Driven by innovation and a never-ending search for comprehensive digital solutions, the technology sector is well-positioned for long-term growth. The industry has been taking great strides in the fields of software, cloud computing, IoT, machine learning, quantum computing, blockchain, and artificial intelligence (AI).
Given the industry’s long-term growth prospects, investors could consider buying fundamentally strong tech stocks Cisco Systems, Inc. (CSCO), Box, Inc. (BOX), and Lantronix, Inc. (LTRX).
But before delving deeper into their fundamentals, let’s explore the industry landscape first.
The buzz around generative AI and the Federal Reserve’s indication of interest rate cuts this year have fueled the rally of the tech-heavy Nasdaq Composite. The Nasdaq has rallied 38.7% over the past year.
The tech sector has been booming as businesses increasingly rely on technology to boost their growth. Digital transformation initiatives across different sectors have been critical in fueling the industry’s expansion. Gartner anticipates global IT spending to hit $5.07 trillion in 2024, rising 8% year-over-year.
Tech companies specializing in cloud computing, networking and communication, artificial intelligence, cybersecurity, and advanced hardware solutions are set to benefit from the growing dependence on digitization. The rising reliance on tech solutions is driving the need for tech services. Gartner predicts that spending on IT services will increase 10.4% year-over-year to $1.55 trillion in 2024.
With the proliferation of smartphones, integration of the Internet of Things (IoT) in various devices and machines, the need for faster connectivity through 5G and broadband satellite internet, and the growth of cloud-based telecommunication networks, the demand for advanced communication and networking equipment is expanding.
The global optical communication and networking equipment market is forecasted to grow at a CAGR of 15.8% to reach $107.46 billion by 2030. Moreover, the increased digitization trends are boosting the demand for cutting-edge hardware, which includes servers and data centers.
Advanced hardware solutions are in demand due to the growing need to process higher workloads and for the smooth functioning of different processes. The market for IT hardware is expected to grow at a CAGR of 7.9% to reach $191.03 billion by 2029.
In light of such favorable trends, let’s delve deeper into the fundamentals of the featured tech stocks.
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry worldwide. The company offers switching portfolio, enterprise routing portfolio, wireless products, and compute portfolio. It also provides Internet for the future products, collaboration products, end-to-end security and optimized application experiences products.
In terms of forward non-GAAP P/E, CSCO’s 13.09x is 46.3% lower than the 24.37x industry average. Its 9.53x forward EV/EBITDA is 38.6% lower than the 15.50x industry average. Likewise, its 10.20x forward EV/EBIT is 50.5% lower than the 20.60x industry average.
On December 21, 2023, CSCO announced the intent to acquire Isovalent, a leader in open-source cloud native networking and security, to bolster its secure networking capabilities across public clouds.
The acquisition of Isovalent will build on the CSCO Security Cloud vision, an AI-driven, cloud delivered, integrated security platform for organizations of any shape and size. The CSCO Security Cloud enables customers to abstract security controls from multi-cloud infrastructure to provide advanced protection against emerging threats across any cloud, application or workload.
"Together with Isovalent, Cisco will build on the open source power of Cilium to create a truly unique multicloud security and networking capability to help customers simplify and accelerate their digital transformation journeys," said Jeetu Patel, executive vice president and general manager of Security and Collaboration at CSCO.
"Imagine in today's distributed environment - of applications, virtual machines, containers and cloud assets - having security controls with total visibility, without hindering networking and application performance. The combination of CSCO and Isovalent will make this a reality" he added.
CSCO’s total revenue for the fiscal first quarter, which ended October 28, 2023, increased 7.6% year-over-year to $14.67 billion. Its non-GAAP operating income increased 23.9% year-over-year to $5.37 billion. The company’s non-GAAP net income increased 27.6% over the prior year quarter to $4.53 billion. Also, its non-GAAP EPS came in at $1.11, registering an increase of 29.1% year-over-year.
Analysts expect CSCO’s revenue and EPS for fiscal 2025 to increase 3.3% and 4.3% year-over-year to $56.36 billion and $4.04, respectively. It has topped the consensus EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 8.2% to close the last trading session at $50.75.
CSCO’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.
It has an A grade for Quality and a B for Stability. It is ranked #6 out of 45 stocks in the Technology – Communication/Networking industry. Click here to see the additional ratings of CSCO for Growth, Value, Momentum, and Sentiment.
Box, Inc. (BOX)
BOX provides a cloud content management platform that enables organizations of various sizes to manage and share their content from anywhere on any device. The company’s Software-as-a-Service platform enables users to collaborate on content-driven business processes, automate content-driven business processes, etc. It also offers web, mobile, and desktop applications for cloud content management.
On January 16, 2024, BOX announced that its e-signature product, BOX Sign, now supports compliance with FDA 21 CFR Part 11 regulations for electronic signatures. The newly released Part 11 e-signature workflow capabilities in Box Sign offer functionality and controls, which, if properly configured and used, enable users to create e-signatures compliant with the requirements of Part 11.
