The outsourcing of tech services is expanding due to advancements such as chatbots, AI for personalized experiences, big data analytics, cloud migrations, and robotic process automation. These technologies improve efficiency, reduce costs, and offer innovative solutions, driving the sector's growth.
Amid this backdrop, it could be wise to consider buying fundamentally strong outsourcing tech stocks, Nomura Research Institute, Ltd. (NRILY), Cognizant Technology Solutions Corporation (CTSH), and The Hackett Group, Inc. (HCKT).
Tech outsourcing has progressed beyond mere cost reduction. It benefits from access to specialized expertise and staying ahead with trends like AI, cloud computing, cybersecurity, and remote work solutions. These factors drive businesses to adopt outsourcing services for enhanced efficiency and innovation.
The global IT services market is projected to grow at a CAGR of 6.8% and reach revenues of $1.77 trillion by 2028.
Furthermore, the popularity of cloud services is fueling the growth of the IT outsourcing sector. Companies are outsourcing their cloud computing projects to third-party cloud service providers for a fee. This helps them reduce IT costs, boost scalability and flexibility, and focus on core competencies.
The IT outsourcing market is expected to grow considerably, from $129.13 billion in 2024 to $171.50 billion by 2028, at a 7.4% CAGR.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Outsourcing - Tech Services industry picks, beginning with the third choice.
Stock #3: Nomura Research Institute, Ltd. (NRILY)
Headquartered in Tokyo, Japan, NRILY offers consulting, financial, and industrial IT solutions and IT platform services. Its segments include Consulting, Financial IT Solutions, Industrial IT Solutions, and IT Infrastructure Services. The company provides management and system consulting, system development, and operational solutions for various sectors, such as finance, manufacturing, and public services.
On March 11, 2024, NRILY announced the introduction of Nomura Capital Management LLC (NCM), consolidating the firm's asset and investment management capabilities in the Americas to serve institutional and intermediary clients better, focusing on credit market expertise and growth opportunities.
In terms of the trailing-12-month net income margin, NRILY’s 11.34% is 313.3% higher than the 2.74% industry average. Likewise, its 16.07% trailing-12-month EBIT margin is 225.1% higher than the industry average of 4.94%. Furthermore, the stock’s 0.85x trailing-12-month asset turnover ratio is 37.4% higher than the industry average of 0.62x.
NRILY’s net revenue for the nine months ended December 31, 2023, increased 10.5% year-over-year to ¥1.12 trillion ($7.37 billion). Likewise, its net income attributable to NRILY shareholders came in at ¥109.11 billion ($719.53 million) or ¥34.69 per share, up 27.8% and 26.4% over the prior-year quarter, respectively.
Also, its total assets as of December 31, 2023, stood at ¥54.75 trillion ($361.06 billion) compared to ¥47.77 trillion ($315.02 billion) as of March 31, 2023.
For the quarter ending September 30, 2024, NRILY’s revenue is expected to increase 5.8% year-over-year to $1.30 billion. Over the past year, the stock has gained 17.7% to close the last trading session at $27.48.
NRILY’s POWR Ratings reflect strong prospects. It has an overall rating of B, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #3 out of 9 stocks in the A-rated Outsourcing - Tech Services industry. It has an A grade for Stability and a B for Quality. Click here to see NRILY’s ratings for Growth, Value, Momentum, and Sentiment.
Stock #2: Cognizant Technology Solutions Corporation (CTSH)
CTSH is a professional services company that provides consulting technology and outsourcing services in North America, Europe, and internationally. It operates through four segments: Financial Services, Health Sciences, Products and Resources, and Communications, Media, and Technology.
On April 2, 2024, CTSH announced a new agreement with McCormick & Company, Inc. (MKC), aimed at transforming and managing MKC’s global technology infrastructure to enhance employee and customer experiences, with a focus on AI automation tools and delivering predictable business outcomes over the next five years.
On March 28, 2024, CTSH announced an extended collaboration with LexisNexis Legal & Professional. The multi-year agreement focuses on providing cloud and digital engineering services to enhance the customer experience with LexisNexis' next-gen legal research solution in the U.S. and Canada. It mainly emphasizes improving search capabilities and overall customer satisfaction.
In terms of the trailing-12-month EBITDA margin, CTSH’s 17.66% is 86.3% higher than the 9.48% industry average. Likewise, its 10.99% trailing-12-month net income margin is 300.3% higher than the 2.74% industry average. Additionally, its 12.91% trailing-12-month Return on Total Capital is 398.3% higher than the 2.59% industry average.
CTSH’s revenues for the fourth quarter ended December 31, 2023, came in at $4.76 billion. The company’s adjusted income from operations grew 11.4% from the year-ago value to $764 million. In addition, its net income and adjusted EPS were $558 million and $1.18, up 7.1% and 16.8% year-over-year, respectively.
Street expects CTSH’s EPS for the quarter ending June 30, 2024, to increase 0.8% year-over-year to $1.11. Its revenue for the quarter ending September 30, 2024, is expected to increase 0.5% year-over-year to $4.92 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 17.3% to close the last trading session at $71.13.
CTSH’s robust fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Quality. Within the same industry, it is ranked #2. Click here to access CTSH’s Growth, Value, Momentum, Stability, and Sentiment ratings.
Stock #1: The Hackett Group, Inc. (HCKT)
HCKT is a global strategic advisory and technology consulting firm. It has three segments: Global Strategy & Business Transformation, Oracle Solutions, and SAP Solutions. The company provides online resources, best practice accelerators, advisory services, research insights, peer interaction, benchmarking services, business transformation practices, and Oracle and SAP solutions for clients' specific needs.
On January 16, 2024, HCKT and Civic Initiatives, LLC, announced a strategic agreement to collaborate in public procurement. The deal combines expertise in benchmarking and advisory services to offer enhanced solutions to clients in the public sector and higher education.
HCKT’s Principal and Global Procurement Advisory Practice Leader, Chris Sawchuk, said, “The partnership with Civic Initiatives opens up exciting opportunities to leverage our expertise in benchmarking and advisory services. Together, we aim to bring innovative solutions to public procurement challenges and create lasting impact.”
In terms of the trailing-12-month EBIT margin, HCKT’s 19.14% is 287.4% higher than the 4.94% industry average. Likewise, its 28.58% trailing-12-month Return on Total Capital is considerably higher than the industry average of 2.59%. Furthermore, the stock’s 1.59x trailing-12-month asset turnover ratio is 157% higher than the industry average of 0.62x.
For the fiscal fourth quarter ended December 29, 2023, HCKT’s total revenues increased 3.3% year-over-year to $72.40 million. Its operating income came in at $11.48 million. In addition, the company’s adjusted net income came in at $10.83 million. Its adjusted net income per common share stood at $0.39, representing an increase of 8.3% over the prior-year quarter.
Analysts expect HCKT’s EPS and revenue for the quarter ended March 31, 2024, to increase 0.9% and 4.5% year-over-year to $0.37 and $74.43 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 26.2% to close the last trading session at $23.32.
It’s no surprise that HCKT has an overall rating of B, which translates to a Buy in our POWR Ratings system.
It has an A grade for Sentiment and a B for Stability and Quality. It is ranked first in the Outsourcing – Tech Services industry. Beyond what we stated above, we also have given HCKT grades for Growth, Value, and Momentum. Get all the HCKT ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CTSH shares were trading at $70.99 per share on Monday morning, down $0.14 (-0.20%). Year-to-date, CTSH has declined -5.65%, versus a 9.47% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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