The technology industry emerged as the best-performing sector in the first quarter, encouraged by impressive earnings and cost-cutting measures from industry participants. Moreover, the Artificial Intelligence (AI) theme also played a prominent role in pushing stocks higher. Given the solid rebound, it could be profitable to scoop up the shares of Extreme Networks, Inc. (EXTR) and PCTEL, Inc. (PCTI) with strong fundamentals.
Although the tech sector has significant growth potential, some weak tech stocks might face difficulties due to macroeconomic headwinds. As investors weigh the risks of recession, investors could consider avoiding fundamentally weak tech stocks Akoustis Technologies, Inc. (AKTS) and Ondas Holdings Inc. (ONDS), which seem to be struggling.
After enduring sharp declines last year, the first quarter of 2023 has brought a surprising turnaround for the tech industry. The tech-heavy Nasdaq composite index surged 16.8%, posting its best quarter since 2020.
Wedbush’s Dan Ives believes the rebound was mounted by the Artificial Intelligence (AI) boom that has spawned an $800 billion opportunity over the next decade across the enterprise and consumer tech space.
Outperforming the broader market, most tech companies have been proactive in their approach to the new investing landscape and adopting new technologies such as cloud computing and data analytics. Gartner forecasts global IT spending will reach $4.6 trillion this year, indicating a rise of 5.5% from the previous year.
However, the sector has also undergone a rough patch due to sweeping layoffs and the Federal Reserve’s aggressive interest rate hikes. Amid all the jitters, the minutes revealed no sign of rate cuts in sight. This, in turn, could continue to exert pressure on tech stocks.
That being said, let’s evaluate the fundamentals of the featured stocks in detail:
Stocks to Buy:
Extreme Networks, Inc. (EXTR)
EXTR is a software-driven networking solutions provider. It offers wireless network infrastructure equipment and develops software for network management, policy, analytics, security, and access controls.
On May 9, the company introduced ExtremeCloud Edge, the industry’s first networking cloud continuum, delivering more choice and flexibility to customers while running networking applications, including management, analytics, and AI. ExtremeCloud Edge eliminates cloud sovereignty concerns and dramatically boosts the one-network experience.
This new launch reflects EXTR’s continued innovation in enterprise networking and should witness a robust market demand.
In terms of forward EV/Sales, EXTR is trading at 1.90x, 29.8% lower than the industry average of 2.70x. Its forward EV/EBIT and Price/Sales multiples of 13.02 and 1.84 are 24.6% and 30.5% lower than the industry averages of 17.27 and 2.64, respectively.
In the third quarter that ended March 31, 2023, EXTR’s total net revenue increased 16.5% year-over-year to $332.51 million. Its non-GAAP operating income grew 45.9% from the year-ago value to $52.04 million.
The company’s non-GAAP net income amounted to $38.84 million and $0.29 per share, representing an increase of 41.6% and 38.1% from the prior-year quarter, respectively.
The consensus EPS estimate of $0.31 for the fourth quarter (ending June 30, 2023) represents a 106.7% improvement year-over-year. The consensus revenue estimate of $343.37 million for the current quarter represents a 23.4% increase from the same period last year.
The company has an excellent earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock’s trailing-12-month ROCE and ROTA of 57.35% and 5.43% are significantly higher than the 0.71% and 0.31% industry averages, respectively. Likewise, its levered FCF margin of 14.05% is 100.4% higher than the industry average of 7.01%.
EXTR’s shares have gained 97.7% over the past year to close the last trading session at $18.41.
EXTR’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and Quality. Among the 51 stocks in the Technology – Communication/Networking industry, it is ranked #4.
In addition to the POWR Ratings I’ve just highlighted, you can see EXTR ratings for Value, Momentum, Stability, and Sentiment here.
PCTEL, Inc. (PCTI)
PCTI is a global provider of wireless technology solutions, including purpose-built Industrial IoT devices, antenna systems, and test and measurement products. It designs and manufactures precision antennas and industrial IoT devices that are deployed in small cells, enterprise Wi-Fi access points, fleet management, transit systems, and equipment and devices for the industrial IoT.
On May 23, PCTI announced the addition of new 4G LTE and 5G NR network monitoring capabilities to the SeeHawk™ Monitor system, enabling users to rapidly detect and respond to changes in network conditions.
The newly added capabilities support mission-critical coverage, international spectrum coordination, and rogue base station detection, thereby making it highly effective in garnering strong user demand.
On March 27, the company introduced its latest innovative testing solution for P25 public safety radio networks with the industry’s first automated uplink drive and walk testing.
This solution is designed to assist radio network managers in delivering more reliable critical communications coverage for public safety and emergency response teams, including police, fire, and EMS, ultimately increasing the dependence on the product.
PCTI’s forward non-GAAP P/E is trading at 13.97x, 32.8% lower than the industry average of 20.78x. Likewise, its forward EV/EBITDA and EV/Sales multiples of 7.07 and 0.69 are 49.2% and 74.5% lower than the industry averages of 13.92x and 2.70x.
During the first quarter that ended on March 31, 2023, PCTI’s revenues increased marginally year-over-year to $22.97 million, while its gross profit grew 23.6% from the year-ago value to $11.53 million.
