The tech services industry is set to grow due to increased adoption of generative AI, continued cloud migration, and rising regulatory demands. Likewise, higher software and IT services spending this year reflects positive industry sentiment. These trends drive infrastructure investment and modernization, making the sector a strong investment opportunity this year.

Given these favorable trends, investors could consider undervalued tech stocks like Zoom Video Communications, Inc. (ZM), Dropbox, Inc. (DBX), and Leidos Holdings, Inc. (LDOS), which have Strong Buy ratings this month.

This year, optimism for the IT services sector is driven by several key trends: increased AI adoption, boosting demand for specialized consultancies, rapid expansion of cloud and edge computing, and a rise in mergers and acquisitions (M&A) activity. These factors collectively support a forecasted lead in IT services spending and sector growth.

Consequently, the U.S. IT Services Market, valued at $461.03 billion in 2024, is projected to reach $630.76 billion by 2029, reflecting a 6.5% CAGR. Meanwhile, Gartner predicts a 7.1% increase in IT services spending this year, reaching $1.61 trillion. This growth, fueled by innovation investments, creates new opportunities for tech services companies to deliver cutting-edge solutions promising future growth.

Considering these conducive trends, let’s assess the fundamentals of the three abovementioned Technology – Services stocks, starting 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 August 5, 2024, ZM introduced Zoom Docs, an AI-powered document solution within Zoom Workplace. It converts meeting content into actionable documents and comes at no additional cost with Zoom Workplace plans.

On June 20, 2024, ZM announced that Workvivo, its employee experience platform, is now available for resale through its channel partners. This allows partners to offer Workvivo’s employee engagement solutions alongside ZM’s existing services.

In terms of forward non-GAAP P/E, ZM’s 11.14x is 51.1% lower than the 22.76x industry average. Its 5.49x forward EV/EBITDA is 60% lower than the 13.73x industry average. Furthermore, its 1.35x forward non-GAAP PEG is 26.3% lower than the 1.84x industry average.

ZM’s revenues for the first quarter, which ended on April 30, 2024, increased 2.7% year-over-year to $1.14 billion. Similarly, its gross profit rose 3.2% over the prior-year quarter to $867.93 million.

For the same quarter, the company’s non-GAAP income from operations increased 8.1% year-over-year to $456.60 million. In addition, the company’s non-GAAP net income was $426.32 million, or $1.35 per share, up 20.7% and 16.4% from the prior year’s quarter, respectively.

Street expects ZM’s revenue for the quarter ended July 31, 2024, to increase marginally year-over-year to $1.15 billion. Its EPS for fiscal 2026 is expected to increase marginally year-over-year to $5.11. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 2.6% to close the last trading session at $55.41.

ZM’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It is ranked #8 out of 75 stocks in the Technology – Services industry. It has a B grade for Value and Quality. Click here to see ZM’s ratings for Growth, Momentum, Stability, 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.

In terms of forward non-GAAP PEG, DBX’s 0.82x is 55.5% lower than the 1.84x industry average. Its 9.58x forward EV/EBIT is 50.4% lower than the 19.30x industry average. Likewise, its 10.02x forward non-GAAP P/E is 56% lower than the 22.76x industry average.

In the fiscal second quarter that ended June 30, 2024, DBX’s revenue stood at $634.50 million, up 1.9% year-over-year, and non-GAAP gross profit rose 4.1% year-over-year to $536.30 million. For the same quarter, its non-GAAP net income and net income per share increased 11.6% and 17.6% over the prior-year quarter to $194.10 million and $0.60, respectively.

Analysts expect DBX’s revenue for the quarter ending September 30, 2024, to increase marginally year-over-year to $637. 01 million. Its EPS for the quarter ending December 31, 2024, is expected to increase 4.2% year-over-year to $0.52. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained marginally to close the last trading session at $22.05.

DBX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

It is ranked #6 in the same industry. It has an A grade for Quality and a B for grade for Growth and Value. To see DBX’s Momentum, Stability, and Sentiment, click 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 Defense Solutions, Civil, and Health segments.

On July 29, 2024, LDOS announced it received an $823 million contract from DISA to manage and maintain the upgraded DoDNet. This five-year deal will extend support to over 160,000 users and improve network services with enhanced IT solutions.

On July 11, 2024, LDOS received a $476 million contract from NASA to provide cargo mission engineering and integration services for the ISS Program and Artemis campaign. This two-year contract includes support for NASA’s space missions through analytical, engineering, and hardware development services.

In terms of forward EV/Sales, LDOS’ 1.46x is 16.8% lower than the 1.76x industry average. Similarly, its 16.01x forward non-GAAP P/E is 13.4% lower than the 18.48x industry average. Also, its 14.35x forward EV/EBIT is 7.5% lower than the 15.52x industry average.

LDOS’ revenues for the fiscal second quarter that ended June 28, 2024, increased 7.7% from the year-ago value to $4.13 billion and its non-GAAP operating income rose 35.1% from the year-ago value to $524 million.

For the same period, its non-GAAP net income attributable to LDOS common stockholders stood at $358 million, up 43.8% over the prior-year quarter. Also, its non-GAAP EPS attributable to LDOS common stockholders grew 46.1% year-over-year to $2.63.

For the quarter ending September 30, 2024, LDOS’ revenue is expected to increase 3.6% year-over-year to $4.06 billion. Its EPS for the quarter ending December 31, 2024, is expected to increase 6% year-over-year to $2.11. LDOS surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 48.5% to close the last trading session at $144.90.

LDOS’ robust fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It has a B grade for Growth, Value, Momentum, Stability, and Sentiment. Within the Technology – Services industry, it is ranked first. To access the additional POWR Ratings of LDOS for Quality, click here.

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LDOS shares were trading at $145.46 per share on Monday afternoon, up $1.25 (+0.87%). Year-to-date, LDOS has gained 35.14%, versus a 12.84% 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. More...

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