Order has been restored. With the tech-heavy Nasdaq snapping its three-week losing streak, the market’s sector leader is back — at least for now.
By far 2023’s best-performing group, information technology companies are benefiting from job cuts, other cost-saving measures, a semiconductor recovery and of course, an artificial intelligence (AI) boom. Some of the year’s biggest winners — NVIDIA, Meta Platforms and AMD — are beneficiaries of all of the above.
While tech’s current tailwinds likely have more to give (especially AI), the extent to which this is already built into share prices is less clear. With a third of the year still remaining, several large-cap tech stocks have doubled. A handful have tripled. There is something to be said about riding the hot hand, but at this stage, investors who hitch their wagons to the big gainers are susceptible to disappointment.
Big runs often coincide with big run-ups in a stock’s valuation. This has been the case for several tech winners, including NVIDIA, which is trading at 143x trailing earnings. As the dot com bubble and other periods of frothy tech valuations have proven, paring back outperformers and reallocating to less popular, less expensive names can be a prudent portfolio strategy.
Before the herd flees from the 2023 winners, rotating into these three mid-cap tech stocks may be a winning move.
What Does Itron Do?
Itron, Inc. (NASDAQ: ITRI) provides technology solutions to the energy and water industries. Best known for its handheld meter reading devices, the company offers a range of hardware, software and services that help utilities and related businesses share data. Over 8,000 customers around the world use Itron technologies to optimize electricity, gas and water delivery and usage.
As a leader in this space, Itron is well-positioned to benefit from increased global attention on how we manage our natural resources. With climate change and energy conservation more pressing issues, Itron’s smart networks, meters and sensors are poised to play a major role in commercial and residential energy management. The company recently teamed up with Celestica to create a connected lighting network across Paris, France that is projected to lower energy costs by 30%.
Itron has a second compelling growth driver in the form of U.S. infrastructure spending. As the nation’s aging roads, grids and waterways get updated, there will be increasing demand for modern technology that optimizes these upgrades. A pair of powerful growth themes and a 2024 P/E ratio of 25x make Itron a stock to own for the next tech wave.
What Is Sanmina’s Growth Outlook?
Electronics manufacturing services (EMS) provider Sanmina Corporation (NASDAQ: SANM) has a bright future tied to growth in communications, networking, data storage, automotive and several other industries. Its ability to rapidly and effectively assemble printed circuit boards and conduct testing make it a staple for customers that make the electronics behind 5G wireless networking and enterprise digital transformations.
Although orders from telecom customers have slowed amid industry consolidation, Sanmina is experiencing solid demand from industrial and medical customers. Together with the aerospace and automotive customers, these high-value-added, high-margin markets are being targeted to represent 60% of company revenue over time. With the less profitable but higher volume telecom and cloud infrastructure markets accounting for the rest, Sanmina’s evolving business model is becoming more balanced — and more attractive.
So too is its valuation. This year’s pullback to the mid-$50’s has given Sanmina an 11x P/E ratio that is significantly below the stock’s 14x five-year historical average.
Are Ciena Shares Undervalued?
At first glance, Ciena Corporation (NYSE: CIEN) shares appear expensive. The optical networking leader is trading at 31x trailing earnings — and that’s after sliding 46% since the start of 2022. A closer look reveals that Ciena is actually cheap.
First, the average technology sector stock has a trailing P/E of 40x. More importantly, looking ahead to next year’s earnings estimate, Ciena’s forward P/E is only 12x. Meanwhile, large-cap communications equipment peers such as Arista Networks (27x) and Motorola Solutions (22x) trade at significant premiums despite having exposure to the same end markets as Ciena.
The mid-cap has stabilized in recent weeks in a down market, which could signal a shift in investor sentiment. Ciena’s 48% second-quarter earnings growth well exceeded Wall Street’s expectations. And with demand from Asia-Pacific customers surging, profit growth is forecast to accelerate again in Q3. Similar to the boost chipmakers are getting, steady sales growth and diminishing supply chain constraints are driving stronger profits.
Longer term, Ciena is expected to benefit from wireless carrier and cloud data center investment in optical technologies that drive their next-gen networks. Its WaveLogic optics solutions, which can support an industry-best 1.6 terabit wavelengths, could be a growth game-changer heading into 2024.
With Wall Street predicting an 11% upside for large-cap peer Arista Networks versus 29% for Ciena, ‘switching’ to the mid-cap could lead to larger gains.
