The demand for technology services remains robust thanks to rising digital transformation initiatives. The growth of cloud services and the adoption of new-age technologies are expected to bolster the industry’s prospects.
Considering these factors, it could be wise to buy fundamentally strong tech stocks N-able, Inc. (NABL), PC Connection, Inc. (CNXN), and TravelSky Technology Limited (TSYHY) for a stable portfolio and resilient returns.
Before delving deeper into their fundamentals, let’s discuss why the tech services industry is growing.
Businesses invest in digital transformation to modernize, become agile, gain a competitive edge, enhance customer satisfaction, and improve operational efficiency. They are increasingly relying on tech services for various tasks.
Demand for technology is evident from the Technology Select Sector SPDR Fund’s (XLK) 31.8% year-to-date gains, outpacing the broader SPDR S&P 500 ETF Trust’s (SPY) 9.4% gains over the same period.
According to the forecast by Gartner, global IT spending is expected to total $5.10 trillion in 2024, up 8% year-over-year. Moreover, spending on IT services is expected to grow 10.4% year-over-year to $1.55 trillion next year.
Furthermore, as per a report by Mordor Intelligence, the international IT services market is projected to reach $1.67 trillion by 2028, growing at a CAGR of 8.4% between 2023 and 2028.
Now that we have looked at the bright and prosperous future of the Technology - Services industry let’s check out the fundamentals of the stocks mentioned above, starting with the third stock.
Stock #3: N-able, Inc. (NABL)
NABL offers cloud-based software solutions tailored for Managed Service Providers (MSPs) to facilitate digital transformation and expansion in small and medium-sized enterprises. Its enterprise-grade platform acts as an operating system for MSP partners, capable of scaling their businesses' growth.
On October 10, NABL announced the strengthening of its partnership with SentinelOne, Inc. (S) to offer enhanced endpoint security solutions for MSPs. This deeper integration and expanded security offerings empower MSPs to provide enterprise-grade security services. This collaboration should benefit the company.
For the fiscal second quarter (ended June 30, 2023), NABL’s revenue increased 15.8% year-over-year to $106.08 million. Its non-GAAP gross profit rose 14.8% from the previous year's value to $89.91 million.
The company’s non-GAAP operating income rose 23.1% year-over-year to $28.70 million. Moreover, its non-GAAP net income increased 1.8% from the prior-year quarter to $16.26 million.
NABL’s trailing-12-month levered FCF margin and Return On Common Equity (ROCE) of 14.65% and 2.40% are 98.8% and 113% higher than the industry averages of 7.37% and 1.13%, respectively. Additionally, its trailing-12-month Return On Total Assets (ROTA) of 1.38% is substantially higher than the industry average of 0.03%.
Street expects NABL’s EPS and revenue for the quarter ending March 2024 to increase 3.1% and 11.7% year-over-year to $0.08 and $111.52 million, respectively. It surpassed the consensus revenue estimates in each of the trailing four quarters and EPS estimates in three of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 19.7% to close the last trading session at $12.96. It increased 26.1% year-to-date. It has a five-year beta of 0.47, indicating greater stability than the broader market.
NABL’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Technology - Services industry, it is ranked #14 out of 73 stocks. It has an A grade for Growth and a B for Stability and Sentiment. Click here to see the other ratings of NABL for Value, Momentum, and Quality.
Stock #2: PC Connection, Inc. (CNXN)
CNXN specializes in a wide range of Information Technology (IT) solutions, organized into three distinct segments: Business Solutions; Enterprise Solutions; and Public Sector Solutions.
For the second quarter that ended June 30, 2023, CNXN’s total net sales came in at $733.55 million. Also, its net cash provided by operating activities increased 287.9% year-over-year to $115.94 million.
Furthermore, the company’s cash and cash equivalents at the end of the period stood at $243.98 million, registering an improvement of 157.1% from the prior year quarter.
CNXN’s trailing-12-month ROCE and cash per share of 9.95% and $9.29 are 781.5% and 389.1% higher than the industry averages of 1.13% and $1.90, respectively. Its trailing-12-month ROTA of 6.52% is considerably higher than the 0.03% industry average.
The consensus revenue estimate of $3.15 billion for the fiscal year ending December 2024 reflects a 7.2% year-over-year improvement. Likewise, the consensus EPS estimate of $3.56 for the same period reflects a 17.5% rise year-over-year.
The stock has gained 33.1% over the past six months and 14.2% year-to-date to close the last trading session at $53.58. It has a five-year beta of 0.67.
CNXN’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
CNXN has a B grade for Stability, Sentiment, and Quality. It has ranked #9 in the same industry.
In addition to the POWR Ratings I’ve just highlighted, you can see CNXN ratings for Growth, Value, and Momentum here.
Stock #1: TravelSky Technology Limited (TSYHY)
TSYHY, based in Beijing, specializes in offering information technology solutions to China's aviation and travel industry. The company’s services encompass aviation information technology, distribution information technology, as well as accounting, settlement, and clearing services.
For the six months that ended June 30, 2023, TSYHY’s total operating income increased 45.6% year-over-year to RMB 3.31 billion ($452 million). Its operating profits grew 220.1% from the year-ago value to RMB 1.34 billion ($182.94 million).
Also, net profit attributable to shareholders of the company rose 170.9% year-over-year to RMB 1.20 billion ($164.04 million). Additionally, the company’s earnings per share came in at RMB 0.41, registering an increase of 173.3% year-over-year.
TSYHY’s trailing-12-month net income margin of 22.16% is 408.3% higher than the industry average of 4.36%. Likewise, its trailing-12-month levered FCF margin and EBIT margin of 21.39% and 19.83% are 301.1% and 169.4% higher than the industry averages of 5.33% and 7.36%, respectively.
Analysts expect TSYHY’s revenues for the current fiscal year (ending December 2023) to increase 42.5% year-over-year to $1.09 billion. For the fiscal year 2024, the consensus revenue estimate of $1.28 billion indicates an improvement of 18% year-over-year.
Over the past year, TSYHY’s stock has gained 8.5% to close the last trading session at $15.82. It has a five-year beta of 0.62.
TSYHY’s strong prospects are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
TSYHY has an A grade for Quality and a B for Growth, Stability, and Sentiment. It is ranked #4 in the same industry.
Click here for TSYHY’s additional POWR Ratings (Value and Momentum).
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TSYHY shares were trading at $15.54 per share on Wednesday afternoon, down $0.28 (-1.79%). Year-to-date, TSYHY has declined -25.94%, versus a 10.89% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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