Contract electronics manufacturer Jabil (NYSE: JBL) has already had a hard time on the stock market this year, losing 11% of its value at the time of writing. The company’s latest quarterly report also did not exactly boost investor confidence.
Jabil published its fiscal 2024 third quarter results (for the three months ended May 31) on June 20. The stock initially rose on the better-than-expected numbers, but the outlook was bleak and the company’s shares fell more than 11%. Let’s take a look at why that was the case and whether a new catalyst in the form of artificial intelligence (AI) can boost Jabil.
Weakness in certain end markets weighs on Jabil
Jabil posted quarterly revenue of $6.8 billion, down 20% from the same period last year. Investors should note that the company spun off its mobility business in December of last year, which explains the steep year-over-year revenue decline. The good part, however, is that Jabil’s revenue exceeded the midpoint of its guidance range of $6.2 billion to $6.8 billion. Wall Street would have been satisfied with $6.53 billion in revenue from Jabil.
The company’s adjusted earnings of $1.89 per share also exceeded guidance of $1.85 per share. However, Jabil’s warning that tepid demand for contract electronics manufacturing in the automotive and medical verticals would drag down the business in the near term caused investors to hit the panic button. At the same time, it’s worth noting that the company has maintained its full-year revenue forecast of $28.5 billion and earnings of $8.40 per share.
One reason Jabil was able to maintain its full-year guidance is strong demand for connected devices like smartphones, as well as strength in the networking and storage markets thanks to growing demand for AI data centers. The good news is that AI is likely to be a solid catalyst for Jabil going forward. Let’s take a look at the reasons why.
Why AI will become a key growth driver for the company
Jabil expects connected devices segment revenue to reach $3.2 billion in the current fiscal year, down 20% from the previous year. This segment is dependent on the production of smartphones, which explains why its performance will decline in the current fiscal year. Smartphone sales fell 3.2% last year, but the advent of AI is set to revolutionize this space.
Market research firm IDC estimates that smartphone shipments will increase 2.8% this year. More specifically, AI smartphone shipments are expected to show a whopping annual growth rate of 83% through 2027, according to Counterpoint Research. This trend will likely give Jabil a solid boost, as it counts Apple as the largest customer. The iPhone maker accounted for 17% of Jabil’s revenue last fiscal year.
Analysts expect Apple’s iPhone sales to increase in the next fiscal year thanks to AI. The tech giant recently unveiled Apple Intelligence, a set of generative AI features that will make their way to its devices. As a result, Apple is expected to see a 10% increase in iPhone sales in fiscal 2025, starting later this year, followed by another increase in fiscal 2026.
Apple’s MacBook sales could also get a boost from growing demand for AI-enabled PCs. It all bodes well for Jabil’s connected devices business, which is likely to get a boost as Apple ramps up production of its devices after a poor start to 2024 that saw iPhone sales fall 9.6% in Q1.
Meanwhile, Jabil predicts that its AI data center-related markets are poised for growth in the current fiscal year and beyond. It wouldn’t be surprising if AI data centers present a long-term growth opportunity for Jabil. That’s because McKinsey predicts 10% annual growth in data center construction through 2030, with hyperscale data center construction expected to grow at a higher rate of 20% per year.
These growth drivers explain why analysts expect Jabil’s profits to grow at an annual rate of 12% over the next five years, but don’t be surprised if the company does better thanks to the new AI-related catalysts. Therefore, investors looking for a cheap, troubled tech stock with turnaround potential should take a closer look at this company.
Jabil is trading at just 10 times trailing earnings, below the five-year average of 17 earnings and a huge discount to the U.S. tech sector’s price-to-earnings ratio of 47. Investors are getting a good deal on Jabil right now and may want to keep the stock on their watchlists because an AI-driven turnaround at its business could change its fortunes in the market.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Apple. The Motley Fool has a disclosure policy.
Is This Incredibly Cheap Tech Stock the Next Hot Play in Artificial Intelligence (AI)? was originally published by The Motley Fool
