The shift toward cloud-based software and increased digitalization across industries have heightened the demand for technology products and services, benefiting tech companies. Thus, investors could consider buying fundamentally sound tech stocks, Zoom Video Communications, Inc. (ZM), Dropbox, Inc. (DBX), and Leidos Holdings, Inc. (LDOS), at a bargain now.
The global demand for IT services is steadily rising due to the growing preference for cloud-based software and the increased focus on automating business operations. Cloud-based IT services have been experiencing rapid growth among SMEs since 2022 and are expected to capture more than 80% of the IT services market by 2025.
Additionally, the rapid adoption of AI and big data analytics presents opportunities and challenges for data security and privacy, necessitating strong measures to prevent unauthorized access, data breaches, and privacy violations. IT service providers offer specialized solutions to ensure ethical data use and implement IoT security policies.
Therefore, the global IT services market is anticipated to reach around $2.80 trillion by 2033, growing at a CAGR of 7.2% from 2024 to 2033.
Considering these conducive trends, let’s take a look at the fundamentals of the three Technology - Services stock picks, beginning with the third choice.
Stock #3: Zoom Video Communications, Inc. (ZM)
ZM provides a unified communications platform in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The company offers Zoom Meetings, Zoom Phone, Zoom Chat, Zoom Rooms, Zoom Conference Room Connector, Zoom Events, OnZoom, and Zoom Webinars.
On May 21, ZM announced that post-quantum end-to-end encryption (E2EE) was available globally for Zoom Workplace, specifically Zoom Meetings, with Zoom Phone and Zoom Rooms coming soon. The launch of the new security enhancement makes ZM the first UCaaS company to offer a post-quantum E2EE solution for video conferencing.
On March 25, 2024, ZM launched Zoom Workplace, its AI-powered collaboration platform, on AWS Marketplace. This allows customers to conveniently buy Zoom Workplace products, like Meetings and Team Chat, via AWS Marketplace, simplifying tech purchases and optimizing AWS resources.
In terms of forward EV/EBITDA, ZM is trading at 5.47x, 62.2% lower than the industry average of 14.45x. Its forward EV/EBIT multiple of 5.76 is 72.1% lower than the industry average of 20.67. Likewise, the stock’s forward EV/Sales of 2.18x is 25.5% lower than the industry average of 2.93x.
ZM’s revenues for the first quarter ended April 30, 2024, increased 2.7% year-over-year to $1.14 billion. The company’s non-GAAP net income and net income per share increased 20.7% and 16.4% from the prior-year quarter to $426.32 million and $1.35, respectively. Also, as of January 31, 2024, the company’s total liabilities amounted to $1.91 billion, compared to $1.92 billion as of January 31, 2023.
Street expects ZM to post a $1.15 billion revenue for the second quarter (ending July 2024), representing a marginal year-over-year increase. The company’s EPS is expected to be $1.22 for the same quarter. Moreover, it surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Shares of ZM have plunged 12.4% over the past month to close the last trading session at $56.21.
ZM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates 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.
ZM has a B grade for Value and Quality. It is ranked #6 among 79 stocks in the Technology - Services industry.
Click here to access the additional ZM ratings (Momentum, Stability, Growth, and Sentiment).
Stock #2: Dropbox, Inc. (DBX)
DBX provides a content collaboration platform worldwide. The company’s platform allows individuals, families, teams, and organizations to collaborate and sign up for free through its website or app, as well as upgrade to a paid subscription plan for premium features.
On April 24, 2024, DBX announced new security, organization, and sharing features to give teams the control, flexibility, and speed to get work done from anywhere. Using the lessons learned from Virtual First, which is the Dropbox playbook for distributed work, these tools were designed to help teams get work done quickly and seamlessly from DBX.
In terms of forward EV/EBITDA, DBX is trading at 7.70x, 46.7% lower than the industry average of 14.45x. Its forward EV/EBIT multiple of 9.18 is 55.6% lower than the industry average of 20.67. Likewise, the stock’s forward Price/Sales of 2.69x is 5.8% lower than the industry average of 2.86x.
For the fiscal first quarter that ended March 31, 2024, DBX’s revenue and non-GAAP gross profit stood at $631.30 million and $533.80 million, up 3.3% and 6.1% year-over-year, respectively. For the same quarter, its non-GAAP net income and net income per share increased 34.6% and 38.1% over the prior-year quarter to $196.70 million and $0.58, respectively.
Street expects DBX’s EPS and revenue for the quarter ending June 30, 2024, to increase 2.6% and 1.2% year-over-year to $0.52 and $630.01 million, respectively. The company surpassed consensus EPS and revenue estimates in each of the trailing four quarters.
DBX’s stock plunged marginally intraday to close the last trading session at $20.76.
DBX’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Growth and Value. DBX is ranked #5 in the same industry.
Beyond what is stated above, we’ve also rated DBX for Sentiment, Stability, and Momentum. Get all DBX ratings here.
Stock #1: Leidos Holdings, Inc. (LDOS)
LDOS provides services and solutions in the defense, intelligence, civil, and health markets in the U.S. and internationally. The company operates through the Defense Solutions; Civil; and Health segments.
On May 14, 2024, LDOS and Elroy Air, an autonomous aircraft systems and software development company, announced that they had been approved to demonstrate an autonomous Medium Aerial Resupply Vehicle – Expeditionary Logistics (MARV-EL) prototype for the Navy and Marine Small Tactical Unmanned Aircraft Systems program office (PMA-263).
The flight test activities are scheduled for July 2024. The development and testing are part of a contract awarded last year to develop and demonstrate an Uncrewed Aircraft System (UAS) that can autonomously resupply forward-deployed ground forces for the U.S. Marine Corps.
On May 7, 2024, LDOS secured a $631 million contract from the U.S. Army for the DIABLO program, enhancing its role as a premier mission equipment provider with a focus on developing, integrating, and supporting Aerial Intelligence, Surveillance, and Reconnaissance (AISR) sensors over a decade.
In terms of forward EV/Sales, LDOS is trading at 1.48x, 16.1% lower than the industry average of 1.77x. Its forward EV/EBIT multiple of 15.18 is 2.4% lower than the industry average of 15.55. Likewise, the stock’s forward Price/Sales of 1.20x is 15.8% lower than the industry average of 1.43x.
LDOS’ revenues for the fiscal first quarter that ended March 29, 2024, increased 7.5% from the year-ago value to $3.98 billion. Its operating income rose 56.6% year-over-year to $415 million. Moreover, its non-GAAP net income attributable to LDOS common stockholders stood at $314 million, up 54.7% over the prior-year quarter.
Also, its non-GAAP EPS attributable to LDOS common stockholders grew 55.8% year-over-year to $2.29.
Analysts expect LDOS’ revenue and EPS for the quarter ending June 30, 2024, to increase 5.5% and 23% year-over-year to $4.05 billion and $2.21, respectively. The company surpassed Street revenue and EPS estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 67.5%, closing the last trading session at $143.87.
LDOS’ POWR Ratings reflect bright prospects. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
LDOS has a B grade for Momentum, Sentiment, Growth, Value, and Stability. It is ranked first in the same industry.
In addition to the POWR Ratings highlighted above, one can access LDOS’ ratings for Quality 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.
ZM shares were trading at $56.21 per share on Wednesday afternoon, down $0.74 (-1.30%). Year-to-date, ZM has declined -21.83%, versus a 15.75% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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