The tech-heavy Nasdaq Composite has jumped more than 19% year-to-date, more than doubling the S&P 500’s 7.2% rise, boosted by stronger-than-expected earnings and cost-cutting measures from major companies. Therefore, investors could consider buying quality stock Dropbox, Inc. (DBX) to capitalize on the industry tailwinds.

However, the current economic scenario with high-interest rates, stubborn inflation, and the collapse of the banking sector in the US presents a set of obstacles for the tech industry. Thus, I think tech stocks Snowflake Inc. (SNOW) and Shift4 Payments, Inc. (FOUR) are best avoided.

The technology sector has remained buoyed with an unwavering commitment to innovation and relentless pursuit of digital transformation across a multitude of industries.

In addition, as per John-David Lovelock, Distinguished VP Analyst at Gartner, the momentum of digital transformation remains unhindered by macroeconomic challenges. He highlighted that IT spending will remain robust, even in countries with stagnant gross domestic product (GDP) growth and high inflation in 2023.

Gartner projects global IT spending will reach $4.6 trillion this year, a rise of 5.5% from the previous year.

However, the central bank’s aggressive stance on monetary policy, with ten rate hikes implemented since March 2022, has propelled the benchmark overnight interest rate from near-zero levels to the current range of more than 5.00%, which is a 16-year high. Higher interest rates and an uncertain macroeconomic picture could present further headwinds for the tech industry.

Furthermore, the recent collapse of the US banking sector and the risks of default on the debt ceiling has sent shockwaves through the tech industry, further complicating the already intricate business environment.

Stock to Buy:

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 an upgrade to a paid subscription plan for premium features.

DBX’s trailing-12-month EBIT margin of 14.85% is 216.7% higher than the 4.69% industry average. Its trailing-12-month EBITDA margin of 21.60% is 142.2% higher than the 8.92% industry average.

DBX’s revenue rose 8.7% year-over-year to $611.10 million in the first quarter that ended March 31, 2023. Its non-GAAP gross profit grew 10% from the prior-year quarter to $503.30 million.

The company’s non-GAAP net income increased 3.3% year-over-year to $146.10 million, while non-GAAP net income per share rose 10.5% year-over-year to $0.42.

Street expects DBX’s EPS to increase 19.8% year-over-year to $0.46 in the fiscal second quarter ending June 2023. Its revenue is likely to rise 7.2% from the prior-year quarter to $613.70 million in the same quarter.

The company has an impressive earnings surprise history, surpassing the consensus EPS and revenue estimates in each of the trailing four quarters.

Over the past year, the stock has gained 8.8% to close the last trading session at $22.07. It has a 60-month beta of 0.84.

DBX’s POWR Ratings reflect this robust outlook. 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 Growth and Value. It is ranked #5 in the 81-stock Technology – Services industry.

Click here to access DBX’s additional POWR Ratings for Momentum, Stability, and Sentiment.

Stocks to Avoid:

Snowflake Inc. (SNOW)

SNOW provides a cloud-based data platform in the United States and internationally. The company’s platform offers Data Cloud, which enables customers to consolidate data into a single source of truth to drive meaningful business insights, build data-driven applications, and share data.

SNOW’s trailing-12-month negative EBIT and EBITDA margins of 40.54% and 37.94% are lower than the industry averages of 4.69% and 8.92%.

SNOW’s total operating expenses rose 48.4% year-over-year to $687.42 million in the fiscal first quarter ending April 30, 2023. Its operating loss increased 44.7% year-over-year to $273.24 million. The company’s net loss grew 36.4% year-over-year to $226.06 million, and net loss per share increased 32.1% from the prior-year quarter to $0.70.

SNOW’s EPS and revenue are expected to amount to $0.59 and $2.88 billion in the fiscal year ending January 2024.

Over the past five days, the stock has lost 2% to close the last trading session at $177.14. It has a 24-month beta of 1.73.

SNOW’s POWR Ratings reflect its poor prospects. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.

SNOW has a D grade for Value and Stability. It is ranked #70 in the same industry.

Beyond what is stated above, we’ve also rated SNOW for Growth, Momentum, Sentiment, and Quality. Get all the SNOW ratings here.

Shift4 Payments, Inc. (FOUR)

FOUR offers various software and payment processing solutions. Its omnichannel card acceptance and processing solutions include credit, debit, contactless card, Europay, Mastercard and Visa, QR Pay, and alternative payment methods.

FOUR’s trailing 12-month EBIT and EBITDA margins of 5.04% and 10.51% are 75.2% and 42.5% lower than the industry averages of 20.74% and 20.40%, respectively.

During the fiscal first quarter that ended March 31, 2023, FOUR’s general and administrative expenses rose 29.5% year-over-year to $85.70 million. Its adjusted net income came in at $44.40 million or $0.51 per share.

Moreover, the company’s net cash used in investing and financing activities stood at $31.40 million and $7 million, respectively.

Analysts expect FOUR’s EPS and revenue to amount to $0.55 and $634.69 million in the current fiscal quarter ending June 2023.

Shares of FOUR declined 2.9% intraday to close the last trading session at $64.98. It has a 24-month beta of 1.59.

FOUR’s POWR Ratings reflect its dull fundamentals. The stock has an overall rating of D, equating to a Sell in our proprietary rating system.

It also has a D grade for Value, Quality, and Stability. It is ranked #68 in the same industry.

One can access FOUR’s additional Growth, Momentum, and Sentiment ratings here.

What To Do Next?

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DBX shares were trading at $22.23 per share on Thursday morning, up $0.16 (+0.72%). Year-to-date, DBX has declined -0.67%, versus a 8.40% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...

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