The broader equity markets have witnessed intense volatility since the beginning of 2022, courtesy of record-high inflation and a tight monetary policy led by a hawkish stance by the Fed to rein in the inflationary pressures. The technology sector has been one of the prime casualties of this bloodbath, and the tech-heavy Nasdaq Composite Index is no exception. The Nasdaq Composite Index has declined 30.5% year to date, recording one of the worst performances among the leading benchmark indices.
Amid such market dynamics, we have zeroed in on five technology stocks with solid Zacks Rank and inherent growth potential that have survived this mayhem and appear poised for a healthy growth momentum in 2023. These are
Flex Ltd.
FLEX
,
Plexus Corp.
PLXS
,
Model N, Inc.
MODN
,
Clearfield, Inc.
CLFD
and
Harmonic Inc.
HLIT
.
What Triggered the Bloodbath?
A demand-supply imbalance triggered by a surge in pent-up demand in the post-pandemic era is primarily attributable to the high inflation data, which peaked at a 40-year high of 9.1% in June 2022. Although various recent data portray that inflation is on its way down, the Fed has vowed to continue its aggressive stance even at the risk of a recession. The markets widely expect the central bank to raise interest rates by a 0.5 percentage point after four successive 75 basis point increases. This, in turn, could put the terminal rate in excess of 5% from its current target range of 3.75-4%.
Technology firms are usually high-growth-oriented companies that depend on easy access to cheap credit to expand their businesses. This has largely affected their cash flow and adversely impacted its short-term growth.
While the supply chain woes have declined compared to the beginning of the year, the industry continues to face a dearth of chips, which are the building blocks for various equipment used by technology firms. Moreover, high raw material prices due to inflation and economic sanctions against the Putin regime have affected the operation schedule of various firms. Extended lead times for basic components have hurt the delivery schedule and escalated production costs, largely affecting profitability due to inflated equipment prices.
Key Picks
We have narrowed our search to five large-cap (market capital in excess of $1 billion) technology stocks that have stood tall despite the broader price erosion. With a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy), these stocks possess healthy fundamentals to tide over the storm in the coming quarters as well. You can see
the complete list of today’s Zacks #1 Rank stocks here
.
Image Source: Zacks Investment Research
Flex:
Singapore-based Flex is a provider of “Sketch-to-Scale” services to original equipment manufacturers (OEMs). The company provides end-to-end services, including designing, engineering, manufacturing and supply chain services & solutions. With a market cap of $10.07 billion, this Zacks Rank #2 stock has a long-term earnings growth expectation of 12.76%. It has a
VGM Score
of B.
Flex has evolved into an end-to-end solutions provider where it is engaged in the design, procurement, manufacturing, and supply services for a broad range of products, from electronics to athletic shoes. The company has expanded and enhanced its service offering capabilities in 3D printing, automation, innovation labs, real-time supply chain software, machine-to-machine communications, advanced simulation & visualization, and AR/VR. These additional capabilities and a diversified end-market are key positives for the company’s business model. The stock has gained 21.4% year to date.
Plexus:
Neenah, WI-based Plexus is a leading provider of electronic contract manufacturing services to OEMs in a wide range of industries, including networking/ communications, health care/life sciences, industrial/ commercial and defense/security/aerospace. With a market cap of $2.94 billion, this Zacks Rank #1 stock has a VGM Score of B.
Plexus has been streamlining its manufacturing facilities to optimize its operations. It is expanding its presence in low-cost regions, establishing its presence in Penang, Malaysia and Guadalajara, Mexico. Incremental sales to customers in the higher-margin industrial & commercial sectors have helped Plexus to offset the slowdown in other areas. Moreover, the company’s cost-cutting initiatives and strong growth in higher-margin engineering agreements will likely help it to strengthen its gross and operating margins over the long run. The stock has gained 10.9% year to date.
Model N:
San Mateo, CA-based Model N provides revenue management solutions for life sciences and technology companies, including applications for configure, price, quote (CPQ), rebates management and regulatory compliance. With a market cap of $1.46 billion, this Zacks Rank #2 stock has a VGM Score of B.
Model N has significant growth opportunities in the revenue management market as it continues to replace legacy processes that were labor-intensive, error-prone, inflexible and costly. The company is accelerating its transition of revenue management to the cloud and is making steady progress in its transformation to a Software-as-a-Service (SaaS) based business model.
The stock has gained 30.3% year to date.
Clearfield:
Headquartered in Minneapolis, MN, Clearfield is a leading provider of communication networks, telecom services and support solutions. With a market cap of $1.43 billion, this Zacks Rank #1 stock has a VGM Score of B.
The company is witnessing a strong demand environment, largely driven by an effort by rural broadband operators to establish themselves as dominant broadband access providers. In addition, Clearfield is gaining traction with Tier 2 carriers that aim to extend their fiber connectivity across the country. The stock has gained 22.2% year to date.
Harmonic:
Headquartered in San Jose, CA, Harmonic provides video delivery software, products, system solutions and services worldwide. With more than three decades of experience, it has revolutionized cable access networking via the industry’s first virtualized cable access solution, enabling cable operators to more flexibly deploy gigabit internet service to consumers’ homes and mobile devices.
Harmonic, carrying a Zacks Rank #2, delivered an earnings surprise of 55.5%, on average, in the trailing four quarters. With a market cap of $1.43 billion, the stock has gained 15.3% year to date.
Zacks Top 10 Stocks for 2023
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