The tech industry is witnessing rapid growth due to the increasing adoption of AI, machine learning, cloud computing, and IoT technologies, which enhance connectivity and data management capabilities.
Given the industry’s growth prospects, investors could consider buying fundamentally sound tech stock Cisco Systems, Inc. (CSCO) for solid returns. However, Logitech International S.A. (LOGI) and Information Services Group, Inc. (III) are best avoided considering their weak fundamentals.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the tech industry.
According to Gartner, global IT spending will reach $5.10 trillion in 2024, an increase of 8% year-over-year. The IT sector is likely to grow significantly in the coming years as businesses continue to prioritize technological investments.
The information technology market is predicted to increase at a 14.7% CAGR to $1.36 trillion by 2029. The U.S. tech market accounts for 35% of the world market and is expected to grow 5.4% in 2023.
Moreover, investors’ interest in tech stocks is evident from the iShares Expanded Tech Sector ETF’s (IGM) 9.4% returns over the past six months and 30.9% over the past nine months.
Despite numerous downturns, the technology industry has experienced significant growth and innovation, transforming sectors through innovative technologies and adaptability, and has become a driving force in the global economy.
Stock to Buy:
Cisco Systems, Inc. (CSCO)
CSCO is engaged in designing, manufacturing, and selling Internet Protocol-based networking and other products related to the communications and information technology industry. The company offers wireless products, routed optical networking, 5G, silicon, optics solutions, etc.
CSCO’s forward non-GAAP P/E multiple of 12.34 is 45.8% lower than the industry average of 22.76. Its forward EV/EBIT multiple of 9.58% is 50.5% lower than the industry average of 19.36.
CSCO’s trailing-12-month ROCE of 31.78% is significantly higher than the industry average of 1.11%. Its trailing-12-month net income margin of 23.40% is 966% higher than the industry average of 2.20%.
CSCO’s revenue increased 7.6% year-over-year to $14.67 billion during the fiscal 2024 first quarter that ended October 28, 2023. Its operating income grew 20.8% from the year-ago value to $4.28 billion. The company’s net income and EPS came in at $3.64 billion, and $0.89, up 36.3% and 36.9% year-over-year, respectively.
Analysts expect CSCO’s revenue to come in at $54.61 billion for the year ending July 2024. Its EPS is expected to come in at $3.88 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained marginally year-to-date to close the last trading session at $47.70.
CSCO’s POWR Ratings reflect this promising outlook. The stock 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.
CSCO also has an A grade for Quality and a B grade for Stability. It is ranked #6 out of 46 stocks in the Technology – Communication/Networking industry. Click here for the additional POWR Ratings for Growth, Value, Sentiment and Momentum for CSCO.
Stocks to Hold:
Logitech International S.A. (LOGI)
Headquartered in Lausanne, Switzerland, LOGI designs, manufactures, and markets products that connect people to working, creating, gaming, and streaming worldwide. The company offers pointing devices, such as wireless mouse; corded and cordless keyboards, living room keyboards, and keyboard-and-mouse combinations; PC webcams; and keyboards for tablets and smartphones, as well as other accessories for mobile devices.
LOGI’s trailing-12-month levered FCF margin of 17.15% is 111.2% higher than the 8.12% industry average while, its trailing-12-month gross profit margin of 38.68% is 20.5% lower than the 48.67% industry average.
For the fiscal second quarter ended September 30, 2023, LOGI’s net sales came in at $1.06 billion. The company’s non-GAAP net income increased 25.9% over the prior-year quarter to $173.42 million. Also, its non-GAAP net income per share came in at $1.09, representing an increase of 29.8% year-over-year.
However, as of September 30, 2023, its total current assets stood at $2.49 billion compared to $2.61 billion as of December 31, 2022. Also, its total assets stood at $3.43 billion compared to $3.56 billion for the same period.
Street expects LOGI’ revenue to decrease 8.2% year-over-year to $4.17 billion for the year ending March 2024. Its EPS is expected to decline marginally year-over-year to $3.22 for the same period. Shares of LOGI has gained 61.8% over the past nine months to close the last trading session at $86.36.
LOGI’s uncertain outlook is reflected in its POWR Ratings. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system.
LOGI has a C grade for Growth, Value, Stability and Sentiment. It ranks #17 out of 37 stocks in the Technology – Hardware industry. Click here to access additional LOGI ratings (Momentum, and Quality).
Information Services Group, Inc. (III)
III is a technology research and advisory company offering digital transformation, risk management, and technology research services to private and public sector organizations. Its platforms, ISG Digital and ISG Enterprise, aid in technology solutions and operational optimization. It also provides ISG GovernX, a software platform for supplier relationship management.
III’s trailing-12-month ROCE of 13.35% is significantly higher than the 1.13% industry average while, its trailing-12-month levered FCF margin of 1.86% is 77.1% lower than the 8.12% industry average.
III’s revenues for the third quarter that ended September 30, 2023, increased 4.3% year-over-year to $71.77 million. Also, as of September 30, 2023, its total current assets stood at $118.42 million compared to $115.48 million as of December 31, 2022.
However, its net income and EPS came in at $3.20 million and $0.06, down 42.4% and 45.5% year-over-year, respectively.
Street expects III’s revenue to increase 2.7% year-over-year to $294 million for the year ending December 2023. Its EPS is expected to decline 19.3% year-over-year to $0.43 for the same period. III’s shares have gained 4.5% over the past month to close the last trading session at $4.41. However, the stock has lost 17.1% over the past nine months.
III has an overall C rating, equating to a Neutral in our POWR Ratings system. It has a C grade for Sentiment, Momentum and Quality. It is ranked #30 out of 76 stocks in the Technology – Services industry.
Beyond what is stated above, we’ve also rated III for Growth, Value and Stability. Get all III ratings here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
CSCO shares were trading at $48.22 per share on Thursday afternoon, up $0.52 (+1.09%). Year-to-date, CSCO has gained 4.32%, versus a 21.09% 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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