Despite a challenging macro environment, the tech industry is well-placed for continued resilience and growth, driven by sustained demand for tech services. Organizations are accelerating digitalization and adopting advanced technologies to boost productivity, reduce manual labor, streamline processes, and supply chain control, propelling the industry’s growth.
Considering the industry’s rosy growth prospects, it could be wise to add fundamentally sound tech stocks Dropbox, Inc. (DBX), Key Tronic Corporation (KTCC), and Issuer Direct Corporation (ISDR) to your portfolio this coming week.
Enterprises across several end-use industries like retail, automotive, manufacturing, and healthcare are accelerating the digitalization of customer and supply-chain interactions and internal operations to lower costs, boost operational efficiency, and spur innovation. Rising digital transformation worldwide is the primary driving factor of the technology services market.
Amid rapid digital business transformations, global tech spending will likely remain robust despite a tough macroeconomic environment. According to the forecast by Gartner, worldwide IT spending is expected to total $4.7 trillion this year, an increase of 4.3% year-over-year.
Increasing adoption of new, cutting-edge technologies among organizations, including artificial intelligence (AI), the Internet of Things (IoT), metaverse, machine learning (ML), blockchain, 5G, and augmented reality (AR), would further drive the tech industry’s prospects.
As per Gartner Digital Markets’ 2023 SMB Software Buying Trends Survey, emerging technology plays an integral part in the IT strategy of 57% of businesses, with most being comfortable early adopters of new technology.
Further, with the amount of data generated globally increasing tremendously, there is a growing need for IT services and platforms to analyze the data for extraction and analysis. US businesses would generate a whopping 224.08 billion gigabytes of data in 2023, up from 178.21 billion gigabytes in 2022, as per Statista.
According to a report by Mordor Intelligence, the US IT services market is projected to reach $306.10 billion, growing at a CAGR of 7.1% during the forecast period (2023-2028). Growing digitalization across sectors and an increasing emphasis on leveraging the core competencies by outsourcing non-core operations are the major driving forces of the market.
Meanwhile, the global IT services market is estimated to grow at a CAGR of 8.4% to reach $1.67 trillion by 2028. Increased IT spending and the widespread adoption of Software-as-a-Service (SaaS) and cloud-based offerings should propel the market’s profitability.
Against the backdrop, quality tech service stocks DBX, KTCC, and ISDR could be solid additions to your portfolio this upcoming week.
With these favorable trends in mind, let’s take a look at the fundamentals of the three best Technology - Services stocks, starting with number 3.
Stock #3: Dropbox, Inc. (DBX)
DBX offers a content collaboration platform globally. The company’s platform enables individuals, families, teams, and organizations to collaborate and sign up for free through its website or app and an upgrade to a paid subscription plan for premium features. It serves customers in professional services, technology, media, industrial, retail, and financial services industries.
On June 21, DBX launched Dropbox Dash and Dropbox AI, new AI-powered product experiences designed to improve modern work and assist customers in getting more out of their content. Dropbox Dash is a universal search tool that connects tools, content, and apps in a single search bar and Dropbox AI to summarize and answer questions about content saved in Dropbox.
Further, the company built on its investment in AI with the launch of Dropbox Ventures, a new startup initiative to support the growing AI ecosystem. These strategic developments reflect DBX’s commitment to leveraging the power of AI to deliver enhanced value to its customers.
DBX’s trailing-12-month gross profit margin of 81.03% is 69.2% higher than the 47.89% industry average. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of 21.49% and 21.61% are favorably higher than the industry averages of 9.04% and 2.01%, respectively.
DBX’s forward P/E non-GAAP of 14.36x is 37.5% lower than the 22.97x industry average. The stock’s forward EV/EBITDA multiple of 10.88 is 26.7% lower than the industry average of 14.84.
For the second quarter that ended June 30, 2023, DBX’s revenue increased 8.7% year-over-year to $622.50 million. Its non-GAAP gross profit grew 8.3% from the year-ago value to $515.19 million. The company’s income from operations came in at $213.10 million, an increase of 16.5% from the prior year’s quarter.
Furthermore, the company’s non-GAAP net income increased 26% year-over-year to $174 million, and its non-GAAP net income per share was $0.51, up 34.2% year-over-year.
Analysts expect DBX’s revenue to increase 6.2% year-over-year to $627.74 million for the third quarter ending September 2023. The company’s EPS for the ongoing quarter is expected to grow 13.8% year-over-year to $0.49. Moreover, DBX has surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
In addition, for the fiscal year ending December 2023, the consensus revenue and EPS estimates of $2.49 billion and $1.90 indicate increases of 7.2% and 20.3% year-over-year, respectively.
Shares of DBX have gained 35.5% over the past six months and 27.1% over the past year to close the last trading session at $27.65.
DBX’s POWR Ratings reflect solid fundamentals and growth prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an A grade for Quality and a B for Value. It is ranked #14 out of 76 stocks in the Technology - Services industry.
