Despite the current macroeconomic challenges, the tech services industry is well positioned for growth due to the sustained high demand driven by enterprises' significant investments in digitizing their operations and adopting emerging technologies.
Considering these factors, it could be wise to buy fundamentally strong tech stocks Uber Technologies, Inc. (UBER), ON24, Inc. (ONTF), and Xerox Holdings Corporation (XRX).
Before delving deeper into their fundamentals, let’s discuss why the tech services industry is growing.
With technology rapidly changing across different industries, the tech services industry is expected to grow strongly. The growth of the tech services industry is expected to be driven by the growing investments in digital transformation by various sectors and the adoption of cutting-edge technologies like artificial intelligence (AI), Internet of Things (IoT), and blockchain to boost productivity.
According to Gartner, IT spending for this year is expected to rise 4.3% year-over-year to reach $4.70 trillion. In addition, spending on IT services is expected to increase 8.8% year-over-year to $1.42 trillion. This rising spending on tech services can be attributed to the rising need for digital transformation across various sectors to increase operational efficiencies and profitability.
The adoption of generative AI, providing improved customer and client experience, increasing cybersecurity protection, and optimizing public cloud spending are expected to be the major growth drivers for the tech services industry in the long term.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology - Services industry picks, beginning with the third choice.
Stock #3: Uber Technologies, Inc. (UBER)
UBER develops and operates proprietary technology applications in the United States, Canada, Latin America, Europe, the Middle East, Africa, and Asia, excluding China and Southeast Asia. It operates through three segments: Mobility, Delivery, and Freight.
On August 11, UBER announced a new partnership with the grocery chain Hy-Vee to offer on-demand and scheduled grocery delivery services to customers across the Midwest. Over 260 Hy-Vee grocery and liquor stores are now available for shopping through UBER and UberEats, allowing customers to order a wide range of products for convenient doorstep delivery.
This new partnership will assist UBER in expanding into previously untapped markets, which could drive the company's growth and profitability.
In terms of the trailing-12-month gross profit margin, UBER’s 32.06% is 5.8% higher than the 30.30% industry average. Additionally, its 1.08x trailing-12-month asset turnover ratio is 32.7% higher than the 0.81% industry average.
For the second quarter that ended June 30, 2023, UBER’s revenue increased 14.4% year-over-year to $9.23 billion. Its income from operations came in at $326 million, compared to a loss from operations of $713 million in the year-ago quarter. The company’s adjusted EBITDA increased 151.7% year-over-year to $916 million.
Analysts expect UBER’s revenue for the quarter ending September 30, 2023, to increase 14.5% year-over-year to $9.55 billion. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 186.1% year-over-year to $1.07. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 97.9% year-to-date to close the last trading session at $48.94.
UBER’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates 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 #27 out of 76 stocks in the B-rated Technology - Services industry. It has an A grade for Sentiment and a B for Growth and Quality. Click here to see UBER’s Value, Momentum, and Stability ratings.
Stock #2: ON24, Inc. (ONTF)
ONTF provides a cloud-based digital engagement platform that enables businesses to convert customer engagement into revenue through interactive webinar, virtual event, and multimedia content experiences worldwide.
On June 14, 2023, ONTF announced a new AI-powered Optimization Suite, designed to help enterprises personalize, orchestrate, and automate digital experiences and content, ultimately improving campaign performance and ROI. It aims to enhance ON24 experiences while saving time and resources for customers.
Sharat Sharan, co-founder and CEO at ONTF said, “Today, at the ON24 Experience, we’re proud to showcase how our platform is digitally transforming go-to-market strategies for industry leaders, and we believe that with the addition of the ON24 Optimization Suite, we can help enterprises further accelerate that evolution and make digital transformation their competitive advantage.”
In terms of the trailing-12-month gross profit margin, ONTF’s 72.25% is 49.9% higher than the 48.20% industry average. Additionally, its 9.69% trailing-12-month levered FCF margin is 36.2% higher than the 7.11% industry average.
ONTF’s total revenue for second quarter ended June 30, 2023, came in at $42.09 million. Its non-GAAP gross profit came in at $31.70 million. The company’s non-GAAP operating loss narrowed 86.1% year-over-year to $859 thousand.
Its non-GAAP net income came in at $2.07 million, compared to non-GAAP net loss of $6.38 million in the year-ago quarter. Also, its non-GAAP EPS came in at $0.04, compared to a non-GAAP loss per share of $0.14 in the year ago quarter. Additionally, its adjusted EBITDA came in at $418 thousand, compared to an adjusted EBITDA loss of $4.95 million in the prior-year quarter.
For the fiscal year ending December 31, 2024, ONTF’s EPS is expected to increase 297.1% year-over-year to $0.05. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 6% to close the last trading session at $6.66.
It’s no surprise that SGPYY has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value. Within the same industry, it is ranked #21. In total, we rate ONTF on eight different levels. Beyond what we stated above, we also have given ONTF grades for Growth, Momentum, Stability, Sentiment, and Quality. Get all the ONTF ratings here.
Stock #1: 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,. This sale is part of Xerox's strategic shift to focus on its core capabilities and offerings, such as print, IT, and digital services, while divesting non-core assets.
In terms of the trailing-12-month EBITDA margin, XRX’s 5.53% is 23.5% higher than the 4.48% 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.
For the fiscal second quarter ended June 30, 2023, XRX’s revenues 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.
Street expects XRX’s EPS for the quarter ending September 30, 2023, is expected to increase 104.2% year-over-year to $0.39. It surpassed the consensus EPS estimates in three of the four trailing quarters. The stock has gained 15.3% year-to-date to close the last trading session at $16.83.
XRX’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.
It has a B grade for Growth and Value. It is ranked #15 in the Technology - Services industry. To see XRX’s Momentum, Stability, Sentiment and Quality ratings, click here.
What To Do Next?
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UBER shares were trading at $49.08 per share on Tuesday afternoon, up $0.14 (+0.29%). Year-to-date, UBER has gained 98.46%, versus a 17.84% 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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