Apple (AAPL +0.11%) supplier Jabil (JBL 6.74%) has defied the broader sell-off in tech stocks so far in 2021. The contract electronics manufacturer's impressive top- and bottom-line growth and its attractive valuation have prompted investors to ignore the volatility plaguing the broader market and stick with the stock.
If you missed out on Jabil's impressive rally so far this year (it's up about 35% in 2021), it's still a great time to buy the stock. There is some speculation that the stock may fly higher after Jabil's fiscal third-quarter earnings report is released on Thursday, June 17.
Let's see why that may be the case.
JBL data by YCharts
Jabil is set to deliver solid growth
Jabil's Q3 guidance calls for $0.90 to $1.10 per share in core earnings on revenue of $6.6 billion to $7.2 billion. The company delivered core earnings of $0.37 per share on $6.3 billion in revenue in the prior-year period, indicating that it is on track to register double-digit percentage revenue growth along with a huge jump in earnings.
However, it is worth noting that Jabil has increased its full-year outlook a couple of times over the past few months, thanks to improving business conditions. The company bumped up its revenue guidance in December last year on the back of strong demand for Apple's new iPhones and the smooth transition to a subscription-based model in the cloud business. It increased its guidance once again in March, citing stronger-than-expected demand across several verticals such as mobility, connected devices, automotive, healthcare, and the cloud.
What's more, Jabil management pointed out on the March earnings conference call that things could keep getting better as the year progresses. Jabil CFO Mike Dastoor expects "the long-term secular tailwinds that are driving our business to continue," while CEO Mark Mondello said that the company has a "firm foundation for further margin expansion as we look to FY '22."
Image source: Getty Images.
So there's a chance of Jabil crushing Wall Street's expectations and raising the outlook once more. A closer look at the catalysts it is sitting on will clarify why that looks like a real possibility.
Meet the growth drivers
Jabil gets nearly a third of its revenue from two customers -- Apple and Amazon. Apple was its largest customer last fiscal year, accounting for 20% of the total revenue. Amazon was the second largest with 11% of the total revenue.
Jabil manufactures casings for the iPhone and the iPad through its diversified manufacturing services (DMS) unit. This business was struggling just over a year ago and weighing on Jabil's overall revenue growth. However, the DMS unit's fortunes changed with the arrival of the latest iPhones. The segment's revenue increased 13% year over year in the first quarter of FY21, which ended in November 2020, and followed that with a 26% increase in Q2.
The DMS business accounted for 53% of Jabil's Q2 revenue, a big step up from the 39% it supplied in the year-ago quarter. The good news is that the DMS business should continue to enjoy high levels of growth, as Apple is reportedly on track to increase production this year and beyond to meet surging demand. Dan Ives of Wedbush estimates that Apple could ship between 240 million and 250 million iPhones this year, breaking the 2015 record of 231 million units.
The sales momentum is expected to continue into 2022, driven by the launch of new iPhones this year that are expected to bring additional upgrades such as screens with higher refresh rates. Analysts expect Apple to increase the initial builds of the 2022 iPhone lineup by 25% over the iPhone 12, which bodes well for Jabil's DMS business.
Meanwhile, the electronics manufacturing services (EMS) business is also sitting on robust tailwinds. Jabil makes products used in cloud, industrial, automotive, energy, defense, telecom, smart home, and retail businesses through the EMS unit. The business recorded a 1% year-over-year revenue drop in Q2 on account of a change in the business model that it made last year.
The company's EMS cloud products are now sold through subscriptions. While that has been weighing on the top line, the change has given the margins a huge bump.
JBL Gross Profit Margin data by YCharts
The EMS business's growth should pick up the pace, as Jabil is on track to take advantage of the growing demand for hyperscale data centers and the deployment of 5G networks. These are the reasons Jabil has increased its revenue outlook for the EMS business from $12.5 billion to $13.4 billion for this year.
Thanks to such lucrative end markets, the company's revenue and earnings are expected to clock consistent growth over the long run.
JBL Revenue Estimates for Current Fiscal Year data by YCharts
Finally, with the stock trading at just 10 times forward earnings and 0.3 times sales, investors who have missed the Jabil gravy train so far this year still have an opportunity to go long. But they shouldn't delay much, as a strong showing next week could supercharge this growth stock and inflate the valuation.
