Jabil (JBL -0.18%) may not be a fashionable name among tech investors as the company does the "boring" job of providing contract-manufacturing services to customers in various industries, such as automotive, mobility, cloud computing, and networking (among others), but the stock has set the market on fire in 2023 with terrific gains of 53%.
This means Jabil stock has outperformed the tech-laden Nasdaq-100 Technology Sector index's gains of 37% by a handsome margin. Given that Jabil gets a nice chunk of its revenue by providing contract-manufacturing services to Apple (AAPL -0.35%), there is a good chance that the stock could keep up its momentum for the rest of the year. And more importantly, the markets that Jabil serves suggest that the company could deliver robust long-term growth.
Let's look at the reasons why buying this stock looks like a no-brainer.
Jabil could deliver stronger growth as headwinds subside
Jabil released its fiscal 2023 third-quarter results (for the three months ended May 31, 2023) a couple of months ago. The company delivered $8.5 billion in revenue, a slight increase of 2% over the prior-year period. However, Jabil's non-GAAP earnings increased at a faster pace of 16% to $1.99 per share. Analysts would have settled for earnings of $1.87 per share on revenue of $8.2 billion.
One might argue that Jabil's top-line growth wasn't good enough to justify the stock's impressive surge this year. But it is worth noting that the company has been able to deliver growth even at a time when it is witnessing weakness in certain areas. More specifically, the company was handicapped by "lower demand in some of our consumer-facing markets and in semi-cap."
Spending on semiconductor capital equipment is expected to fall 22% in 2023, as per Gartner's estimates. Meanwhile, sales of smartphones have been declining for eight quarters on the trot, according to Counterpoint Research. So, it is not surprising to see the challenges that Jabil is facing in these areas. The good part is that the company has managed to deliver growth in revenue and earnings despite these headwinds, driven mainly by strength in the automotive, healthcare, and industrial businesses.
And now, there is a good chance that the headwinds that have weighed on Jabil may be clearing. For instance, market research firm Canalys recently pointed out that the smartphone market is showing early signs of a recovery. Sony, on the other hand, estimates that the smartphone market could head north in 2024. But for Jabil, the recovery could begin sooner thanks to Apple, which is its largest customer and produced 19% of its top line in the previous fiscal year.
Jabil's relationship with Apple could give it a solid boost in the coming year as the smartphone giant is reportedly on track to benefit from a potential upgrade cycle. According to Dan Ives of Wedbush Securities, the launch of the next-generation iPhones next month could encourage 250 million users to upgrade to the new devices since they haven't been upgraded in four years, at least.
For comparison, Apple has shipped 222 million iPhones in the past four quarters. As Jabil is known for making aluminum casements for iPhones and iPads, a potential double-digit jump in Apple's smartphone shipments in the coming year is likely to give the contract-electronics manufacturer's business from its largest customer a nice boost. Throw in the fact that Apple is set to start the production of its Vision Pro mixed-reality headset next year, there is a chance that Jabil could see its business from the tech giant expanding.
On the other hand, spending on semiconductor capital equipment is expected to increase 1.3% in 2024 following this year's decline, followed by a stronger jump of 9.5% in 2025. All this indicates that Jabil could benefit from an improvement in business conditions going forward, which should ideally translate into stronger growth for the company.
The valuation makes buying the stock a no brainer
Analysts are anticipating Jabil's earnings will increase at an annual rate of 11% for the next five years. The company is expected to finish the current fiscal year with $8.51 per share in earnings. Using this year's projected earnings as the base, Jabil's bottom line could jump to $14.34 per share after five years.
Multiplying the projected earnings with Jabil's five-year average-earnings multiple of 30 points, toward a stock price of $430 after five years, would lead to an amount just over four times the company's current stock price. However, Jabil is now trading at a very attractive 15 times trailing earnings. Assuming the stock maintains a similar multiple after five years, the stock price could jump to $215, indicating that the stock could at least double from its current levels.
So, it isn't too late for investors who have missed Jabil's impressive rally to buy the stock as it seems built for a healthy upside in the long run.
