The tech industry is poised for long-term growth due to the rapid adoption of emerging technologies and increased spending on digitization initiatives, which is being driven by rising demand for innovative solutions. Therefore, let’s evaluate whether tech stocks NetApp (NTAP) and Dropbox (DBX) are wise investments to capitalize on the industry tailwinds. Keep reading.
The technology sector is popular for its ability to adapt to and address emerging challenges quickly. The industry is expected to grow strongly in the long run, driven by the increased demand for advanced technologies and rising spending on digital transformation initiatives across various sectors.
Given the industry’s bright prospects, it could be wise to consider investing in fundamentally strong tech stocks NetApp, Inc. (NTAP) and Dropbox, Inc. (DBX).
Before delving deeper into their fundamentals, let’s discuss what’s shaping the tech industry’s prospects.
Following a poor 2022, the tech industry rebounded strongly last year, driven by the hype around generative AI and the expectations of interest rate cuts this year by the Federal Reserve. The tech-heavy Nasdaq Composite has risen 6.8% year-to-date and 38.5% over the past year.
The technology sector is among the fastest-growing sectors today because of its continuous innovations and cutting-edge products. Technology companies are pushing the boundaries of innovation to come up with solutions that enhance the productivity, flexibility, competitiveness, and efficiency of an enterprise.
Gartner forecasts worldwide IT spending to rise 6.8% year-over-year to $5 trillion this year. The popularity of cloud-based services and the growing demand for cybersecurity solutions, data storage solutions, and advanced networking technologies are boosting the demand for tech services. Spending on IT services this year is projected to grow 8.7% year-over-year to $1.50 trillion.
In addition, the IT hardware market is predicted to reach $191.03 billion by 2029, growing at a 7.9% CAGR. This growth is being driven by the increasing complexity of software applications and the rise of data-intensive workloads.
Additionally, the adoption of virtual and augmented reality, the Internet of Things (IoT), and artificial intelligence in various industries is expected to fuel demand for cutting-edge hardware.
Investors’ interest in tech stocks is evident from the Technology Select Sector SPDR ETF’s (XLK) 47.2% returns over the past year.
Let’s examine the fundamentals of the tech stocks mentioned above.
NetApp, Inc. (NTAP)
NTAP provides cloud-led and data-centric services to manage and share data on-premises and private and public clouds worldwide. It operates in two segments: Hybrid Cloud and Public Cloud. The company offers intelligent data management software, storage infrastructure solutions, cloud storage and data services, cloud operation services, and application-aware data management services.
NTAP’s trailing-12-month net income margin of 15.21% is 500.6% higher than the industry average of 2.53%. Its 20.56% trailing-12-month ROTC is 760.3% higher than the industry average of 2.39%. Also, the stock’s 89.69% trailing-12-month ROCE is significantly higher than the industry average of 3.06%.
For the fiscal third quarter, which ended January 26, 2024, NTAP’s net revenues increased 5.2% year-over-year to $1.61 billion. Its non-GAAP gross profit rose 14.4% year-over-year to $1.17 billion. The company’s non-GAAP net income increased 36.2% from the year-ago value to $410 million. In addition, its non-GAAP net income per share came in at $1.94, up 41.6% over the prior-year quarter.
Street expects NTAP’s EPS and revenue for the quarter ending April 30, 2024, to increase 15.6% and 4.4% year-over-year to $1.78 and $1.65 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, NTAP’s stock has gained 60.3% to close the last trading session at $104.80.
NTAP’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Momentum and Quality and a B for Growth. Within the B-rated Technology – Hardware industry, it is ranked #11 out of 36 stocks. To see NTAP’s ratings for Value, Stability, and Sentiment, click here.
Dropbox, Inc. (DBX)
DBX provides a worldwide content collaboration platform, offering both free and paid subscription plans with premium features. It serves diverse industries, including professional services, technology, media, education, and finance.
DBX’s trailing-12-month asset turnover ratio of 0.82x is 34% higher than the industry average of 0.61x. Its 12.45% trailing-12-month ROTC is 421% higher than the 2.39% industry average. Additionally, its 18.13% trailing-12-month net income margin is 616.1% higher than the 2.53% industry average.
During the fiscal fourth quarter ended December 31, 2023, DBX’s revenue increased 6% year-over-year to $635 million. Its gross profit improved 6.2% from the year-ago quarter to $513 million.
The company’s non-GAAP net income and net income per share rose 21% and 25% from the prior-year quarter to $170.80 million and $0.50, respectively.
For the quarter ending March 31, 2024, DBX’s EPS and revenue are expected to increase 18.4% and 2.9% year-over-year to $0.50 and $628.76 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 16.8% to close the last trading session at $23.80.
It’s no surprise that DBX has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has an A grade for Quality and a B for Growth and Value. It is ranked #3 out of 79 stocks in the Technology – Services industry. Beyond what is stated above, we’ve also rated DBX for Momentum, Stability, and Sentiment. Get all DBX ratings here.
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NTAP shares were unchanged in premarket trading Thursday. Year-to-date, NTAP has gained 19.57%, versus a 7.25% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master’s degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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