Despite economic challenges, the tech services industry is expected to expand due to increased demand, digital transformation, and government initiatives. The growing reliance on cloud computing, data analytics, and AI is a key factor behind this trend.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the tech services industry is well-positioned to grow.
Digital transformation revolutionizes how businesses operate and connect with customers, enhancing processes, productivity, and personalized experiences. It fosters innovation to stay competitive.
The digital transformation market is projected to reach $3.14 trillion by 2030, growing at a CAGR of 24.1%. The surge in digitization and the need for efficient resource utilization should drive this growth.
Statista predicts that the global IT services market will reach $1.77 trillion by 2028, with a 7.4% annual growth. This growth is due to the rising demand for digital transformation and cloud computing solutions in various industries. The market is expected to expand as organizations prioritize technology integration and IT service outsourcing.
This is evident from investors’ interest in tech stocks, as seen in the Technology Select Sector SPDR ETF’s (XLK) 9.7% returns over the past six months.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology – Services picks, beginning with the third choice.
Stock #3: Sanmina Corporation (SANM)
SANM provides integrated manufacturing solutions, components, products and repair, logistics, and after-market services worldwide. It operates in two businesses: Integrated Manufacturing Solutions; and Components, Products, and Services.
In terms of the trailing-12-month Return on Total Assets, SANM’s 6.18% is significantly higher than the 0.09% industry average. Likewise, its 5.17% trailing-12-month EBIT margin is 8% higher than the 4.78% industry average. Additionally, its 14.98% trailing-12-month Return on Common Equity is significantly higher than the 1.10% industry average.
SANM’s net sales for the fiscal fourth quarter that ended on September 30, 2023, came in at $2.05 billion, while gross profit increased 0.7% from the year-ago value to $173.43 million. Its non-GAAP net income attributable to common shareholders came in at $83.97 million and $1.42 per share, up 2.1% and 3.6% year-over-year, respectively.
Analysts expect SANM’s EPS and revenue for the fiscal year ending September 30, 2025, to increase 22.2% and 11.7% year-over-year to $6.55 and $8.91 billion, respectively. It surpassed Street EPS estimates in three of the trailing four quarters. Over the past month, the stock has declined 11.3% to close the last trading session at $47.13.
SANM’s POWR Ratings reflect solid prospects. It is ranked #31 out of 73 in the Technology – Services industry. It has an A grade for Momentum and a B for Value. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Click here to see SANM’s Growth, Stability, Sentiment, and Quality ratings.
Stock #2: Celestica Inc. (CLS)
CLS provides supply chain solutions in North America, Europe, and Asia. It operates through Advanced Technology Solutions, and Connectivity & Cloud Solutions segments.
On October 16, 2023, CLS introduced the DS5000, an 800GbE switch for data centers and enterprise access. They aim to make it the first OCP-inspired 800G Ethernet switch. The DS5000 suits various uses and supports SONiC and ONIE installer.
Gavin Cato, Head and Chief Technology Officer for Platform Solutions at CLS, expressed that the DS5000 showcases their commitment to addressing AI workloads with a dense, low-power capability, meeting the needs of cloud and enterprise customers for infrastructure performance and scalability.
In terms of the trailing-12-month EBIT margin, CLS’ 5.44% is 13.7% higher than the 4.78% industry average. Likewise, its 2.58% trailing-12-month net income margin is 17.7% higher than the industry average of 2.19%. Furthermore, its 1.42x trailing-12-month asset turnover ratio is 128.6% higher than the industry average of 0.62x.
CLS’ total revenue for the third quarter ended September 30, 2023, rose 6.2% year-over-year to $1.92 billion. The company’s adjusted gross profit increased 16.6% year-over-year to $200 million.
Its adjusted net earnings increased 23% year-over-year to $78.20 million. Additionally, its adjusted EPS came in at $0.65, representing an increase of 25% year-over-year. Its net cash provided by operating activities rose 18.8% year-over-year to $88.40 million.
For the quarter ending December 31, 2023, CLS’ EPS and revenue are expected to increase 21.9% and 2.9% year-over-year to $0.68 and $2.10 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 127.1% to close the last trading session at $24.96.
CLS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Momentum and a B for Growth and Sentiment. It is ranked #20 in the same industry. Click here to see CLS’ ratings for Value, Stability, and Quality.
Stock #1: Fujitsu Limited (FJTSY)
Headquartered in Tokyo, Japan, FJTSY operates as an information and communication technology company in Japan and internationally. The company operates through three segments: Technology Solutions; Ubiquitous Solutions; and Device Solutions.
On May 16, 2023, FJTSY completed a public takeover offer of GK Software, acquiring 68.03% of its total share capital. This move will advance FJTSY’s shift towards Cloud and Software-as-a-Service (SaaS) and expand its global reach in Digital Transformation offerings.
In terms of the trailing-12-month net income margin, FJTSY’s 4.87% is 122% higher than the 2.19% industry average. Likewise, its 5.97% trailing-12-month EBIT margin is 22.4% higher than the industry average of 4.88%. Furthermore, the stock’s 6.80% trailing-12-month Return on Total Capital is 169.2% higher than the industry average of 2.53%.
FJTSY’s revenue for the six months that ended September 30, 2023, increased 0.4% year-over-year to ¥1.71 trillion ($11.34 billion). Its operating profit came in at ¥44.78 billion ($297.02 million). The company’s profit for the period and earnings per share came in at ¥43.94 billion ($291.45 million) and ¥200.44.
For the quarter ending June 30, 2024, FJTSY’s revenue is expected to increase 3.6% year-over-year to $5.96 billion. Over the past month, the stock has gained 9.7% to close the last trading session at $25.94.
FJTSY’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. Within the Technology – Services industry, it is ranked #18 out of 73 stocks. To see FJTSY’s Growth, Momentum, Stability, Sentiment, and Quality ratings, click here.
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FJTSY shares were trading at $26.06 per share on Thursday afternoon, up $0.13 (+0.48%). Year-to-date, FJTSY has declined -1.74%, versus a 15.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments. More...
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