This contract electronics maker is underperforming on the stock market in 2024, but a turnaround is possible.
Contract electronics manufacturer Jabil (JBL -3.85%) has had a tough time on the stock market so far this year, with shares down 11% as of press time, and the company's most recent quarterly report did little to inspire investor confidence.
Jabil reported its third-quarter fiscal 2024 earnings (the three months ending May 31) on June 20. While the better-than-expected numbers initially boosted the stock price, the company's shares fell by more than 11% after the company's guidance turned pessimistic. Let's take a look at why that happened and whether a new catalyst — artificial intelligence (AI) — can boost Jabil's performance.
Weakness in certain end markets is holding Jabil back
Jabil's quarterly sales were $6.8 billion, down 20% year over year. Investors should note that the company sold its mobility business in December, which is why sales were down so much year over year. However, the good news is that Jabil's sales beat the midpoint of its guidance range of $6.2 billion to $6.8 billion. Wall Street would have been happy with $6.53 billion in Jabil sales.
The company's adjusted earnings were $1.89 per share, beating guidance of $1.85 per share. However, investors panicked when Jabil warned that weak demand for contract electronics manufacturing in the automotive and medical sectors would hurt the company's performance in the near term. At the same time, it's worth noting that the company maintained its full-year sales guidance of $28.5 billion and earnings per share of $8.40.
One of the reasons Jabil was able to maintain its full-year outlook is the strength of the network and storage market due to the strong demand for connected devices such as smartphones, as well as the increased demand for AI data centers. The good news is that AI is likely to be a strong catalyst for Jabil going forward. Let's see why.
Why AI is key to the company's growth
Jabil expects its connected devices division to reach $3.2 billion in revenue this fiscal year, down 20% from last year. The division is dependent on smartphone manufacturing, which is why it will see a decline this year. Smartphone sales fell 3.2% last year, but the emergence of AI will help turn things around in this area.
Market research firm IDC predicts that smartphone shipments will grow 2.8% this year. More specifically, Counterpoint Research predicts that AI smartphone shipments will grow at a staggering 83% annually through 2027. This trend will certainly benefit Jabil, whose largest customer is Apple, which accounted for 17% of Jabil's revenue last fiscal year.
Analysts expect Apple's iPhone sales to increase next fiscal year thanks to AI. The tech giant recently unveiled Apple Intelligence, a suite of AI-generated features that will be built into its devices. As a result, Apple is expected to see a 10% increase in iPhone sales in fiscal 2025, which starts later this year, and further growth in fiscal 2026.
The growing demand for AI-enabled PCs could also boost Apple's MacBook sales. All of this bodes well for Jabil's connected device business. After a weak start with iPhone sales declining 9.6% in the first quarter of 2024, the company's business is likely to pick up as Apple ramps up production of its devices.
Meanwhile, Jabil expects the AI ​​data center-related market to grow this quarter and next. It's no surprise that AI data centers open up long-term growth opportunities for Jabil, as McKinsey predicts data center construction will grow 10% annually through 2030, with hyperscale data center construction expected to grow at an even higher rate of 20% annually.
These growth drivers explain why analysts expect Jabil's earnings to grow 12% annually over the next five years, but don't be surprised if the company performs even better thanks to a new AI-related catalyst. So investors looking for cheap, battered tech stocks with potential for recovery should consider taking a closer look at this company.
Jabil shares are trading at just 10 times its trailing year earnings, lower than the company's five-year average earnings multiple of 17 and a steep discount to the U.S. technology sector's price-to-earnings multiple of 47. Investors are getting a good deal on Jabil right now and may consider keeping the stock on their watchlist as the company's AI-driven business transformation could change its fortunes in the market.
Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares in and recommends Apple. The Motley Fool has a disclosure policy.
