Jabil (NYSE: JBL) is not a household name in the technology sector; the company provides contract manufacturing services for many applications such as automotive, connected devices, networking and storage, data centers, and semiconductor manufacturing equipment, among others, rather than making popular products such as artificial intelligence (AI) chips or smartphones.
On top of that, the company has been suffering from weakness in multiple end markets, which explains why its recent financial performance has not been great. However, Jabil has been trying to overcome the tepid end-market scenario by restructuring its business and focusing on fast-growing niches such as AI.
In this article, we will take a closer look at Jabil’s business and check out why it has the potential to make the most of the growing adoption of AI in the long run.
Jabil released fiscal 2024 results (for the year ended Aug. 31) on Sept. 26. It finished the year with $28.9 billion in revenue, down from $34.7 billion in the preceding year. Jabil’s adjusted earnings for the full year dropped to $8.49 per share from $8.63 per share in fiscal 2023.
Jabil’s year-over-year decline can be attributed to a couple of factors. First, the company divested its mobility business in December 2023 (which was the first month of its second quarter of fiscal 2024). This business generated $4.2 billion in revenue in fiscal 2023, but its contribution came down to $1.7 billion in fiscal 2024 on account of the divestiture since it was sold after the first four months of the fiscal year.
At the same time, Jabil saw lower-than-expected revenue in the automotive business, while the softness in the 5G, renewable energy, and digital print end markets also weighed on its growth.
These factors offset the strength in other end markets such as robust growth in the connected devices business, as well as improvements in the cloud, semiconductor capital equipment, and warehouse automation markets. The bad news for investors is that Jabil’s fiscal 2025 revenue guidance of $27 billion points toward a 7% projected drop in its top line.
However, the company’s focus on keeping its costs low and restructuring its business through headcount reduction explains why it is forecasting a small increase in non-GAAP earnings to $8.65 per share.
What seems surprising is that shares of Jabil have shot up 15% since the beginning of September. What’s more, Jabil stock shot up over 11% following the release of its latest quarterly report, as its numbers weren’t as bad as expected. At the same time, it looks like a couple of AI-related catalysts could act as tailwinds for Jabil stock.
Apple is Jabil’s largest customer, with the iPhone maker accounting for 17% of its total revenue in fiscal 2023. The contract electronics manufacturer makes casings for iPhones and iPads, so it was not surprising to see why management remarked on Jabil’s latest earnings conference call that it witnessed “stronger growth” in the connected devices business.
Jabil’s relationship with Apple is going to be a key growth driver for the former thanks to the growing demand for AI-enabled smartphones. Apple is going to offer a host of generative AI features on its latest iPhone models, which could encourage a large number of users to upgrade to its new devices. There are reportedly 300 million iPhones that haven’t been upgraded in four years, according to Dan Ives of Wedbush Securities.
So, Apple could witness a nice bump in shipments in the future as more users upgrade from their older iPhones to new devices with generative AI. In turn, Jabil could witness an increase in business from Apple as the iPhone maker’s shipments are expected to improve with the advent of those generative AI smartphones.
Meanwhile, Jabil has taken a step to improve its AI-related prospects by acquiring Mikros Technologies this month. Mikros manufactures liquid-cooling solutions for data centers, a market that has been witnessing impressive growth of late on the back of the growing adoption of AI servers. Persistence Market Research predicts that the data center liquid cooling market could clock an annual growth rate of over 24% from 2024 to 2032, generating annual revenue of $24 billion at the end of the forecast period.
Jabil, therefore, has made a smart move by making an entry into this space as the Mikros acquisition could help accelerate its growth over the long run. This probably explains why analysts have raised their earnings growth expectations from Jabil for the next couple of years.
JBL EPS Estimates for Current Fiscal Year data by YCharts
Moreover, the company is expected to clock an annual earnings growth rate of nearly 13% for the next five years, though don’t be surprised to see this estimate heading higher on the back of the AI-related catalysts discussed above. As such, investors seeking a potential AI winner at an attractive valuation can consider buying Jabil stock as it is trading at just 11 times trailing earnings right now even after its recent impressive rally.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.
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