The tech industry is experiencing solid growth thanks to the high demand for advanced tech solutions, increased automation, and higher investments in digital transformation initiatives across industries. Moreover, the tech sector looks well-poised to benefit from expected interest rate cuts by the Federal Reserve this year, further supporting its overall expansion.
Considering these factors, investors could consider buying fundamentally strong tech stocks Science Applications International Corporation (SAIC) and Gilat Satellite Networks Ltd. (GILT). Meanwhile, despite the favorable backdrop, it could be wise to avoid Western Digital Corporation (WDC) and SOBR Safe, Inc. (SOBR), given their weak fundamentals and poor growth prospects.
Before delving deeper into their fundamentals, let’s discuss what’s shaping the tech industry’s prospects.
The excitement around generative AI and its applications and the anticipated rate cuts by the Federal Reserve this year have fueled the strong performance of the Nasdaq Composite, leading to its 34.4% rise over the past year.
The tech industry prospects are being shaped by heavy investments in digitization to modernize operations, boost agility, gain a competitive edge, and improve efficiency. Enterprises globally are strengthening their digital capabilities through investments in digital transformation, which is driving positive momentum for tech companies.
According to Gartner, global IT spending is anticipated to reach $5 trillion this year, reflecting a 6.8% increase over 2023. Moreover, spending on IT services this year is projected to grow 8.7% year-over-year to $1.50 trillion.
Meanwhile, the demand for communication and networking equipment is on the rise due to emerging technologies such as 5G, Network Function Virtualization (NFV), IoT integration, increasing data traffic, expanding data centers, and cloud services adoption. The global optical communication and networking equipment market is projected to grow at a CAGR of 15.8%, reaching $107.46 billion by 2030.
Furthermore, with the surge in digitization initiatives, there is a growing demand for advanced hardware solutions capable of meeting complex processing demands and increased workloads. The IT hardware market is anticipated to expand at a CAGR of 7.9%, reaching $191.03 billion by 2029.
Investors’ interest in tech stocks is evident from the Technology Select Sector SPDR ETF’s (XLK) 46% returns over the past year.
Considering these conducive trends, let’s analyze the fundamentals of the abovementioned technology stocks.
Stocks to Buy:
Science Applications International Corporation (SAIC)
SAIC provides technical, engineering, and enterprise information technology (IT) services primarily in the United States. The company's offerings include a comprehensive range of engineering, technology, IT, logistics, training, simulation, and end-to-end services, including cloud migration, managed services, infrastructure modernization, and data management platform solutions.
On February 8, 2024, SAIC was awarded an $80.5 million U.S. Navy contract to design, produce, and deliver MK 710 Torpedo System Test Sets (TSTS), enhancing the Navy's capability to validate MK 48 heavyweight torpedoes' operational status, supporting training and tactics development.
On January 11, 2024, SAIC was awarded a $156 million U.S. Army Reserve contract for IT Service Management, providing cost-effective enterprise IT solutions and support to over 65,000 users across global locations, focusing on mission value, user experience, and cybersecurity.
In terms of the trailing-12-month Return on Total Assets, SAIC’s 9.05% is 87% higher than the 4.84% industry average. Likewise, its 29.14% trailing-12-month Return on Common Equity is 141.8% higher than the industry average of 12.05%. Furthermore, the stock’s 1.36x trailing-12-month asset turnover ratio is 69.7% higher than the industry average of 0.80x.
For the third quarter that ended November 3, 2023, SAIC’s revenues came in at $1.90 billion. Its adjusted operating income increased 5.9% over the prior-year quarter to $144 million. The company’s adjusted EBITDA rose 4.7% from the year-ago value to $178 million. In addition, its adjusted EPS came in at $2.27, representing an increase of 19.5% year-over-year.
Street expects SAIC’s revenue for the quarter ending July 31, 2024, to increase 2.9% year-over-year to $1.84 billion. Its EPS for fiscal 2024 is expected to increase 4.6% year-over-year to $7.89. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 38.4% to close the last trading session at $136.12.
SAIC’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #13 out of 75 stocks in the Technology - Services. It has a B grade for Value and Momentum. Click here to see SAIC’s ratings for Growth, Stability, Sentiment, and Quality.
Gilat Satellite Networks Ltd. (GILT)
Headquartered in Petah Tikva, Israel, GILT and its subsidiaries provide satellite-based broadband communication solutions in Israel, the United States, Peru, and internationally. It operates in three segments: Satellite Networks, Integrated Solutions, and Network Infrastructure and Services.
