Apple's (AAPL -1.00%) stock has rallied about 50% over the past 12 months, buoyed by robust demand for the iPhone 12 -- its first family of 5G devices -- and the ongoing expansion of its services ecosystem. That rising tide also lifted shares of Apple's suppliers, but many of them still generated lower returns than the iPhone maker.

One notable exception was Jabil (JBL -0.54%), which manufactures Apple's iPhone and iPad casings. Jabil's stock has rallied roughly 75% over the past 12 months as its business withstood the pandemic and generated accelerating revenue and earnings growth. That rally continued after the company released its recent third-quarter report, which easily beat analysts' expectations and featured rosy guidance for the fourth quarter.

Apple's iPhone 12 Pro.

Image source: Apple.

Let's take a closer look at Jabil, how much it relies on Apple, and if the stock still has room to run.

What does Jabil do?

Jabil provides manufacturing services for a wide range of industries. Its EMS (Electronic Manufacturing Services) unit, which generated half its revenue last quarter, provides services for the capital equipment, cloud, networking, defense, industrial, energy, retail, and smart-home markets.

The EMS segment's top customer is Amazon (AMZN 0.23%), which accounted for 11% of its revenue in fiscal 2020 (which ended last August). Amazon accounted for less than 10% of Jabil's revenue in 2018 and 2019.

In 2018 Jabil started manufacturing smart packaging and devices for Amazon's DRS (Dash Replenishment Service) platform, which enables smart appliances to automatically order new supplies. In 2019 it joined Amazon's Packaging Support and Supplier Network, which enables it to provide Amazon-certified packaging design and manufacturing services to vendors, sellers, and manufacturers.

Jabil's DMS (Diversified Manufacturing Services) unit, which generated the remaining half of its revenue, mainly provides engineering solutions for the material science, technology, and healthcare sectors. The segment also serves the automotive and transportation markets, which were shifted over from the EMS segment at the end of fiscal 2020.

The DMS segment's top customer is Apple, which accounted for 20% of its revenue in fiscal 2020, compared to 28% in 2018 and 22% in 2019.

Jabil's other notable customers include Cisco, HP, Johnson & Johnson, Ericsson, and Tesla. It generated 47% of its revenue from its top five customers last year.

How fast is Jabil growing?

Jabil's year-over-year revenue growth accelerated over the past two quarters as its EMS unit stabilized and its DMS unit continued to generate strong double-digit growth.

Revenue Growth (YOY)

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

EMS

(2%)

8%

(4%)

(1%)

8%

DMS

13%

17%

13%

26%

21%

Total

7%

11%

4%

11%

14%

Data source: Jabil.

Jabil's EMS unit grew more slowly than its DMS unit for two reasons. First, the EMS unit's industrial, energy, and retail customers were more heavily exposed to pandemic-related disruptions. The automotive sector, which suffered disruptions throughout the pandemic, also dragged down the EMS unit until it was shifted over to the DMS unit in the fourth quarter.

Those weaknesses partly offset the strength of its cloud-oriented services, which benefited from stay-at-home trends throughout the pandemic, as well as rising demand for edge computing devices, which reduce the physical distance between internet users and servers. 

Second, the DMS unit serves healthcare customers, which suffered fewer disruptions throughout the crisis. Rising demand for new 5G phones from Apple and its mobile peers complemented that growth. Those strengths offset the softness of the automotive and transportation segment, which gradually stabilized as the pandemic passed.

Jabil expects its revenue to rise about 4% year over year in the fourth quarter, which exceeded analysts' previous expectations, and increase 8% for the full year.

The profitability and valuations

On the bottom line, Jabil's core non-GAAP earnings growth accelerated significantly over the past year -- even as it grappled with COVID-19 costs.

Metric

Q3 2020

Q4 2020

Q1 2021

Q2 2021

Q3 2021

Core EPS growth (YOY)

(35%)

11%

52%

154%

251%

Data source: Jabil. Non-GAAP. YOY = Year over year.

It attributed that acceleration to tighter cost controls, with an emphasis on "reliable" operating margins at its slower-growth EMS business and "expanding" operating margins at its higher-growth DMS business.

Jabil expects its core non-GAAP EPS to grow about 38% year over year in the fourth quarter, which also surpassed analysts' estimates, and for its full-year EPS to rise 90%.

Analysts expect Jabil's revenue and earnings to grow 4% and 7%, respectively, next year -- although those estimates will likely be raised after the company easily cleared Wall Street's bar last quarter.

Based on that outlook, Jabil's stock still looks cheap at 10 times forward earnings. Apple, by comparison, trades at 25 times forward earnings.

Should you buy Jabil instead of Apple?

Jabil isn't necessarily a better long-term investment than Apple, since its business is highly cyclical and more exposed to macro headwinds. Its business also has more moving parts to track than Apple's.

However, investors looking for a reliable contract manufacturer that will profit from both Apple and Amazon's growth should take a closer look at Jabil. It still looks undervalued, and it could continue to outperform Apple and many of its other supply chain players throughout the rest of the year.