Even though labor shortages, global supply chain constraints, and increased freight and shipping costs could mar the technology industry’s growth in the near term, tech stocks are gaining attention amid the continuing low-interest-rate environment.

Investors’ renewed interest in tech stocks is evidenced by the Technology Select Sector SPDR ETF’s (XLK) 6.7% returns over the past month. However, the current, ultra-loose monetary policy, in part, has led to stretched valuations for several tech stocks. Nevertheless, the ongoing digital transformation and increasing use of cloud computing, artificial intelligence (AI), and other advanced technologies should keep driving the technology industry’s growth. According to GoRemotely, the tech industry is expected to reach a $5 trillion market value by the end of 2021.

Consequently,  we think it could be wise to bet on Endava plc (DAVA) and Fabrinet (FN). Though these two stocks are trading at lofty valuations, there could be plenty of upside still to be had because of their fundamental strength. These stocks are rated ‘Buy’ in our proprietary POWR Ratings system.

Endava plc (DAVA)

Headquartered in London, DAVA provides technology services for clients in the consumer products, healthcare, mobility, and retail verticals in Europe, Latin America, North America, and internationally. The company offers technology and digital advisory services for payments and financial services.

On April 1, 2021, DAVA announced the acquisition of Levvel LLC. John Cotterell, DAVA’s CEO, said, “Levvel’s strong leadership team will be additive to the continued expansion of our U.S. business. Their approach to digital transformation and innovative culture are well aligned with Endava’s. Their strength in payments, banking, media and mobility in particular will complement and accelerate our existing business.”

DAVA’s revenue increased 47.7% year-over-year to £133.60 million ($155.45 million) for its fiscal fourth quarter, ended June 25, 2021. The company’s adjusted profit before tax grew 92.8% year-over-year to £29.30 million ($34.09 million), while its adjusted profit increased 84.4% year-over-year to £23.60 million ($27.46 million). Also, its adjusted EPS came in at £0.41, up 78.3% year-over-year.

For the quarter ending December 31, 2021, analysts expect DAVA’s EPS to be $41.68, representing a 43.7% year-over-year increase. In addition, it surpassed the consensus EPS estimates in each of the trailing four quarters. The company’s revenue is expected to increase 37.6% year-over-year to $846.71 million in its fiscal year 2022. The stock has gained 144.7% in price over the past year to close yesterday’s trading session at $159.02.

It’s no surprise that DAVA has an overall B rating, which equates to a Buy in our POWR Ratings system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting. It has an F grade for Value. In addition, the stock has an A grade for Sentiment, and a B grade for Growth, Momentum, and Quality.

Click here to see DAVA’s rating for Stability as well. In addition, DAVA is ranked #27 of 160 stocks in the Software – Application industry.

Click here to check out our Software Industry Report for 2021

Fabrinet (FN)

Based in George Town, the Cayman Islands, FN provides optical packaging and precision optical, electro-mechanical, and electronic manufacturing services in North America, the Asia-Pacific, and Europe. The company offers a range of advanced optical and electro-mechanical capabilities in the manufacturing process.

On August 17, 2021, Seamus Grady, CEO of FN, said, “We remain optimistic about demand trends and confident in our ability to execute, positioning us to continue delivering strong results as we enter our new fiscal year.”

FN’s revenue increased 25.8% year-over-year to $509.60 million for the fourth quarter, ended June 25, 2021. The company’s operating income grew 55% year-over-year to $43.59 million, while its non-GAAP net income increased 37.2% year-over-year to $49.40 million. Also, its non-GAAP EPS came in at $1.31, up 36.4% year-over-year.

Analysts expect FN’s EPS to be $1.38 for the quarter ending December 31, 2021, representing a 25.5% year-over-year increase. In addition, it surpassed the Street’s EPS estimates in each of the trailing four quarters. The company’s revenue is expected to increase 13.4% year-over-year to $2.13 billion in its fiscal year 2022. Over the past year, the stock has gained 61.1% in price to close yesterday’s trading session at $96.55.

FN’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to a Buy in our proprietary rating system. It has a D grade for Value. Also, it is graded B for Sentiment, Quality, and Stability.

We have also graded FN for Momentum and Growth. Click here to access all of FN’s ratings. FN is ranked #19 of 54 stocks in the B-rated Technology – Communication/Networking industry.

DAVA shares were trading at $158.40 per share on Friday afternoon, down $0.62 (-0.39%). Year-to-date, DAVA has gained 106.38%, versus a 24.07% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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