Contract electronics manufacturer Jabil(NYSE: JBL) has endured a tough time on the stock market so far this year, losing 11% of its value as of this writing, and the company's latest quarterly report hasn't helped boost investor confidence, either.
Jabil released fiscal 2024 third-quarter results (for the three months ended May 31) on June 20. The stock rose initially thanks to its better-than-expected numbers, but the guidance was gloomy, and the company's shares fell by more than 11%. Let's see why that was the case and check if a new catalyst in the form of artificial intelligence (AI) could give Jabil a boost.
Weakness in certain end markets is weighing Jabil down
Jabil delivered quarterly revenue of $6.8 billion, down by 20% from the year-ago period. Investors should note that the company divested its mobility business in December last year, which explains the steep year-over-year decline in its top line. However, the good part is that Jabil's revenue exceeded the midpoint of its guidance range of $6.2 billion to $6.8 billion. Wall Street would have settled for $6.53 billion in revenue from Jabil.
The company's adjusted earnings of $1.89 per share also exceeded its 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 its business down in the near term led investors to press the panic button. At the same time, it is worth noting the company has maintained its full-year revenue forecast of $28.5 billion and earnings of $8.40 per share.
One reason why Jabil managed to maintain its full-year forecast is the strength in demand for connected devices such as smartphones, as well as strength in the networking and storage markets thanks to the growing demand for AI data centers. The good part is that AI is likely to become a solid catalyst for Jabil going forward. Let's look at the reasons why.
Why AI is set to become a key growth driver for the company
Jabil is expecting its revenue from the connected devices segment to land at $3.2 billion in the current fiscal year, down 20% from the previous year. This segment is reliant on the manufacturing of smartphones, which explains why its performance is set to dip in the current fiscal year. Sales of smartphones fell 3.2% last year, but the the advent of AI is going to bring about a turnaround in this space.
Market research firm IDC estimates that smartphone shipments are set to increase by 2.8% this year. More specifically, shipments of AI smartphones are expected to clock a terrific annual growth rate of 83% through 2027, according to Counterpoint Research. This trend is likely to give Jabil a solid boost, as it counts Apple as its largest customer. The iPhone maker accounted for 17% of Jabil's top line in the previous fiscal year.
Analysts are expecting Apple's iPhone sales to increase in the next fiscal year thanks to AI. The tech giant recently revealed Apple Intelligence, a suite of generative AI features set to make their way to its devices. As a result, Apple is expected to witness a 10% bump in iPhone sales in fiscal 2025 that will begin later this year, followed by another increase in fiscal 2026.
Apple's MacBook sales can also get a boost thanks to the growing demand for AI-enabled PCs. All this bodes well for Jabil's connected devices business, which is likely to get a lift as Apple ramps up the production of its devices following a poor start to 2024 when its iPhone sales were down 9.6% in Q1.
Meanwhile, Jabil forecasts that its AI data center-related markets are set for growth in the current fiscal year and the next one . It won't be surprising to see AI data centers opening a long-term growth opportunity for Jabil. That's because McKinsey is forecasting annual growth of 10% in data center construction through 2030, with the construction of hyperscale data centers expected to grow at a higher rate of 20% a year.
These growth drivers explain why analysts are expecting Jabil's earnings to increase at an annual rate of 12% for the next five years, though don't be surprised to see the company doing better thanks to the new AI-related catalysts. That's why investors looking for a cheap and beaten-down tech stock with turnaround potential should consider taking a closer look at this company.
Jabil is trading at just 10 times trailing earnings. That's lower than its five-year average earnings multiple of 17 and also represents a huge discount to the U.S. technology sector's price-to-earnings ratio of 47. Investors are getting a good deal on Jabil right now, and they can consider keeping this stock on their watch lists as an AI-driven turnaround in its business could change its fortunes on the market.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
