The Fed’s aggressive rate hikes have led to a significant sell-off in technology stocks. Yet, the industry is well-positioned to benefit in the long run, thanks to continuous innovation and the demand for digital transformation across industries. Investors looking to invest in tech stocks could consider buying shares of Cisco Systems, Inc. (CSCO) and Extreme Networks, Inc. (EXTR).
However, considering the lingering macroeconomic headwinds, I think it is best to steer clear of fundamentally weak BlackBerry Limited (BB) now.
The IT sector is transforming with advanced technologies like artificial intelligence (AI). AI is transforming traditional IT operations, making them smarter, more time-efficient, and cost-effective. AI has proven to be a valuable tool in quality assurance, service management, and process automation, and AIOps provide a better and more productive approach to managing IT operations.
According to the International Data Corporation’s (IDC) Worldwide Artificial Intelligence Spending Guide, global spending on artificial intelligence (AI), which includes software, hardware, and services for AI-centric systems, will grow at a 27% CAGR between 2022 and 2026, reaching $300 billion in 2026.
Furthermore, the global information technology market is expected to grow at a 10.1% CAGR to reach $1.64 trillion by 2028. Investors’ interest in tech stocks is evident from the iShares U.S. Technology ETF (IYW) 5.9% returns over the past three months.
However, as recession concerns persist as interest rate hikes are expected to continue amid the still high inflation and a tight labor market, fundamentally weak tech stocks might find it difficult to sustain gains.
Stocks to Buy:
Cisco Systems, Inc. (CSCO)
CSCO designs, manufactures, and sells Internet Protocol-based networking and other products related to the communications and information technology industry. In addition, it provides infrastructure platforms, including networking technologies of switching, routing, wireless, and data center products.
On February 27, 2023, CSCO and Mercedes-Benz teamed up to develop the greatest mobile office experience in Mercedes-Benz E-Class vehicles.
CSCO’s Executive Vice President & General Manager, Security & Collaboration, Jeetu Patel, said, “The mobile office cannot progress without the reliable and secure collaboration technology that only Cisco can provide. This partnership with Mercedes-Benz, a leader in automotive luxury, marks a big step forward in delivering the flexibility that the hybrid workforce demands.”
CSCO’s forward EV/EBITDA of 9.16x is 27.7% lower than the industry average of 12.66x. Its forward EV/EBIT of 9.98x is 38.5% lower than the industry average of 16.24x.
CSCO’s trailing-12-month gross profit margin of 61.92% is 26.5% higher than the industry average of 48.94%. Its trailing-12-month EBIT margin of 26.58% is 352% higher than the industry average of 5.88%.
For the second quarter ended January 28, 2023, CSCO’s total revenues have increased 6.9% year-over-year to $13.59 billion. Its gross margin came in at $8.43 billion, up 4.7% year-over-year. The company’s non-GAAP net income increased 2.6% year-over-year to $3.64 billion, while its adjusted EPS came in at $0.88, representing an increase of 4.8% year-over-year.
Analysts expect CSCO’s revenue to increase 9.7% year-over-year to $56.54 billion in 2023. Its EPS is estimated to increase by 11.6% year-over-year to $3.75 in 2023. It surpassed EPS estimates in all four trailing quarters. CSCO’s shares have gained 11.7% over the past nine months to close the last trading session at $48.56.
CSCO’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall A rating indicating a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CSCO has an A grade for Quality and a B grade for Stability and Momentum. In the B-rated Technology - Communication/Networking industry, it is ranked #3 out of 49 stocks. For the additional POWR Ratings for Growth, Value, Sentiment, and Quality for CSCO, click here.
Extreme Networks, Inc. (EXTR)
EXTR is a software-driven networking solutions provider that designs, develops, and manufactures wired and wireless network infrastructure equipment and engages in software development.
On February 16, 2023, EXTR announced the completion of Wi-Fi 6 network deployments at five NASCAR racetracks, including Darlington Raceway, Daytona International Speedway, Martinsville Speedway, Richmond Raceway, and Talladega Superspeedway.
With five NASCAR racetracks now providing high-capacity Wi-Fi to up to 125,000 people at the same time, the company is improving raceday experiences.
On February 8, 2023, EXTR announced the integration of network fabric capabilities into its ExtremeCloudTM SD-WAN platform, allowing users to securely connect diverse environments such as data centers, campuses, and branch sites from a single platform. This multi-faceted product is a solid addition to the company’s portfolio.
EXTR’s forward EV/Sales of 1.87x is 30.5% lower than the industry average of 2.68x. Its forward Price/Sales multiple of 1.79 is 30.8% lower than the industry average of 2.59.
EXTR’s gross profit margin of 56.28% is 15% higher than the 48.94% industry average, while its levered FCF margin of 11.47% is 69.9% higher than the industry average of 6.75%.
EXTR’s non-GAAP total revenue increased 13.3% year-over-year to $318.3 million in the fiscal second quarter that ended December 31, 2022. Its non-GAAP net income and non-GAAP net income per share came in at $36.5 million and $0.27, up 28.5% and 28.6% year-over-year.
The consensus revenue estimate of $1.27 billion for the fiscal year 2023 indicates a 14% increase year-over-year. Its EPS is expected to grow 33.8% year-over-year to $1.03 in 2023. It surpassed EPS estimates in all four trailing quarters. Over the past nine months, the stock has gained 90.4% to close the last trading session at $17.57.
EXTR’s robust prospects are reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system. It has an A grade for Growth and Quality and a B grade for Momentum.
It is ranked #2 in the same industry. To see additional POWR Ratings for Value, Sentiment, Stability and Growth for EXTR, click here.
Stock to Avoid:
BlackBerry Limited (BB)
Headquartered in Waterloo, Canada, BB provides intelligent security software and services to enterprises and governments worldwide. It offers intelligent security software and services to enterprises and governments worldwide. The company operates through three segments: Cybersecurity, IoT, Licensing, and Other.
In terms of forward Price/Sales, BB is currently trading at 3.13x, 20.9% higher than the industry average of 2.59x. Its forward EV/Sales of 3.16x is 17.9% higher than the industry average of 2.68x.
BB’s trailing-12-month EBIT margin of negative 30.43% is lower than the industry average of 5.88%. Its trailing-12-month ROCE of negative 6.94% compares to the industry average of 4.85%.
BB’s operating expenses increased 68.2% year-over-year for the fiscal third quarter ended November 30, 2022, to $111 million. Also, its net loss came in at $4 million, compared to a net income of $74 million in the year-ago period. Its loss per share came in at $0.09, up 80% year-over-year. Moreover, its adjusted EBITDA loss widened 175% year-over-year to $22 million.
BB’s revenue is expected to decrease by 7.5% year-over-year to $664.34 million in 2023. Its EPS is expected to decline 120% year-over-year to negative $0.22 in 2023. The stock has lost 44.9% over the past year to close the last trading session at $3.59.
BB’s bleak outlook is reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell. It is ranked #48 in the same industry.
In addition, it has a D for Stability, Sentiment, and Quality. Click here to access the additional ratings of BB (Value, Momentum, and Growth).
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CSCO shares rose $0.26 (+0.54%) in premarket trading Monday. Year-to-date, CSCO has gained 2.75%, versus a 0.91% rise in the benchmark S&P 500 index during the same period.
About the Author: RashmiKumari
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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