The long-term outlook for the technology sector looks bright as demand for advanced technologies grows, along with the rise in IT spending and the advances in artificial intelligence and cloud computing. Moreover, the expected interest rate cuts later this year will benefit the tech sector.
Against this backdrop, investors could follow the footsteps of smart money by buying fundamentally strong value tech stocks such as NetScout Systems, Inc. (NTCT), Universal Electronics Inc. (UEIC), and Key Tronic Corporation (KTCC). Before delving deeper into their fundamentals, let’s discuss what’s shaping the tech industry’s prospects.
Smart money refers to institutional investors and hedge funds. Due to their access to insightful research, information, and expertise, retail investors often track smart money. Investors should closely monitor smart money’s interest in the above-mentioned stocks as they usually focus on companies with solid growth potential.
The NASDAQ Composite’s 32.1% rise over the past year reflects investor confidence and optimism about the future of technology companies. According to Gartner, Inc.'s most recent report, worldwide IT spending will reach $5.06 trillion in 2024, up 8% from 2023.
John-David Lovelock, Distinguished VP Analyst at Gartner, said: “With spending on IT services on track to grow by 9.7% to eclipse $1.52 trillion, this category is on pace to become the largest market that Gartner tracks.”
The demand for tech services is fueled by digital transformation, cloud adoption, business intelligence, increased demand for data security and privacy protection, and companies’ emphasis on cost-effectiveness. The global IT services industry is expected to grow at a CAGR of 5.8% to $1.88 trillion until 2029.
Moreover, the use of advanced electronic components such as sensors and switches in devices is growing owing to greater interconnectivity between devices and the rise of smart and interactive devices. The global electronics industry is predicted to increase at a 6.8% CAGR, reaching $368.40 billion by 2032.
Moreover, investors’ interest in tech stocks is evident from the iShares U.S. Technology ETF (IYW) 44.7% returns over the past year.
Considering these conducive trends, let’s examine the fundamentals of the three featured tech stocks.
NetScout Systems, Inc. (NTCT)
NTCT provides service assurance and cybersecurity solutions to protect digital business services against disruptions in the U.S., Europe, Asia, and internationally. NTCT has institutional ownership of approximately 91.7%.
In terms of forward EV/Sales, NTCT is trading at 1.49x, 45.9% lower than the industry average of 2.75x. Likewise, its forward non-GAAP P/E of 9.26x is 60.1% lower than the 23.21x industry average. Also, its forward EV/EBITDA of 7.73x is 47% lower than the 14.59x industry average.
In terms of the trailing-12-month gross profit margin, NTCT’s 77.46% is 58.9% higher than the 48.75% industry average. Likewise, its trailing-12-month EBIT margin and EBITDA margin of 6.30% and 15.72% are 47.9% and 66.8% higher than the industry averages of 4.26% and 9.42%, respectively.
NTCT reported total revenue for the third quarter that ended December 31, 2023, to $218.07 million. Its non-GAAP gross profit stood at $178.46 million. The company’s non-GAAP net income and net income per share stood at $52.03 million and $0.73, respectively.
Its total current liabilities came in at $382.25 million for the period that ended December 31, 2023, compared to $453.61 million for the period that ended March 31, 2023.
For the quarter that ended March 31, 2024, NTCT’s revenue and EPS are expected to increase 2.8% and 36.8% year-over-year to $213.90 million and $0.52, respectively. The company surpassed the consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive. The stock has declined marginally intraday to close the last trading session at $20.09.
NTCT’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
NTCT has a B grade for Growth, Value, and Sentiment. Within the Technology - Services industry, it is ranked #12 out of 78 stocks. To see NTCT’s additional Momentum, Stability, and Quality ratings, click here.
Universal Electronics Inc. (UEIC)
UEIC designs, develops, manufactures, ships, and supports control and sensor technology solutions in the U.S., the People’s Republic of China, the rest of Asia, Europe, Latin America, and internationally. UEIC has institutional ownership of approximately 64.2%.
On January 11, UEIC announced the release of its latest QuickSet solution, expanding content discovery, control, and interaction across millions of devices and households.
The newest release of QuickSet expanded functionality for entertainment and whole-home audio use cases to provide deeper device and content history across an ever-increasing landscape of devices and services at home.
In terms of forward EV/Sales, UEIC is trading at 0.44x, 62.9% lower than the industry average of 1.18x. Likewise, its forward EV/EBITDA of 7.59x is 19.6% lower than the 9.44x industry average. Also, its forward Price/Sales of 0.36x is 58.8% lower than the 0.88x industry average.
UEIC’s trailing-12-month asset turnover ratio of 1.09x is 10.2% higher than the industry average of 0.99x. Additionally, its 10.37% trailing-12-month levered FCF margin is 83.1% higher than the industry average of 5.66%.
For the fiscal first quarter that ended March 31, 2024, UEIC’s net sales and non-GAAP gross profit amounted to $91.90 million and $27.23 million, respectively. In addition, its cash and cash equivalents at end of period stood at $26.91 million. As of March 31, 2024, UEIC’s total current liabilities amounted to $138.67 million, compared to $161.15 million as of December 31, 2023.
Street expects UEIC’s EPS and revenue for the quarter ending September 30, 2024, to increase 166.7% and 1.5% year-over-year to $0.21 and $108.69 million, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters. Over the past three months, UEIC’s stock has gained 30.8% to close the last trading session at $11.22.
It’s no surprise that UEIC has an overall B rating, equating to Buy in our POWR Ratings system.
It has a B grade for Value and Sentiment. It is ranked #8 out of 42 stocks in the Technology - Electronics industry. Beyond what is stated above, we’ve also rated UEIC for Growth, Momentum, Stability, and Quality. Get all UEIC ratings here.
Key Tronic Corporation (KTCC)
KTCC provides contract manufacturing services to original equipment manufacturers in the U.S. and internationally. The company offers integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing services. Institutions own approximately 40.7% shares of KTCC.
In terms of trailing-12-month EV/EBIT, KTCC is trading at 0.30x, 90.3% lower than the industry average of 3.04x. Likewise, its trailing-12-month EV/Sales of 0.30x, 90.3% lower than the 3.04x industry average. Also, its trailing-12-month Price/Sales of 0.08x is 97.4% lower than the 2.89x industry average.
In terms of the trailing-12-month asset turnover ratio, KTCC’s 1.53x is 154.6% higher than the 0.60x industry average. Its trailing-12-month Return on Common Equity and Return on Total Capital of 3.43% and 3.58% are 19.6% and 57.8% higher than the industry average of 2.87% and 2.27%, respectively.
During the second quarter, which ended December 30, 2023, KTCC’s net sales rose 17.5% year-over-year to $145.42 million. Its gross profit increased 31.9% from the prior-year quarter to $11.76 million. In addition, its operating income was $3.95 million, up 9.4% year-over-year.
For the same quarter, the company’s net income and net income per share rose 12.1% and 11.1% from the year-ago value to $1.08 million and $0.10, respectively.
The stock has gained 10.1% over the past six months to close the last trading session at $4.36.
KTCC’s 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 Growth and Momentum and a B for Value, Stability, and Sentiment. It is ranked #11 in the Technology - Services industry. Click here to see KTCC's rating for Quality.
What To Do Next?
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NTCT shares were trading at $20.04 per share on Monday morning, down $0.05 (-0.25%). Year-to-date, NTCT has declined -8.70%, versus a 8.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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