The company’s non-GAAP operating income increased 602.2% from the prior-year quarter to $2.24 million, while its adjusted net income came in at $2.14 million, representing a 603.9% year-over-year improvement. Also, its non-GAAP earnings per share stood at $0.12, up significantly year-over-year.
In terms of trailing-12-month ROTA and ROCE, PCTI’s 6.78% and 8.63% are significantly higher than the industry averages of 0.31% and 0.71%, respectively. Also, its trailing-12-month net income margin of 5.77% is 141.5% higher than the industry average of 2.39%.
For the fiscal year 2024, PCTI’s EPS is expected to increase 38.2% year-over-year to $0.47. Its revenue for the next year is expected to be $102.10 million, reflecting an 11.9% year-over-year growth. The company surpassed the EPS estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 15.8% to close the last trading session at $4.75.
PCTI’s POWR Ratings reflect its promising outlook. The stock has an overall A rating, which translates to a Strong Buy in our proprietary rating system.
It also has an A grade for Value and B for Sentiment and Quality. In the same industry, it is ranked first among 51 stocks. Click here to see additional ratings for PCTI (Growth, Momentum, and Stability).
Stocks to Sell:
Akoustis Technologies, Inc. (AKTS)
AKTS is a filter solutions company that engages in the development, design, and manufacture of Radio Frequency (RF) filter products for the mobile wireless device industry. It operates through the Foundry Fabrication Services and RF Filters segments.
The stock’s forward EV/Sales and Price/Sales multiples of 7.21 and 7.47 are 166.6% and 182.7% higher than the 2.70x and 2.64x industry averages, respectively.
AKTS’ trailing-12-month EBIT and net income margins of negative 273% and 258.5% compare with the industry averages of 4.58% and 2.39%. Likewise, its trailing-12-month asset turnover ratio of 0.17x is 72.8% lower than the industry average of 0.61x.
During the third quarter that ended March 31, 2023, AKTS’ gross loss increased 46.3% year-over-year to $1.12 million. Its operating expenses rose 15.2% from the year-ago value to $16.17 million.
The company’s non-GAAP operating and net losses widened 12.2% and 17.4% from the year-ago value to $13.20 million and $13.64 million, respectively. Also, its adjusted loss per share came in at $0.20, widening 4.8% year-over-year.
Analysts expect AKTS’ EPS to remain negative for the fiscal years 2023 and 2024. Also, it failed to surpass the consensus revenue estimates in three of the trailing four quarters.
The stock has declined 41.7% over the past nine months to close the last trading session at $2.84.
AKTS’ POWR Ratings reflect this weak outlook. 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 Quality and a D for Stability. Out of 51 stocks in the Technology – Communication/Networking industry, it is ranked #50.
Beyond what I’ve stated above, we have also given AKTS grades for Growth, Momentum, and Sentiment. Get all AKTS ratings here.
Ondas Holdings Inc. (ONDS)
ONDS is a provider of private wireless data and drone solutions for secure, wide-area mission-critical business-to-business networks through its wholly owned subsidiaries, Ondas Networks Inc. and American Robotics, Inc. It operates in two segments: Ondas Networks and Ondas Autonomous Systems.
ONDS trailing-12-month EV/Sales and Price/Sales multiples of 13.31 and 8.40 are 368.9% and 211.1% higher than the industry averages of 2.84x and 2.70x, respectively.
ONDS’ trailing-12-month ROCE, ROTC, and ROTA of negative 98.57%, 34.49%, and 82.85% compare to the industry averages of 0.71%, 2.24%, and 0.31%. Also, its trailing-12-month asset turnover ratio of 0.04x is 93.1% lower than the industry average of 0.61x.
ONDS’ total operating expenses increased 35.3% year-over-year to $13.68 million for the first quarter (ended March 31, 2023). Its operating and net losses amounted to $12.65 million and $14.46 million, widening 26.6% and 44.4% year-over-year, respectively.
The company’s net loss per share widened 25% from the year-ago value to $0.30 hare. Also, its EBITDA loss stood at $10.16 million, up 30.8% year-over-year.
ONDS’ loss per share is expected to be $0.17 in the current quarter (ending June 30, 2023). Its EPS is expected to remain negative in the fiscal years 2023 and 2024. Moreover, it has a grim earnings surprise history, missing the EPS estimates in each of the trailing four quarters.
Over the past year, the stock has declined 87.8% to close the last trading session at $0.82. Also, it has declined 48.1% year-to-date.
ONDS’ weak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system.
It also has an F grade for Value, Momentum, and Quality and a D for Stability and Sentiment. Within the same industry, it is ranked last. Click here to see ONDS’ rating for Growth.
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REVISED: 2023 Stock Market Outlook >
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REVISED: 2023 Stock Market Outlook (includes top 7 picks)
EXTR shares were trading at $19.02 per share on Friday afternoon, up $0.61 (+3.31%). Year-to-date, EXTR has gained 3.88%, versus a 10.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions. More...
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|AKTS||Get Rating||Get Rating||Get Rating|
|ONDS||Get Rating||Get Rating||Get Rating|