Increased digitization initiatives and the integration of cutting-edge technologies are driving the growth of the technology industry. With businesses boosting their reliance on digital technologies, the tech industry is set to grow substantially in the long term.
Given the favorable industry trends, it could be wise to buy fundamentally strong tech stocks NetApp, Inc. (NTAP) and TD SYNNEX Corporation (SNX). However, not all tech stocks are likely to perform well. Hence, investors could look to avoid IonQ, Inc. (IONQ), given its poor fundamentals and growth prospects.
But before we dive deeper into the fundamentals of the stocks mentioned above, let’s discuss what’s shaping the industry’s prospects.
The technology sector is amongst the fastest-growing sectors today due to its continuous innovations and cutting-edge products. The industry is witnessing solid growth due to the robust demand for digital solutions across businesses as they look to streamline operations and drive efficiency. Gartner forecasts worldwide IT spending to rise 8% year-over-year to $5.07 trillion this year.
Businesses use tech services for a variety of tasks, ranging from routine administrative tasks like managing personnel records to intricate business operations like supply chain and operations management. Spending on IT services is anticipated to increase 10.4% over the prior year to $1.55 trillion in 2024.
In addition, the demand for advanced hardware is being driven by the increased digitization trends. Advanced hardware solutions are now required for the seamless functioning of software and to manage workloads. The use of cloud services, AI, blockchain, IoT, and machine learning are all necessitating the need for advanced hardware to meet the complex processing and data storage requirements.
The market for IT hardware is expected to grow at a CAGR of 7.9% to reach $191.03 billion by 2029.
With these favorable trends in mind, let’s dive into the fundamentals of the tech stocks mentioned above.
Stocks to Buy:
NetApp, Inc. (NTAP)
NTAP provides cloud-led and data-centric services to manage and share data on-premises and private and public clouds worldwide. It operates in two segments: Hybrid Cloud and Public Cloud. The company offers intelligent data management software, storage infrastructure solutions, cloud storage and data services, cloud operation services, and application-aware data management services.
In terms of the trailing-12-month net income margin, NTAP’s 11.34% is 380.9% higher than the 2.36% industry average. Likewise, its 21.72% trailing-12-month EBITDA margin is 130.7% higher than the industry average of 9.42%. Furthermore, the stock’s 70.18% trailing-12-month Return on Common Equity is significantly higher than the industry average of 1.46%.
NTAP’s net revenues for the fiscal second quarter ended October 27, 2023, amounted to $1.56 billion. Its Services revenue rose 3.6% year-over-year to $856 million. Its non-GAAP income from operations increased 6.6% year-over-year to $419 million. The company’s non-GAAP net income increased 2.5% year-over-year to $334 million.
Also, its non-GAAP net income per share came in at $1.58, registering a 6.8% increase over the prior-year quarter.
Analysts expect NTAP’s revenue and EPS for the quarter ending January 31, 2024, to increase 4.1% and 23.3% year-over-year to $1.59 billion and $1.69, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 37.6% to close the last trading session at $86.66.
NTAP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within 35 stocks in the B-rated Technology - Hardware industry, it is ranked #11. It has an A grade for Quality and a B for Growth and Momentum. Beyond what we have highlighted above, one can find NTAP’s ratings for Value, Stability, and Sentiment here.
TD SYNNEX Corporation (SNX)
SNX operates as a distributor and solutions aggregator for the information technology (IT) ecosystem. The company offers personal computing devices and peripherals, mobile phones and accessories, printers, supplies, and endpoint technology software, and data center technologies, such as hybrid cloud, security, storage, networking, servers, technology software, and converged and hyper-converged infrastructure.
On January 2, 2024, SNX’s division Shyft Global Services announced that it has acquired Cokeva, Inc., an industry leader in repair, test and refurbishment of IT equipment. The addition of Cokeva expands Shyft’s depot repair service capabilities and unlocks additional opportunities for Shyft customers with Cokeva’s 220,00 sq. ft. operation in Roseville, California.
The addition of the Roseville facility bolsters Shyft’s global footprint. Shyft’s senior VP Ron Brinckerhoff said, “The addition of Cokeva will provide customers the opportunity to leverage a broader range of end-to-end technology services.”
In terms of the trailing-12-month Return on Total Capital, SNX’s 6.47% is 119.2% higher than the 2.95% industry average. Likewise, its 2.13% trailing-12-month Return on Total Assets is 344.8% higher than the industry average of 0.48%. Furthermore, the stock’s 1.95x trailing-12-month asset turnover ratio is 214.9% higher than the industry average of 0.62x.
For the fiscal fourth quarter ended November 30, 2023, SNX’s revenue amounted to $14.41 billion. Its non-GAAP operating income amounted to $426.58 million. The company’s adjusted EBITDA came in at $455.68 million. Its non-GAAP net income stood at $285.57 million. Additionally, its non-GAAP EPS came in at $3.13.
Street expects SNX’s revenue and EPS for the quarter ending May 31, 2024, to increase 1.6% and 14.7% year-over-year to $14.28 billion and $2.79, respectively. The company has surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 13.4% to close the last trading session at $105.48.
SNX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Value and Momentum. Within the Technology - Services industry, it is ranked #10 out of 76 stocks.
We have also rated SNX for Growth, Stability, Sentiment, and Quality. Get all the SNX ratings here.
Stock to Avoid:
IonQ, Inc. (IONQ)
IONQ engages in the development of general-purpose quantum computing systems in the United States. It sells access to quantum computers of various qubit capacities. The company makes access to its quantum computers through cloud platforms, such as Amazon Web Services (AWS) Amazon Braket, Microsoft's Azure Quantum, and Google's Cloud Marketplace, as well as through its cloud service.
IONQ’s trailing-12-month levered FCF margin is negative 184.76% compared to the 8.65% industry average. Likewise, its trailing-12-month Return on Common Equity is negative 25.05% compared to the 1.46% industry average. Furthermore, the stock’s negative 23.79% trailing-12-month Return on Total Assets compares to the industry average of 0.48%.
IONQ’s net loss for the fiscal third quarter ended September 30, 2023, widened 86.8% over the prior year quarter to $44.81 million. Its net loss per share came in at $0.22, widening 83.3% year-over-year. Additionally, its loss from operations widened 69.4% year-over-year to $42.19 million. Also, its adjusted EBITDA loss widened 67.8% year-over-year.
For fiscal 2023, IONQ’s EPS is expected to remain negative. Over the past three months, the stock has declined 24.4% to close the last trading session at $12.09.
IONQ’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, equating to a Strong Sell in our proprietary rating system.
It has an F grade for Value and Stability and a D for Growth, Sentiment, and Quality. In the Technology - Hardware industry, it is ranked last. Click here to see IONQ’s rating for Momentum.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
NTAP shares were trading at $86.39 per share on Thursday afternoon, down $0.27 (-0.31%). Year-to-date, NTAP has declined -1.44%, versus a -0.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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