The tech sector is growing as a result of increasing digitization across industries and the widespread adoption of cutting-edge technologies. Therefore, it could be wise to own fundamentally strong tech stocks Outbrain Inc. (OB), Mastech Digital, Inc. (MHH) and Zoom Video Communications, Inc. (ZM).
Before delving deeper into their fundamentals, let’s discuss what’s happening in the tech industry.
The demand for technology services is robust due to digital transformation initiatives, cloud services growth, and new-age technologies, driven by constant evolution and competitiveness.
Gartner predicts that global IT spending will reach $5.10 trillion in 2024, an increase of 8% year-over-year. Also, spending on IT services is predicted to increase 10.4% year-over-year to $1.55 trillion in 2024.
Additionally, the global IT services industry is expected to expand at a 9.7% CAGR until 2030. The market is expanding rapidly due to the extensive usage of cloud computing, increased demand for cybersecurity solutions, and a focus on innovation and automation.
Investors’ interest in tech stocks is evident from the iShares of Expanded Tech Sector ETF’s (IGM) 17% returns over the past six months and 22% over the past nine months.
Considering these conducive trends, let’s take a look at the fundamentals the three best Technology – Services stocks, starting with number 3.
Stock #3: Outbrain Inc. (OB)
OB operates a global recommendation platform. The company offers Outbrain Engage, a product suite for media partners that provides data-driven recommendations and user engagement solutions. In addition, it provides solutions for advertisers with access to ad inventory supporting several formats and a suite of programmatic buying capabilities.
OB’s forward EV/Sales multiple of 0.12 is 93.2% lower than the industry average of 1.77. Its forward Price/Sales multiple of 0.20% is 81.6% lower than the industry average of 1.11.
OB’s trailing-12-month asset turnover ratio of 1.32x is 174% higher than the 0.48x industry average.
During the second quarter that ended June 30, 2023, OB reported an income before provision for income taxes of $15.35 million, compared to a loss of $8.66 million in the prior-year quarter. In addition, the company’s net income was $11.28 million or $0.21 per common share, compared to a net loss of $10.32 million or $0.18 a year ago, respectively.
Street expects OB’s revenue to increase marginally year-over-year to $997.87 million for the year ending December 2023. Its EPS is expected to come in at $0.24 for the same period. Over past six months the stock has gained 12.4% to close the last trading session at $4.17.
OB’s POWR Ratings reflect this promising outlook. The stock 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.
OB also has a B grade for Value and Sentiment. It is ranked #19 out of 73 stocks in the Technology – Services industry. Click here for the additional POWR Ratings for Growth, Momentum, Stability, and Quality for OB.
Stock #2: Mastech Digital, Inc. (MHH)
MHH provides digital transformation IT services to large, medium-sized, and small companies. It operates through two segments: Data and Analytics Services, and IT Staffing Services.
MHH’s trailing-12-month EV/Sales of 0.44x is 72.8% lower than the industry average of 1.62x. Its trailing-12-month EV/EBIT of 0.50x is 61.6% lower than the industry average of 1.30x.
MHH’s trailing-12-month levered FCF margin of 10.91% is 79.2%% higher than the 6.09% industry average.
MHH’s total current liabilities came in at $56.22 million for the period that ended September 30, 2023, compared to $53.17 million for the period that ended December 31, 2022. Its total assets came in at $109.54 million, compared to $108.88 million for the same period.
Analysts expect MHH’s revenue to increase marginally year-over-year to $201.53 million for the year ending December 2024. Its EPS is expected to grow at 103.6% year-over-year to $0.85 for the same period. The stock lost 2.1% intraday to close the last trading session at $8.46.
It’s no surprise that MHH has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Value and Quality. It is ranked #15 in the same industry.
Beyond what is stated above, we’ve also rated MHH for Growth, Stability, Sentiment and Momentum. Get all MHH ratings here.
Stock #1: Zoom Video Communications, Inc. (ZM)
ZM is a leading provider of video-first unified communications globally. The company’s services include Zoom Meetings, Phone, Chat, Rooms, Hardware-as-a-Service, Conference Room Connector, Events, OnZoom, Webinars, Developer Platform, App Marketplace, and Contact Center, serving diverse industries.
On October 30, 2023, ZM announced that ZM AI Companion, the company’s generative AI assistant, generated one million meeting summaries and over 125,000 accounts, swiftly reaching a significant milestone in less than two months.
Shorter meeting summary summaries, greater enhancements, and expanded language support are among the new features. More improvements are planned for the November release, including support for 32 additional languages, voice analytics in Smart Recordings, and integration into Zoom Events with customizable control over language model usage.
ZM’s forward non-GAAP PEG multiple of 0.36 is 79.5% lower than the industry average of 1.74. Its forward EV/EBITDA multiple of 7.23% is 46.8% lower than the industry average of 13.59.
ZM’s trailing-12-month levered FCF margin of 34.48% is 358.4% higher than the industry average of 7.52%. Its trailing-12-month ROTA of 1.59% is significantly higher than the industry average of 0.09%.
During the second quarter ended July 31, 2023, ZM’s revenue and gross profit stood at $1.14 billion and $872.12 million, up 3.6% and marginally year-over-year, respectively. Its non-GAAP income from operations grew 17.3% year-over-year to $461.68 million and non-GAAP net income increased 26.6% from the year-ago quarter to $409.57 million.
The consensus revenue estimate of $4.50 billion for the year ending January 2024 represents a 2.5% increase year-over-year. Its EPS is expected to grow at 6.6% year-over-year to $4.66 for the same period. It surpassed EPS estimates in all four trailing quarters. ZM’s shares have lost marginally to close the last trading session at $61.82.
ZM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #8 in the same industry. It has a B grade for Growth, Value and Quality. To see additional ZM’s ratings for Stability, Sentiment and Momentum, click 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 $63.01 per share on Tuesday morning, up $1.19 (+1.92%). Year-to-date, ZM has declined -6.98%, versus a 15.53% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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