"With the ability to support 21 CFR Part 11 compliance, life sciences customers at Box can make strides forward in their digital transformation journey. Box GxP Validation now enable customers globally to support paperless trials, regulatory approvals and inspection readiness programs with full confidence in the electronically signed and approved content" said Manu Vohra, Managing Director of Life Sciences at BOX.
On December 14, 2023, BOX announced new consulting services that help customers safely and securely implement an AI content strategy across their organizations. These offerings are available through Box Consulting, providing tailored workshops, implementation roadmaps, and managed deployments with training and support, and hands-on guidance to assist organizations in safely implementing their strategies.
“The promise of AI combined with the value of an enterprise’s unique business content is potentially transformative, but the steps you can take to harness the full power of this new technology are not always clear,” said Jon Herstein, Chief Customer Officer at Box.
“These new offerings merge Box Consulting’s deep expertise in enterprise content with access to Box’s groundbreaking AI technology and the experts who built it. By executing a robust AI content strategy with Box Consulting, organizations can unlock the value of their unstructured data and realize the power of AI much more quickly,” he added.
In terms of forward non-GAAP PEG, BOX’s 0.91x is 55.5% lower than the 2.03x industry average. Its 13.98x forward EV/EBITDA is 9.8% lower than the 15.50x industry average. Likewise, its 16.82x forward EV/EBIT is 18.4% lower than the 20.60x industry average.
For the fiscal third quarter, which ended October 31, 2023, BOX’s revenue increased 4.6% year-over-year to $261.54 million. Its non-GAAP gross profit rose 4.4% over the prior year quarter to $199.65 million. Its non-GAAP operating income increased 7.8% year-over-year to $64.63 million.
The company’s non-GAAP net income attributable to common stockholders increased 14.1% year-over-year to $53.23 million. Also, its non-GAAP EPS came in at $0.36, representing an increase of 16.1% year-over-year.
Street expects BOX’s revenue and EPS for the quarter ending January 31, 2024, to increase 2.5% and 4.1% year-over-year to $262.83 million and $0.39, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 2.5% to close the last trading session at $25.79.
BOX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Quality and a B for Growth and Value. It is ranked #5 out of 76 stocks in the Technology – Services industry. One can see the additional ratings of BOX for Momentum, Stability, and Sentiment here.
Lantronix, Inc. (LTRX)
LTRX provides solutions for video surveillance, infotainment systems, and intelligent substations infrastructure. It offers IoT products, Embedded IoT Modules, and Software and Engineering Services. It also provides telematics devices, network switches, media converters, power over ethernet, NICS, and optical SFPs, system on modules, development kits, and services for mechanical, hardware, and software engineering.
On January 3, 2024, LTRX announced that it has partnered with P3 Digital Services3 to pre-integrate LTRX’s embedded in-vehicle infotainment platform with SPARQ OS, the flagship IVI software by P3. Pre-integration between hardware and software offers automakers accelerated time-to-market, reduced technology risk, and significant savings in engineering and management time.
Additionally, an automotive manufacturer can bring innovative new products to market sooner and start earning revenues through the IVI platform, while the OEM’s customers can be confident in a reliable, highly functional IVI platform with SPARQ OS as its foundation.
On October 25, LTRX announced that it had expanded its embedded product line to meet the changing needs of the automotive sector. Leveraging Qualcomm Technologies Inc.’s (QCOM) latest Snapdragon Ride and Cockpit Platforms, including the Snapdragon Ride Flex Platform, LTRX introduced the Snapdragon Ride SX Automotive Development Platform (ADP).
This platform is designed to expedite the development of customizable infotainment, cluster, and driver monitoring systems (DMS).
In terms of forward EV/Sales, LTRX’s 1.40x is 51.4% lower than the 2.87x industry average. Its 10.57x forward EV/EBITDA is 31.8% lower than the 15.50x industry average. Likewise, its 1.34x forward Price/Sales is 53.2% lower than the 2.85x industry average.
LTRX’s net revenue for the fiscal first quarter that ended September 30, 2023, increased 3.9% year-over-year to $33.03 million. Its gross profit increased marginally over the prior year quarter to $14.10 million. The company’s non-GAAP net income and net income per share stood at $2.46 million and $0.07, respectively.
LTRX’s revenue and EPS for the quarter ended December 31, 2023, are expected to increase 19.3% and 105% year-over-year to $37.59 million and $0.08, respectively. Over the past nine months, the stock has gained 50% to close the last trading session at $6.24.
It’s no surprise that LTRX has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It has an A grade for Sentiment and a B for Growth, Momentum, and Quality. Within the A-rated Technology – Hardware industry, it is ranked #7 out of 36 stocks. In addition to the POWR Ratings stated above, one can access LTRX’s Value and Stability ratings here.
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.
CSCO shares were trading at $51.13 per share on Friday morning, up $0.38 (+0.75%). Year-to-date, CSCO has gained 2.00%, versus a 0.48% 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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