Despite macroeconomic uncertainty, the long-term prospects of the technology industry are bright, thanks to advancements and rising demand for digital solutions. Against this backdrop, investing in fundamentally sound tech stocks Zoom Video Communications, Inc. (ZM - Get Rating) and Dropbox, Inc. (DBX - Get Rating) could be wise.

Global demand for IT services is growing amid the demand for efficient implementation, upkeep, and optimization of automated systems due to the growing use of cloud-based software and business process automation.

The US IT services market is estimated to reach $306.10 billion by 2028, increasing at a CAGR of 7.1%. IT services in the United States offer a range of business skills to assist companies in developing, managing, and optimizing information and business functions. These services include software development, network management, data analysis, cybersecurity, and cloud computing.

With the rapid advancements in technology and the increasing reliance on digital solutions, the demand for IT services is expected to continue growing in the coming years.

Moreover, the global IT services market is expected to grow at 8.4% CAGR to $1.67 trillion by 2028. Investors’ interest in tech stocks is evident from the Technology Select Sector SPDR ETF’s (XLK) 39.6% returns over the past nine months.

Considering these conducive trends, let’s look at the fundamentals of the Technology – Services stock picks, beginning with number 2.

Stock #2: Zoom Video Communications, Inc. (ZM - Get Rating)

ZM is a provider of video communication platforms. The company provides a unified communications and collaboration platform that delivers fundamental changes in how people interact, connecting them through frictionless and secure meetings, phone, chat, content sharing, and more.

ZM’s forward non-GAAP PEG multiple of 0.39 is 80.2% lower than the industry average of 1.96. Its forward non-GAAP P/E multiple of 14.67% is 37.7% lower than the industry average of 23.57.

ZM’s trailing-12-month EBIT margin of 36.08% is 329.1% higher than the 8.41% industry average. Its trailing-12-month ROTA of 2.52% is 718.6% higher than the 0.31% industry average.

For the fiscal third quarter ended October 31, 2023, ZM’s revenue grew 3.2% year-over-year to $1.14 billion. Its non-GAAP income from operations increased 154.7% over the prior-year quarter to $461.68 million. The company’s non-GAAP net income increased 24.2% year-over-year to $401.24 million. Its non-GAAP EPS came in at $0.45, representing an increase of 181.3% year-over-year.

Street expects ZM’s revenue to increase 2.7% year-over-year to $4.51 billion for the year ending January 2024. Its EPS is expected to grow 13.2% year-over-year to $4.95 for the same period. It surpassed EPS estimates in all four trailing quarters.

Over the past month, the stock has gained 14.9% to close the last trading session at $71.28. Wall Street analysts expect the stock to reach $77.29 in the upcoming 12 months, indicating a potential upside of 8.4%.

ZM’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.

ZM also has a B grade for Growth, Value and Quality. It is ranked #10 out of 76 stocks in the Technology – Services industry. Click here to see the additional POWR Ratings for Stability, Sentiment and Momentum for ZM.

Stock #1: Dropbox, Inc. (DBX - Get Rating)

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 forward EV/EBITDA multiple of 10.76 is 27.8% lower than the industry average of 14.91. Its forward EV/EBIT multiple of 13.03% is 33.3% lower than the industry average of 19.54.

DBX’s trailing-12-month ROTA of 18.42% is significantly higher than the 0.31% industry average. Its trailing-12-month ROTC of 12.39% is 359.7% higher than the 2.70% industry average.

DBX’s revenues increased 7.1% year-over-year to $633 million in the fiscal third quarter that ended September 30, 2023. The company’s net income increased 37.1% from the year-ago quarter to $114.10 million. Also, net income per share increased 43.5% year-over-year to $0.33.

The consensus revenue estimate of 2.50 billion for the year ending December 2023 represents a 7.4% increase year-over-year. Its EPS is expected to grow 24.4% year-over-year to $1.97 for the same period. It surpassed EPS estimates in all four trailing quarters.

DBX’s shares have gained 50.2% over the past nine months to close the last trading session at $28.72. Wall Street analysts expect the stock to reach $29.50 in the upcoming 12 months, indicating a potential upside of 2.7%.

DBX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It is ranked #5 in the same industry. It has an A grade for Quality and a B for Value. To see additional DBX’s ratings for Growth, Momentum, Sentiment and Stability, click here.

What To Do Next?

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ZM shares were trading at $69.83 per share on Wednesday morning, down $1.45 (-2.03%). Year-to-date, ZM has gained 3.09%, versus a 22.97% 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. More...

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