To access additional ratings for DBX’s Growth, Stability, Sentiment, and Momentum, click here.
Stock #2: Key Tronic Corporation (KTCC)
KTCC offers contract electronic manufacturing services (EMS) to original equipment manufacturers (OEMs) in the United States, Mexico, China, and Vietnam. The company provides integrated electronic and mechanical engineering, assembly, sourcing and procurement, logistics, and new product testing services.
After reporting record annual revenue and solid earnings in fiscal 2023, the company seems optimistic for continued growth and increased profitability in fiscal 2024. KTCC expects to report revenue in the range of $140 million to $150 million for the first quarter of 2024 and earnings to come between $0.05 to $0.15 per share.
In the company’s latest financial release, Craig Gates, President and CEO, said, “We move into fiscal 2024 with a strong backlog and pipeline of potential new business, our inventory more in line with our revenue levels and continuing improvement in the global supply issues and lower labor turnover.”
KTCC’s trailing-12-month ROCE of 4.06% is 552.6% higher than the industry average of 0.62%. Moreover, the stock’s trailing-12-month ROTA compares to the industry average of negative 0.24%.
In terms of trailing-12-month EV/Sales, KTCC’s 0.32x is 88.4% lower than the 2.75x industry average. Also, the stock’s trailing-12-month EV/EBITDA and Price/Sales multiples of 8.86 and 0.08 compare to the respective industry averages of 15.09 and 2.60.
KTCC’s net sales increased 28.8% year-over-year to $162.61 million in the fourth quarter that ended July 1, 2023. Its gross profit grew 18.2% from the prior-year quarter to $13.90 million. Its operating income was $4.22 million, up 86.8% year-over-year. Also, the company’s net income rose 9.6% from the year-ago value to $1.60 million.
In addition, the company’s net income per share came in at $0.10, an increase of 11.1% year-over-year. Its cash and cash equivalents stood at $3.60 million as of July 1, 2023, up 111.1% year-over-year.
KTCC’s stock has gained 3.9% year-to-date to close the last trading session at $4.54.
KTCC’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
KTCC has an A grade for Growth and Momentum. It also has a B grade for Value, Stability, and Sentiment. Within the Technology - Services industry, it is ranked #11 out of 80 stocks.
Beyond what is stated above, we’ve also rated for Value. Get all KTCC ratings here.
Stock #1: Issuer Direct Corporation (ISDR)
ISDR is a communications and compliance company, providing solutions for public relations and investor relations professionals worldwide. It offers press release distribution, media databases, and newsroom through the media advantage platform; ACCESSWIRE, a news dissemination and media outreach service; and the Visual Webcaster platform.
On August 18, Newswire, a wholly owned subsidiary of ISDR, introduced the Press Release Optimizer (PRO). Newswire’s approach to press release distribution combines their technology, press release distribution network, and their team’s expertise to assist companies in driving website traffic, building brand awareness, improving search engine rankings, and expanding reach.
This new product offering should drive the company’s growth and increase its profitability.
On July 18, ISDR’s Newswire launched Aimee, its cutting-edge AI-Writing Assistant and Recommendation Engine. This innovative tool empowers clients to generate more powerful stories, engaging content, and targeted messaging. Also, it allows optimization based on industry comparisons and engagement traffic data.
In terms of forward non-GAAP P/E, ISDR is trading at 13.07x, 43.1% lower than the industry average of 22.97x. Also, its forward Price/Sales multiple of 2.12 is 19.2% higher than the industry average of 2.62.
ISDR’s trailing-12-month gross profit margin of 76.37% is 59.5% higher than the 47.89% industry average. Likewise, the stock’s trailing-12-month net income margin of 5.85% is 191% higher than the industry average of 2.01%.
During the second quarter that ended March 31, 2023, ISDR’s revenues increased 66.2% year-over-year to $9.65 million, and its gross profit grew 64.6% from the year-ago value to $7.32 million. Its non-GAAP net income came in at $2.03 million, an increase of 88.7% from the prior year’s quarter.
Additionally, the company’s non-GAAP net income per share rose 82.8% from the previous year’s period to $0.53. Its adjusted free cash flow was $1.77 million, up 64.2% year-over-year.
Street expects ISDR’s revenue for the fiscal year (ending December 2023) to increase 53% year-over-year to $35.97 million. The company’s revenue is expected to grow 61.1% from the previous year to $1.53 in the current year. Over the past month, the stock has gained marginally to close the last trading session at $19.99.
ISDR’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
ISDR has an A grade for Sentiment and a B for Growth and Value. It is ranked #10 in the same industry.
Click here for ISDR’s additional POWR Ratings (Momentum, Quality, and Stability).
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DBX shares fell $0.05 (-0.18%) in premarket trading Tuesday. Year-to-date, DBX has gained 23.55%, versus a 16.51% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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