The electronics industry, particularly in the realm of miscellaneous products, is currently navigating through turbulent waters, grappling with harsh macroeconomic conditions, inventory challenges, and soaring interest rates. This sector is facing hurdles in the wake of a global economic tumult that is expected to limit semiconductor capital expenditure, casting a shadow on the outlook for industry players in the short term.
Despite these adversities, leading entities like KLA, Flex, and Daktronics are finding pockets of growth amidst the chaos by capitalizing on increased investments in cutting-edge technologies such as augmented reality and virtual reality. Furthermore, sustained investments in data centers, high-performance computing, and the burgeoning 5G market are serving as pivotal growth drivers. The expansion of fabs (foundries) in key locations like the United States, South Korea, Taiwan, and China, coupled with escalated spending on memory equipment, is projected to steer the industry towards a prosperous future beyond 2024.
An Intriguing Industry Landscape
The electronics – miscellaneous products sector encompasses a diverse array of original equipment manufacturers involved in air-conditioning systems, green energy solutions, remote-control systems, GPS navigation, home automation, healthcare devices, robotics, and semiconductor applications. This industry is in the throes of digital metamorphosis, fueled by the surging demand for silicon across various sectors. The escalating cost of manufacturing operations is proving advantageous for equipment providers, while the insatiable thirst for silicon presents a lucrative opportunity for semiconductor enterprises.
Shaping Forces of Change in the Sector
Solid Capital Spending Fuels Optimism: Technological advances are precipitating product intricacies, fueling the need for solutions offered by industry players. The upsurge in investments aimed at expanding manufacturing capacities by semiconductor firms stands out as a key growth catalyst in the long run. Despite prevailing macroeconomic challenges, such capital outlays are expected to benefit the industry substantially. Additionally, the surge in spending on advanced nodes like 7 nm, 5 nm, and 3 nm processes from logic and foundry customers augurs well for industry incumbents, with a healthy outlook for logic and foundry investment.”,
Emerging Markets of Wearables, AR & VR Fuel Expansion: The industry is witnessing a robust upswing in demand for wearables and AR/VR-powered display systems, driving growth across defense, industrial, consumer, and healthcare sectors. The rising adoption of AR and VR technologies can be attributed to the widespread proliferation of the metaverse, opening up new avenues of growth and innovation.
Challenges Amidst Macroeconomic Headwinds: The industry faces headwinds stemming from a harsh global macroeconomic backdrop, with enterprises displaying hesitancy in committing to long-term agreements. Persisting inflationary pressures and adverse forex trends are adding to the woes of industry stakeholders, painting a challenging landscape.
Insights into Industry Dynamics
The electronics – miscellaneous products domain, nestled within the broader Zacks Computer and Technology sector, carries a Zacks Industry Rank #184, positioning it in the lower echelons of over 250 Zacks industries. The industry’s current position in the bottom 50% of Zacks-ranked sectors signals a subdued near-term trajectory. Historical data reveals that industries in the top 50% of Zacks-ranked segments outshine their lower counterparts by a notable margin, emphasizing the industry’s tepid outlook.
Adopting a bearish sentiment, analysts have downwardly revised the earnings estimates for constituent companies within this industry conclave by a significant 25.5% since July 31, 2023, reflecting a somber earnings growth outlook.
Evaluating Performance and Valuation
Relative Performance
In the past year, the electronics – miscellaneous products industry has lagged behind both the S&P 500 index and the broader Zacks Computer & Technology sector, posting a modest return of 9.6%. This pales in comparison to the significant growth of 19.3% witnessed by the S&P 500 composite and a robust 27% return observed in the broader sector.
Current Valuation Metrics
Based on the forward 12-month P/E ratio, a widely used valuation metric for gauging miscellaneous electronics companies, the industry currently trades at 21.32X. In contrast, the S&P 500 registers a slightly lower 21.03X, while the sector’s forward-12-month P/E stands at 25.88X. Over the past five years, the industry has seen valuations range from a high of 22.16X to a low of 17.89X, with the median resting at 18.12X.
Exploring Potential Investment Opportunities
Daktronics: This Brookings-based company, specializing in digital LED display technology and audio systems, is benefitting from a surge in order volume, particularly in the Live Events and International business segments. Daktronics holds a Zacks Rank #1 (Strong Buy), with its shares soaring by 73.5% year-to-date. Earnings estimates for fiscal 2025 have been revised upward by an impressive 34.5% over the past month.
Price and Consensus: DAKT
KLA: Securing a Zacks Rank #2 (Buy), KLA is on an upward trajectory driven by the robust performance of its wafer inspection division, fueled by escalating demand for cutting-edge wafer inspection applications in advanced technology development arenas. The San Jose-based company is capitalizing on increased investments across various nodes and heightened capital intensity in the Foundry & Logic segment. Earnings estimates for fiscal 2025 have received a minor uptick, now standing at $28.19 per share, translating to a 31.3% surge in share value year-to-date.
Price and Consensus: KLAC
Flex: With a Zacks Rank #2, Flex is witnessing an upsurge in demand driven by the next-gen mobility wave, encompassing EV onboard electronics and advanced computing platforms for the software-defined vehicle ecosystem. The Health Solutions business segment is gaining traction owing to robust digital health and medical device demand. Moreover, the company is riding the wave of AI-driven cloud expenditure. Though Flex shares have increased by 1.6% since the beginning of the year, earnings estimates for fiscal 2025 have held steady at $2.36 per share over the past month.
Price and Consensus: FLEX
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