3 Electronics Stocks to Buy From a Challenging Industry – Daktronics (NASDAQ:DAKT), Flex (NASDAQ:FLEX)

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By Ronald Tech






Prospects Amidst Peril: A Deeper Dive into Electronics Stocks

Unveiling the Electronics Industry Landscape

The Zacks Electronics – Miscellaneous Products sector, marred by challenging macroeconomic conditions, elevated inventories, and onerous interest rates, is navigating stormy waters. The global financial turmoil looms large, and cautious optimism prevails amidst semiconductor capex constraints. Nonetheless, glimmers of hope emerge for KLA, Flex, and Daktronics as they ride the turbulent waves with strategic investments in cutting-edge technologies like augmented reality and virtual reality. The trio’s focus on data centers, high-performance computing, and the burgeoning 5G realm spearheads their trajectory. With fab expansions in key global locales and intensified memory equipment expenditures, growth beckons on the horizon.

Delineating the Electronics Domain

The Zacks Electronics – Miscellaneous Products industry houses a medley of innovators crafting air-conditioning systems, eco-friendly solutions, GPS navigation setups, healthcare gadgets, and semiconductor applications. An era of metamorphosis unfolds with digital revolutions and surging silicon appetites across diverse sectors. While escalating production expenses favor equipment suppliers, silicon hunger propels semiconductor firms. Originating mainly from the U.S., Japan, Germany, the Netherlands, and Switzerland, these enterprises operate manufacturing hubs in China and South-East Asia.

Forecasting Trends in the Industry’s Horizon

Boosted by Capital Spending: Industry resurgence thrives on technology complexities and semiconductor juggernauts’ expansionary endeavors. Robust investments in advanced manufacturing processes such as the 7 nm, 5 nm, and 3 nm variants allure industry players. The paradigm shift heralds favorable winds for miscellaneous electronics purveyors, with logic and foundry sectors poised for resplendence despite existing economic adversities.

Embracing Emerging Markets: A cadence of innovation amplifies the industry’s orbit as wearables, AR, and VR tear through defense, industrial, and healthcare landscapes. With the metaverse spreading its tendrils, AR and VR applications enjoy burgeoning popularity.

Navigating Macroeconomic Murkiness: A tempest brews on the economic front as enterprises shy away from prolonged commitments. Severe inflation and vexing forex vagaries cast a pall over industry endeavors, underscoring prevalent challenges.

The Industry’s Fortunes Unveiled

The Zacks Electronics – Miscellaneous Products sector, nestled in the broader Zacks Computer and Technology sphere, occupies a modest Zacks Industry Rank #184, positioning it in the nether regions among 250+ Zacks cohorts. The industry’s nethermost status is compounded by grim earnings forecasts and a downtrend in estimates since 2023, hinting at a subdued horizon for its constituents.

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Bucking the broader trends, Daktronics, KLA, and Flex stand as beacons of resilience amidst the industry’s turmoil.

Decoding Market Performance and Valuation

The Electronics – Miscellaneous Products domain trails the S&P 500 and the expansive Zacks Computer & Technology swath over the yesteryear. A modest return pace of 9.6% juxtaposed with the S&P 500’s 19.3% and the sector’s 27% reinforces the sector’s somber narrative.

Exploring Forward P/E and Market Dynamics

An affable forward 12-month P/E snapshot reveals the industry trading at 21.32X, nudging past the S&P 500’s 21.03X yet trailing the sector’s 25.88X clip. Amidst a historical P/E range of 17.89X to 22.16X, the industry’s current stride warrants scrutiny for discerning investors.

Spotlight on Top Performers

Daktronics: Emerging as a stronghold of digital LED display technology, this South Dakota native thrives on order surges amid a backdrop of vivacious Live Events and buoyant International orders. With resilient share growth of 73.5% YTD, Daktronics shines as a Zacks Rank #1 entity, with fiscal 2025 earnings prospects soaring by 34.5%.

KLA: Nestled in San Jose, CA, this Zacks Rank #2 contender revels in heightened wafer inspection dynamism, propelled by advanced applications in cutting-edge technological realms. Anchored by enriched capital intensity and an upbeat fiscal 2025 consensus of $28.19 per share, KLA’s share value burgeons by 31.3% YTD.

Flex: As a steadfast Zacks Rank #2 stalwart, Flex rides high on next-gen mobility and a veritable cornucopia of EV electronics and avant-garde computing frameworks fueling the automotive echelon. Bolstered by surges in the Health Solutions domain and robust AI-driven cloud expenditure, Flex’s shares ascend by 1.6% YTD, with steady fiscal 2025 earnings per share pegged at $2.36.

Insights Into Magnificent 7 Earnings Performance

Market Disappointment and Precursors

The market reception of the recent earnings reports from Alphabet (GOOGL) and Tesla (TSLA) left much to be desired among investors. This reaction, particularly towards Alphabet’s results, may serve as an ominous foreshadowing of what is to come this week as four other members of ‘The Magnificent 7’ gear up to report.

Alphabet vs. Tesla Performance

Despite Tesla missing consensus estimates and facing margin pressures, Alphabet managed to beat estimates with several positive outcomes, notably in search and cloud areas. However, the spotlight shifted to Alphabet’s larger-than-anticipated capital expenditures, raising concerns about ongoing AI-focused capex and its eventual returns. The worries were accentuated by Alphabet’s management highlighting the risk of underinvestment. In contrast, Tesla experienced a drop in Q2 earnings, while Alphabet marked a 28.6% increase year-over-year with a 15% rise in revenues.

Future Outlook for Mag 7

The impending reports from Meta Platforms, Microsoft, Amazon, and Apple are expected to reflect on capital expenditures, growth trends in cloud services, and market skepticism towards AI initiatives. Amazon faces scrutiny over decelerating cloud growth compared to its peers, while Apple’s focus remains on evolving iPhone trends in the Chinese market.

Group Performance and Expectations

The ‘Mag 7’ stocks are projected to showcase a 26.8% surge in earnings and a 13.7% increase in revenues compared to the same period last year. This sector is a crucial driver of the broader Technology industry, which anticipates a 16.8% earnings uptick and 9.5% revenue growth for Q2.

Industry Sector Growth Analysis

The Technology sector, buoyed by an upswing in estimates for the Mag 7 stocks, has witnessed a positive trend in recent quarters. The upcoming earnings season, with a multitude of companies preparing to report results, including key players like McDonald’s, Proctor & Gamble, and Pfizer, is expected to provide further insights into sector performance.

Earnings Landscape Overview

With over 41% of S&P 500 members already having disclosed Q2 results, the overall earnings show a modest 0.6% increase year-over-year alongside a 4.9% rise in revenues. As the reporting cycle gains momentum, eyes are on the broader market to gauge earnings and revenue beats.

Insights Into Q2 Revenue Trends

Notably, the Q2 revenue beats percentage hit a historic low of 57.5% for the 207 index members, indicating a demanding quarter compared to the last two decades.

Earnings Big Picture Analysis

When considering the aggregate picture for Q2, S&P 500 earnings are predicted to grow by 6.9% year-over-year with a 5.2% increase in revenues. The promising revisions trend observed prior to the earnings season underscores a positive outlook for the quarter’s financial performance.

Analysis of Index Level Aggregate Earnings Growth The Landscape of Aggregate Earnings Growth