The technology sector is brimming with opportunities due to the rapid integration of technologies like generative Artificial Intelligence (AI) into various industries.
As a result, it appears to be a favorable time to take a bullish stance on tech stocks International Business Machines Corporation (IBM) and Sanmina Corporation (SANM), while investors could keep an eye on Capgemini SE (CGEMY) for a better entry point.
However, before delving into the fundamental aspects of the featured stocks, let's explore the landscape of the technology industry.
The technology industry had thrived amid the disruption caused by the pandemic. It is now poised for further growth due to the rapid digital transformation in various sectors such as healthcare, automotive, and real estate.
Currently, generative AI is considered an exciting new frontier for the technology industry. According to McKinsey, generative AI has the potential to contribute between $2.60 trillion and $4.40 trillion annually across 63 different use cases.
Furthermore, demand for more user-oriented, advanced, secured, and interactive technologies, alongside government initiatives to develop new technologies such as Web 3.0, is driving the prospects for the tech sector. The global Web 3.0 market is expected to grow at a CAGR of 43.7% to reach $81.5 billion in 2030.
Tech services have also emerged as leaders in the technology sector. Gartner predicts that spending on IT services will reach $1.42 trillion in 2023 and $1.59 trillion in 2024, indicating year-over-year growth of 8.8% and 11.6%, respectively.
Furthermore, Statista forecasts that the global IT Services market will experience an annual growth rate of 7.4%, resulting in a market volume of $1.77 trillion by 2028.
Given these favorable trends, let's examine the fundamentals of these Technology - Services stocks, starting with the third choice.
Stock to Watch:
Stock #3: Capgemini SE (CGEMY)
Headquartered in Paris, France, CGEMY provides consulting and technology services. The company operates through the segments of Application services; Technology and Engineering services; Consulting services; and Other Managed services.
On September 28, CGEMY announced its acquisition of HDL Design House, a prominent provider of silicon design and verification services based in Europe. This acquisition, which closed on September 27, is expected to expand CGEMY's global silicon engineering capabilities, solidifying its position as a leader in the intelligent industry revolution.
In the same month, CGEMY announced that it had signed an agreement to acquire the Financial Crime Compliance (FCC) division of Exiger, a financial crime practice. This transaction, due to close in the upcoming months, should strengthen the company’s risk management and regulatory compliance services portfolio.
CGEMY’s revenues for the fiscal first half of 2023, increased 6.9% year-over-year to €11.43 billion ($12.03 billion), while its operating profit grew 7.8% from year-ago value to €1.15 billion ($1.21 billion).
The company’s net profit and EPS came in at €809 million ($851.76 million) and €4.54, registering increments of 21.3% and 20.1% from the prior-year period, respectively.
Street expects CGEMY’s EPS to come in at $2.37 for the fiscal year ending December 2023, indicating a 3.7% year-over-year increase. Its revenue is projected to reach $24.14 billion, reflecting a rise of 3.1% from the prior year. Moreover, it topped analyst revenue expectations for three out of the trailing four quarters.
The stock has gained 2.9% year-to-date and 7.2% over the past year to close the last trading session at $34.32. However, it is down 7.4% over the past month and 1.8% intraday.
CGEMY’s prospects are reflected in its POWR Ratings. It has an overall rating of C, which equates to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Stability. Out of 75 stocks in the Technology - Services industry, it is ranked #29. In addition to the POWR Ratings we’ve stated, we also have CGEMY’s ratings for Growth, Value, Momentum, Sentiment, and Quality. Get all CGEMY ratings here.
Stocks to Buy:
Stock #2: International Business Machines Corporation (IBM)
IBM provides hybrid cloud, AI, and business services. It offers integrated solutions and products that utilize data and information technology across various industries and business processes. The company operates through four segments: Software; Consulting; Infrastructure; and Financing.
On October 2, IBM announced that The U.S. Chamber of Commerce Foundation is exploring the potential of AI, particularly in skills-based hiring, with the help of IBM's expertise to assess risks and build trust in AI solutions.
This collaborative initiative highlights the importance of addressing potential unintended outcomes and aligning AI with principles like safety, accountability, fairness, and efficacy, showcasing IBM's commitment to responsible AI and its consulting capabilities.
On September 28, IBM announced the general availability of its watsonx Granite model series, designed to infuse generative AI into business applications and workflows, expanding its portfolio. IBM also confirms that standard contractual intellectual property protections will apply to these AI models, offering businesses scalability and customization options for AI applications.
For the fiscal second quarter that ended June 30, 2023, IBM’s income from continuing operations rose 7.9% year-over-year to $1.58 billion. The company’s net income grew 13.7% from the year-ago value to $1.58 billion, while its EPS increased 12.4% year-over-year to $1.72. IBM’s non-GAAP gross profit rose 2.1% year-over-year to $8.65 billion.
The consensus revenue estimate of $14.78 billion for the fiscal third quarter (ended September 2023) reflects a 4.8% year-over-year improvement. Likewise, the consensus EPS estimate of $2.14 for the same quarter indicates an 18.4% rise year-over-year. The company has an impressive surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
Shares of IBM have gained 18.5% over the past year and 7.4% over the past six months to close the last trading session at $140.80.
IBM’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system. It is ranked #24 in the same industry.
IBM has a B grade for Growth and Quality. In addition to the POWR Ratings I’ve just highlighted, you can see IBM’s additional ratings here.
Stock #1: Sanmina Corporation (SANM)
SANM is a global provider of integrated manufacturing solutions, products, and services. It operates in two segments: Integrated Manufacturing Solutions; Components, Products and Services, serving various industries, including industrial, medical, defense, automotive, communications, and more.
On August 8, Viking Enterprise Solutions, a SANM division, launched its ONYX Series, a high-density, network-attached unified storage solution to meet storage needs across sectors. The new offering should bolster the company’s revenue stream.
For the fiscal third quarter that ended on July 1, 2023, SANM’s net sales increased 9.1% year-over-year to $2.21 billion, while gross profit increased 13% from the year-ago value to $183.21 million. Its non-GAAP net income attributable to common shareholders came in at $92.16 million and $1.55 per share, up 19% and 23% year-over-year, respectively.
For the fiscal year ended September 2023, SANM’s EPS is estimated to increase 26.7% year-over-year to $6.32. Its revenue for the same period is forecasted to be $9.04 billion, registering a 14.6% increase year-over-year. The company has an impressive surprise earnings history, surpassing the consensus EPS estimates in all four trailing quarters.
Over the past year, the stock has gained 17.6% to close the last trading session at $54.19.
SANM’s robust outlook is reflected in its POWR Ratings. It has an overall rating of B, which translates to Buy in our proprietary rating system. It has a B grade for Value and Momentum.
Within the same industry, it is ranked #17. Click here to view SANM’s ratings for Growth, Stability, Sentiment, and Quality.
What To Do Next?
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IBM shares were trading at $140.57 per share on Tuesday afternoon, down $0.23 (-0.16%). Year-to-date, IBM has gained 3.55%, versus a 11.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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