In the long term, the technology sector will be a force to reckon with in the market. The thrust for digitization comes from two sides. Individuals, who enjoy immense benefits of digital platforms during coronavirus-led lockdowns, are less likely to go back to their old habits. The new way of connecting has opened up a new world for them. Also, business entities will be more interested in cloud computing, automation and AI to establish smooth supply chain systems.
Most market participants are busy talking about the impressive performance given by large-cap tech stocks in 2020. But the potential of some mid-cap tech stocks (stocks with a market cap. that is > $2 billion and < $10 billion) cannot be ignored.
While small-cap stocks are often fast growing but volatile, and large-cap stocks tend to be slow growing and relatively stable, the best mid-caps tend to fall in between: less volatile than fast-moving small caps but with more growth potential than mammoth large-cap companies. Top-ranked mid-cap stocks have a high potential to enhance their profitability, productivity and market share.
Our research team has a few recommendations for mid-cap stocks from the technology sector that are poised to surge this year.
NETGEAR Inc. (NTGR)
NETGEAR Inc. (NTGR) designs, develops and markets networking and Internet connected products for consumers, businesses and service providers. It operates in two segments — Connected Home, and Small and Medium Business. NTGR’s product line consists of devices that include network attached storage, wireless controllers and access points, unified storage products, Internet protocol (IP) security cameras, and home automation devices and services. It also offers value-added services that include technical support, parental controls, and cybersecurity protection.
NETGEAR is expected to benefit from robust networking solutions. It maintains a competitive edge with product launches, based on Wi-Fi 6 standards, and aims to leverage the latest technological innovation to accelerate growth.
In order to capitalize on the increasing demand for cloud-based applications pertaining to small and medium-sized enterprises, NETGEAR is introducing next-generation commercial products.
The new offerings include Power over Ethernet (PoE) switches, Multi-gigabit Ethernet switches, high capacity local and remote unified storage, small-to-medium capacity campus wireless local area network (LAN) and security appliances. These products are likely to augment the effectiveness and efficiency of its hybrid cloud access network and reinforce its position in the market.
The company’s net revenue has increased 45.1% year-over-year to $367.07 million for the fourth quarter ended December 31, 2020.
Analysts expect NTGR’s EPS for the next quarter, ending June 30, 2021, to be $0.74, up 37% year-over-year. It’s earnings surprise history looks impressive; the company has surpassed the consensus EPS estimate in each of the trailing four quarters. Also, for the next quarter, analysts expect NTGR’s revenue to be $325.62 million, representing a 38.4% rise from the prior-year period.
The company has an expected earnings growth rate of 12.9% for the current year. The consensus analyst estimate for the current year has improved 9.2% over the last 30 days. Which is an indicator for significant growth.
Synnex Corp. (SNX)
Synnex Corp. (SNX) is a provider of IT supply chain services. It offers a range of distribution, logistics, and integration services to the technology industry. The company, through its Technology Solutions segment, distributes peripherals, information technology (IT) systems, consumer electronics (CE) and complementary products. It also provides systems design and integration solutions. Synnex distributes over 30,000 technology products from manufacturers around the world and provides technology solutions to more than 20,000 resellers and retail customers.
SNX has merged with Tech Data, one of the world’s largest technology distributors, at a value of $7.2 billion, including net debt. The combined company, with estimated pro forma annual revenues of $57 billion, will provide expansive reach across products, services, and geographies to accelerate technology adoption.
Last month, SNX was named Samsung 2020 Mobile Distribution Partner of the Year based on total sales volume. And since March 10, SNX has collaborated with Hewlett Packard Enterprise Company (HPE) to offer HPE GreenLake cloud services to reseller partners through its Stellar Marketplace.
SNX’s revenue for its fiscal year 2021 first quarter, ended February 28, 2021, was $4.94 billion, which represents an improvement of more than 21% year-over-year. The company’s gross profit increased 19.4% year-over-year to $304.57 million.
Non-GAAP earnings figures can sometimes provide a more accurate measure of a company’s financial performance. SNX’s non-GAAP operating income was $156 million for the quarter, which represents an improvement of more than 35% year-over-year.
In terms of non-GAAP forward price/earnings, SNX is currently trading at 14.51x, 44.9% lower than the industry average 26.33x. In terms of forward price/sales, SNX is currently trading at 0.29x, 92.7% lower than the industry average 4.04x.
A consensus EPS estimate of $1.91 for the current quarter, ending May 31, represents an improvement of 4.4% year-over-year. Also, SNX surpassed consensus EPS estimates in each of the trailing four quarters. The stock has gained 63.4% over the past year and closed yesterday’s trading session at $120.66.
DXC Technology Co. (DXC)
DXC Technology Co. (DXC) Technology is a provider of information technology services and products. DXC targets IT modernization including both on-premises and cloud services, as well as data-driven operations and workplace modernization. The company serves 6,000 customers across the private and public sectors globally.
CEO Mike Salvino, who joined the company from Accenture in September 2019, has made progress on DXC’s operating issues, setting the company for a strong fundamental rebound over the next year and beyond. Salvino has replaced about 75% of the senior management team, many of them from Accenture.
For its Q3 FY 2021, ended December 31, 2020, DXC Technology reported a revenue decline of 14.6% YOY while net income increased by more than 12 times YOY. Despite the revenue decline YOY, revenue for the quarter nonetheless exceeded guidance.
Deutsche Bank analyst Bryan Keene, who raised his price target on the stock to $44 from $28, recently noted, “We see accelerating revenue growth and material margin expansion on the horizon.” He continued, “Channel checks point to considerably improved client service levels. DXC has a critical enterprise technology stack to offer clients and we believe it will remain relevant in the digital IT Services journey.”
The analyst adds that an analyst day to be held in May or June will provide “a much-improved outlook.” And he says the stock looks “very attractively priced” at just seven times calendar 2022 estimated earnings.
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