdrop, tech stocks Jabil Inc. (JBL) and Encore Wire Corporation (WIRE) might be solid buys in 2023. However, Snowflake Inc. (SNOW) and Western Digital Corporation (WDC) could be best avoided considering their weak fundamentals.
Stocks to Buy:
Jabil Inc. (JBL)
JBL offers products and services for manufacturing all over the world. The company operates in two broad segments: Electronics Manufacturing Services and Diversified Manufacturing Services.
On January 26, 2023, JBL announced that its board of directors declared a quarterly dividend of $0.08 per share on common stock payable to shareholders on March 2, 2023. This reflects its cash generation abilities.
On January 18, JBL, in cooperation with ams OSRAM and Artilux, announced that its renowned optical design center in Jena, Germany, is currently demonstrating a prototype of a next-generation 3D camera with the ability to seamlessly operate in both indoor and outdoor environments up to a range of 20 meters.
This innovation should strengthen the future growth prospects of the company.
On November 14, JBL inaugurated a new design facility in Wroclaw, Poland, where it is expected to create cutting-edge solutions for various industries, including healthcare and automotive. JBL aims to expand its business with this strategic move.
In terms of forward non-GAAP P/E, JBL is trading at 10.07x, which is 51.3% lower than the 20.67x industry average. The stock's forward EV/Sales multiple of 0.39 is 86.7% lower than the industry average of 2.95.
JBL's trailing-12-month ROCE of 41.31% is 769% higher than the 4.75% industry average. Its trailing-12-month ROTC of 15.90% is 435.3% higher than the 2.97% industry average.
JBL's net revenues came in at $9.64 billion for the first quarter (ended November 30, 2022), up 12.5% year-over-year. Its gross profit increased 10.1% year-over-year to $743 million. Also, its core operating income increased 15.3% year-over-year to $461 million.
Its core earnings increased 12.3% year-over-year to $319 million, while its core earnings per share increased 20.3% year-over-year to $2.31 for the same quarter. The company also raised the core EPS projection for the year (the fiscal year 2023) to $8.40.
Analysts expect JBL's revenue to increase 7.3% year-over-year to $8.10 billion for the fiscal second quarter (ending February 2023). Its EPS is estimated to rise 10% year-over-year to $1.85 for the same quarter. It surpassed EPS and revenue estimates in all four trailing quarters, which is impressive.
Over the past six months, the stock has gained 35.2% to close the last trading session at $84.09. Moreover, it has also gained 24.9% over the past three months.
JBL's POWR Ratings reflect this promising outlook. It has an overall A rating, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Value and Quality. Within the Technology – Services industry, it is ranked #8 out of 80 stocks.
To see the additional POWR Ratings for Growth, Stability, and Sentiment for JBL, click here.
Encore Wire Corporation (WIRE)
WIRE manufactures and sells electrical building wires and cables for interior electrical wiring in commercial and industrial buildings, homes, apartments, manufactured housing, and data centers. It sells its products to wholesale electrical distributors primarily through independent manufacturers' representatives.
WIRE's forward non-GAAP P/E of 12.05x is 32.3% lower than the industry average of 17.80x. Its forward EV/Sales multiple of 1.13 is 37.7% lower than the 1.82x industry average.
WIRE's trailing-12-month EBIT margin of 30.32% is 215.2% higher than the 9.62% industry average. Its trailing-12-month ROTC of 36.22% is 435.8% higher than the 6.76% industry average.
For the fiscal fourth quarter that ended December 31, 2022, WIRE's net sales increased marginally year-over-year to $693.89 million. The company's gross profit came in at $248.46 million, representing a 5.7% rise from the year-ago period. Its operating income was $192.95 million, up 5.6% from the prior-year period.
Its net income increased 8.7% year-over-year to $154 million, while its earnings per share grew 19.8% to $8.28.
Street expects WIRE's EPS and revenue to come at $16.09 and $2.49 billion for its fiscal year ending December 2023. The company surpassed the Street's EPS and revenue estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 64.3% and closed yesterday's trading session at $193.81. It gained 14.1% intraday.
WIRE's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It has an A grade for Value and a B grade for Quality. The stock is ranked #7 of 44 stocks in the Technology – Electronics industry.
Click here to see the additional ratings for WIRE (Momentum, Stability, Sentiment, and Growth).
Stocks to Avoid:
Snowflake Inc. (SNOW)
SNOW provides a cloud-based data platform in the United States and internationally. The company's platform offers Data Cloud, which enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data.
SNOW's forward non-GAAP P/E of 789.78x is significantly higher than the industry average of 21.17%. Its forward EV/Sales of 24.57x is 696% higher than the industry average of 3.09x.
Its trailing-12-month EBIT margin is negative at 40.38% compared to the industry average of 5.69%. Its net income margin of negative 38.79% is significantly lower than the industry average of 2.98%.
SNOW's operating loss increased 31% year-over-year to $206.02 million for the quarter that ended October 31, 2022. Net loss attributable to SNOW came in at $200.94 million for the quarter, up 29.8% year-over-year. Its loss per share increased 23.5% year-over-year to $0.63.
SNOW's EPS is expected to decline 58.8% year-over-year to $0.05 for the yet-to-be-reported quarter ended January 2023.
Over the past year, the stock has lost 41.6% to close the last trading session at $175.28.
SNOW's POWR Ratings reflect its poor prospects. It has an overall grade of D, which equates to a Sell.
SNOW has a D grade for Value, Momentum, Stability, and Quality. It is ranked #70 in the Technology – Services industry.
Get additional POWR Ratings for SNOW (Growth and Sentiment) here.
Western Digital Corporation (WDC)
WDC develops, manufactures, and sells data storage devices and solutions internationally. It offers client devices, including hard disk drives and solid state drives for computing devices. It also provides data center devices and solutions, comprising enterprise helium hard drives and enterprise SSDs.
In terms of forward EV/EBITDA, WDC is trading at 31.67x, 137% higher than the industry average of 13.36x. Likewise, its forward Price/Cash flow multiple of 47.91 is 165.9% higher than the industry average of 18.02.
WDC's trailing-12-month gross profit margin of 26.25% is 46.4% lower than the 48.94% industry average. Its trailing-12-month levered FCF margin of 4.15% is 39.1% lower than the 6.81% industry average.
WDC's revenue declined 35.7% year-over-year to $3.11 billion for the fiscal second quarter ended December 31, 2022. The company's non-GAAP operating loss stood at $119 million, compared to an operating income of $882 million in the prior-year quarter.
Its non-GAAP net loss stood at $132 million for the quarter, compared to a net income of $724 million in the year-ago period. Also, its non-GAAP earnings per share came in at negative $0.42, compared to $2.30 in the prior-year quarter that ended December 31, 2021.
Analysts expect WDC's revenue to decline 33.3% in the fiscal year ending June 2023 to $12.54 billion. The company's EPS is expected to come at negative $2.49 for the same year.
Over the past year, the stock has lost 21.8% to close the last trading session at $43.67. It gained 12% over the past six months.
WDC has an overall rating of D, which equates to a Sell in our proprietary POWR Ratings system.
WDC has an F grade for Growth and a D grade for Momentum, Stability, and Sentiment. Of the 43 stocks in the Technology – Hardware industry, WDC is ranked #40.
Beyond what we've stated above, we have also rated the stocks for Value and Quality. Click here to view all the WDC ratings.
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JBL shares were unchanged in premarket trading Thursday. Year-to-date, JBL has gained 23.42%, versus a 8.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy.Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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