On February 8, 2024, GILT announced a $10 million follow-on order from the US Department of Defense for DKET 3421 terminals, facilitating easy-to-deploy transportable satcom network hubs with operational flexibility, scalability, and rapid deployment capability in diverse environments.
On January 16, 2024, GILT was awarded a $17 million contract by Pronatel to expand a regional telecommunications project in Peru, adding connectivity to 35 new localities, schools, and health posts and implementing free Wi-Fi hotspots and a community telecenter for 10 years to promote digital inclusion and literacy in the Amazonas region.
In terms of the trailing-12-month EBIT margin, GILT’s 11.91% is 153.8% higher than the 4.69% industry average. Its 16.70% trailing-12-month EBITDA margin is 82.9% higher than the 9.13% industry average. Likewise, its 7.51% trailing-12-month Return on Total Capital is 202% higher than the industry average of 2.49%.
GILT’s revenues for the fiscal third quarter ended September 30, 2023, increased 5.9% year-over-year to $63.93 million. Its non-GAAP gross profit rose 12.1% over the prior-year quarter to $25.91 million. The company’s non-GAAP operating income stood at $6.10 million, up 39.6% over the year-ago quarter.
For the same quarter, its non-GAAP net income rose 51.2% over the prior-year quarter to $4.58 million. Also, its non-GAAP EPS came in at $0.08, representing an increase of 33.3% year-over-year.
For the quarter ended December 31, 2023, GILT’s revenue is expected to increase 4.6% year-over-year to $75.99 million. Over the past nine months, the stock has gained 10.3% to close the last trading session at $6.30.
GILT’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Growth, Value, and Quality. Within the Technology – Communication/Networking industry, it is ranked first out of 46 stocks. To access the other ratings of GILT for Momentum and Stability, click here.
Stocks to Sell:
Western Digital Corporation (WDC)
WDC develops, manufactures, and sells data storage devices and solutions internationally. It offers client devices such as HDDs and SSDs for PCs, gaming consoles, set-top boxes, and flash-based embedded storage products for mobile devices, automotive, IoT, industrial, and connected home applications.
In terms of the trailing-12-month gross profit margin, WDC’s 8.29% is 83.1% lower than the 49.01% industry average. Likewise, its 0.46x trailing-12-month asset turnover ratio is 25.9% lower than the industry average of 0.61x.
WDC’s non-GAAP revenue for the fiscal second quarter, which ended on December 29, 2023, declined 2.4% year-over-year to $3.03 billion. The company’s non-GAAP operating loss stood at $91 million. Moreover, its non-GAAP net loss and EPS widened 55.6% and 64.2% year-over-year to $210 million and $0.69 per share, respectively.
Analysts expect WDC's EPS for fiscal 2024 to remain negative. Over the past nine months, the stock has declined 39.3% to close the last trading session at $53.39.
WDC’s POWR Ratings reflect its grim prospects. It has an overall rating of D, which translates to a Sell in our proprietary rating system.
It is ranked #31 out of 36 stocks in the A-rated Technology - Hardware industry. It has a D grade for Value, Stability, and Quality. Click here to see WDC’s Growth, Momentum, and Sentiment ratings.
SOBR Safe, Inc. (SOBR)
SOBR is a hardware and software company that develops non-invasive alcohol detection, biometric identity verification, and real-time cloud-based alerts and reporting systems in North America.
In terms of the trailing-12-month asset turnover ratio, SOBR’s 0.02x is 97.5% lower than the 0.61x industry average. Its 44.50% trailing-12-month gross profit margin is 9.2% lower than the industry average of 49.01%.
For the third quarter ended September 30, 2023, SOBR’s loss from operations came in at $2.07 million. Also, the company’s net loss attributable to common stockholders and loss per common share stood at $2.20 million and $0.12, respectively.
Over the past year, SOBR’s stock has declined 72.7% to close the last trading session at $0.67.
SOBR’s weak outlook is reflected in its POWR Ratings. 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 Growth and Stability. It is ranked #38 in the same industry. To see SOBR’s Momentum and Sentiment ratings, click 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.
WDC shares were trading at $55.85 per share on Thursday afternoon, up $2.46 (+4.61%). Year-to-date, WDC has gained 6.65%, versus a 6.55% 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.
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