The technology industry is poised for long-term growth due to rapid adoption of emerging technologies and increased spending on digitization initiatives, which is being driven by growing demand for innovative solutions. So let's assess whether tech stocks NetApp ( NTAP ) and Dropbox ( DBX ) are smart investments to take advantage of industry tailwinds. Continue reading.
The technology sector is popular for its ability to quickly adapt and address emerging challenges. The industry is expected to grow strongly in the long term, driven by increased demand for advanced technologies and increased spending on digital transformation initiatives across sectors.
Given the industry's bright outlook, it might be wise to consider investing in fundamentally strong technology stock NetApp, Inc.NTAP) and Dropbox, Inc. (DBX).
Before we delve into their fundamentals, let's discuss what's shaping the tech industry's outlook.
After a lackluster 2022, the tech industry rebounded strongly last year, fueled by buzz around generative artificial intelligence and expectations of a rate cut this year by the Federal Reserve. The tech-heavy Nasdaq Composite is up 6.8% year-to-date and 38.5% over the past year.
The technology sector is among the fastest growing sectors today due to constant innovations and cutting edge products. Technology companies are pushing the boundaries of innovation to find solutions that increase an enterprise's productivity, flexibility, competitiveness and efficiency.
Gartner predicts growth in IT spending worldwide 6.8% year over year to $5 trillion this year. The popularity of cloud-based services and the growing demand for cyber security solutions, data storage solutions and advanced networking technologies are increasing the demand for technology services. Spending on IT services this year is projected to grow 8.7% year over year to $1.50 trillion.
Additionally, the IT equipment market is projected 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.
Moreover, the adoption of virtual and augmented reality, Internet of Things (IoT) and artificial intelligence in various industries is expected to drive the demand for modern devices.
Investor interest in technology stocks is evident from the Technology Solutions Sector SPDR ETF (XLK) 47.2% returns over the past year.
Let's review the basics of the tech stocks mentioned above.
NetApp, Inc.NTAP)
NTAP provides cloud-driven, 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 provides 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 trailing 12-month ROCE of 89.69% is significantly higher than the industry average of 3.06%.
For the fiscal third quarter, which ended Jan. 26, 2024, NTAP's net income rose 5.2% year-over-year to $1.61 billion. It is non-GAAP gross profit rose 14.4% year over year to $1.17 billion. The company's non-GAAP net income rose 36.2% from a year earlier to $410 million. Additionally, its non-GAAP net income per share came in at $1.94, up 41.6% over the year-ago quarter.
The Street expects NTAP's EPS and revenue for the quarter ending April 30, 2024, to grow 15.6% and 4.4% year-over-year to $1.78 billion and $1.65 billion, respectively. It beat consensus EPS estimates in each of the following four quarters. Over the past year, NTAP shares have gained 60.3% to close the last trading session at $104.80.
NTAPs POWR Ratings reflect this promising outlook. It has an overall rating of B, equal to a Buy in our proprietary rating system. The POWR ratings evaluate stocks on 118 different factors, each with its own weight.
It has an A for Momentum and Quality and a B for Growth. Within the B rating Technology – Hardware industry, it ranks #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 free and paid subscription plans with premium features. It serves various 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 industry average of 2.39%. Additionally, its trailing 12-month net income margin of 18.13% is 616.1% higher than the industry average of 2.53%.
During the fiscal fourth quarter ended December 31, 2023, DBX's revenue rose 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 earnings per share increased 21% and 25% from the year-ago quarter to $170.80 million and $0.50, respectively.
For the quarter ending March 31, 2024, DBX's EPS and revenue are expected to grow 18.4% and 2.9% year-over-year to $0.50 million and $628.76 million, respectively. It beat the Street's EPS estimates in each of the following 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, equal to a Strong Buy in our POWR rating system.
It has an A for Quality and a B for Growth and Value. It ranks third out of 79 shares in Technology – Services industry. Beyond what was said above, we also rated DBX for Momentum, Stability and Sentiment. Get all DBX ratings here.
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Shares of NTAP were flat in premarket trading on Thursday. Year-to-date, NTAP has gained 19.57%, versus a 7.25% gain in the benchmark S&P 500 over 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 the right investment decisions.
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