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), Xerox Holdings Corporation (XRX), and Zoom Video Communications, Inc. (ZM).
Before diving deeper into their fundamentals, let’s discuss why the tech services industry is expected to perform well.
Technology services encompass several types of services, solutions, and support related to enhancing the use of technology in order to boost productivity and optimize operations. The demand for tech services has increased significantly due to the robust digitization initiatives across different industries.
Businesses are utilizing a wide range of tech services such as cybersecurity support, cloud-based solutions, help desk support, network services, security support, etc. Furthermore, the industry is expected to get a boost from the adoption of advanced technologies like blockchain, artificial intelligence (AI), machine learning (ML), the Internet of Things (IoT), 5G, etc.
According to Gartner, information technology (IT) spending is projected to rise 4.3% year-over-year to reach $4.72 trillion in 2023. Next year, IT services spending is expected to rise 8.8% year-over-year to $5.14 trillion.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology – Services industry picks, beginning with the third choice.
Stock #3: N-able, Inc. (NABL)
NABL provides cloud-based software solutions for managed service providers. The company's solutions enable MSPs to support digital transformation and growth within small and medium-sized enterprises. Its software platform is designed to be an enterprise-grade solution that serves as an operating system for its MSP partners and scales as their businesses grow.
On October 10, 2023, NABL announced new and enhanced joint endpoint security solutions with SentinelOne, Inc. (S) with the launch of Attack Surface Management Solution to boost MSP endpoint security services opportunity.
NABL’s general manager of security products, Troels Rasmussen, said, “The endpoint is a sweet spot for threat actors, and this makes our partnership with SentinelOne even more beneficial for our partners. SentinelOne is a trusted cybersecurity leader, and our deepened relationship gives MSPs a stronger set of weapons in their security arsenal, at levels typically only realized by big enterprise companies.”
In terms of the trailing-12-month EBITDA margin, NABL’s 19.66% is 117.5% higher than the 9.04% industry average. Likewise, its 2.40% trailing-12-month Return on Common Equity is 136.9% higher than the 1.01% industry average. Additionally, its 14.94% trailing-12-month EBIT margin is 225% higher than the industry average of 4.60%.
For the fiscal second quarter ended June 30, 2023, NABL’s total revenue increased 15.8% year-over-year to $106.08 million. Its non-GAAP gross profit rose 14.8% year-over-year 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% over the prior-year quarter to $16.26 million. Also, its non-GAAP earnings per share remained flat year-over-year at $0.09.
Street expects NABL’s EPS and revenue for the quarter ended September 30, 2023, to increase 14.4% and 14.3% year-over-year to $0.08 and $106.86 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 29.2% to close the last trading session at $12.76.
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 Sentiment and a B for Growth and Stability. Click here to see the other ratings of NABL for Value, Momentum, and Quality.
Stock #2: Xerox Holdings Corporation (XRX)
XRX designs, develops, and sells document management systems and solutions in the Americas, Europe, the Middle East, Africa, India, and internationally. It offers workplace solutions, including color and multifunction printers, digital services that leverage workflow automation, personalization and communication software, content management solutions, and digitization services.
On August 14, 2023, XRX announced that it sold Elem Additive Solutions to ADDiTEC, a leader in metal additive manufacturing solutions and applications. This sale is part of XRX's strategic shift to focus on its core capabilities and offerings, including print, IT, and digital services.
In terms of the trailing-12-month EBIT margin, XRX’s 5.53% is 20.3% higher than the 4.60% industry average. Likewise, its 3.26% trailing-12-month Return on Total Capital is 37.9% higher than the 2.37% industry average. Additionally, its 0.63x trailing-12-month asset turnover ratio is 1.7% higher than the industry average of 0.62x.
XRX’s revenues for the second quarter ended June 30, 2023, increased 0.4% year-over-year to $1.75 billion. Its adjusted net income rose 200% over the prior-year quarter to $72 million. In addition, its adjusted operating income increased 205.7% year-over-year to $107 million. Also, its adjusted earnings per share increased 238.5% year-over-year to $0.44.
Analysts expect XRX’s EPS for the quarter ended September 30, 2023, is expected to increase 98.9% year-over-year to $0.38. It surpassed the Street EPS estimates in three of the trailing four quarters. The stock has declined 2% year-to-date to close the last trading session at $14.31.
XRX’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth and Value. It is ranked #13 in the same industry. To see the other ratings of XRX for Momentum, Stability, Sentiment, and Quality, click here.
Stock #1: Zoom Video Communications, Inc. (ZM)
ZM provides a unified communications platform. The company offers Zoom Meetings that offer HD video, voice, chat, and content sharing through mobile devices, desktops, laptops, telephones, and conference room systems; Zoom Phone, an enterprise cloud phone system; and Zoom Chat. It also provides Zoom Rooms; Zoom Hardware-as-a-Services; Zoom Conference Room Connector; Zoom Events; OnZoom; and Zoom Webinars.
On September 5, 2023, ZM announced that Zoom AI Companion, its generative AI digital assistant, has now been included at no additional cost for customers with the paid services in their Zoom user accounts.
ZM’s chief product officer, Smita Hashim, said, “We are transcending the hype in generative AI by delivering tangible products and disrupting the industry’s pricing model, making it easy for businesses and people like you and me to leverage generative AI’s full benefits in our day-to-day work.”
In terms of the trailing-12-month gross profit margin, ZM’s 75.62% is 53.5% higher than the 49.27% industry average. Likewise, its 3.17% trailing-12-month net income margin is 56.1% higher than the 2.03% industry average. Additionally, its 2.67% trailing-12-month Capex/Sales is 11.1% higher than the industry average of 2.41%.
For the fiscal second quarter ended July 31, 2023, ZM’s revenue rose 3.6% over the prior-year quarter to $1.14 billion. Its net cash provided by operating activities increased 30.6% year-over-year to $335.97 million. The company’s non-GAAP income from operations increased 17.3% year-over-year to $461.68 million.
In addition, its non-GAAP net income rose 26.6% year-over-year to $409.57 million. Also, its non-GAAP EPS came in at $1.34, representing an increase of 27.6% year-over-year.
For the quarter ended October 31, 2023, ZM’s EPS and revenue are expected to increase 0.2% and 1.6% year-over-year to $1.07 and $1.12 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. The stock has declined 7.4% year-to-date to close the last trading session at $62.75.
ZM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Quality. Within the Technology – Services industry, it is ranked #12. Click here to see the other ratings of ZM for Momentum, Stability, and Sentiment.
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ZM shares were trading at $63.20 per share on Monday morning, up $0.45 (+0.72%). Year-to-date, ZM has declined -6.70%, versus a 14.81% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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