The tech industry is expected to flourish due to the widespread adoption of new technologies and an increasing focus on outsourcing non-essential functions to maximize core strengths.
Therefore, I think it could be wise to capitalize on the industry’s tailwinds by adding quality tech stocks Zoom Video Communications, Inc. (ZM), Dropbox, Inc. (DBX), and GigaCloud Technology Inc. (GCT) to one’s portfolio.
Rapidly increasing digital transformation across industries, adoption of new technologies such as artificial intelligence, IoT, and blockchain, and a growing emphasis on leveraging the core competencies by outsourcing non-core operations are the major driving factors of the IT service market.
Also, IT outsourcing has become more than a simple cost-reduction technique with cloud migrations and service options. The United States IT Services market is expected to reach $306.10 billion by 2028, growing at a CAGR of 7.1%.
Moreover, the software segment is expected to see double-digit growth this year as enterprises prioritize spending to capture competitive advantages through increased productivity, automation, and other software-driven transformation initiatives.
In addition, the IT services segment is expected to continue its growth trajectory through 2024, largely driven by the infrastructure-as-a-service market, which is projected to reach over 30% growth this year.
Let’s discuss the stocks mentioned above in detail:
Zoom Video Communications, Inc. (ZM)
ZM provides unified communications platforms in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.
Its trailing 12-month levered FCF margin of 34.48% is 394.6% higher than the 6.97% industry average. Its trailing 12-month gross profit margin of 75.62% is 57.9% higher than the 47.89% industry average.
On June 27, ZM announced the launch of the award-winning Intelligent Director for Zoom Rooms. For hybrid meetings with a Zoom Room, Intelligent Director uses AI and multiple cameras to provide the best image and angle of participants so remote participants can see each person clearly, even in large conference rooms.
Intelligent Director is specifically designed for medium- to larger-sized rooms and helps avoid the “bowling alley effect.” Intelligent Director can individually frame up to 16 participants in a Zoom Room using multiple cameras, choosing the best video stream via a Zoom-designed AI, and send that stream to the gallery view of the Zoom Meeting.
ZM’s total revenues increased 3.6% year-over-year to $1.14 billion for the fiscal second quarter that ended July 31, 2023. Its net income increased 297.8% year-over-year to $181.97 million. Also, net income per share attributable to common stockholders increased 293.3% year-over-year to $0.59.
Analysts expect ZM’s EPS to rise marginally year-over-year to $1.08 in the fiscal third quarter ending October 2023. Its revenue is expected to increase 1.6% year-over-year to $1.12 billion for the same quarter. Also, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 4% over the past three months to close the last trading session at $67.70.
ZM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
ZM has a B grade for Growth, Value, and Quality. It ranks #9 out of 76 stocks in the Technology – Services industry.
In addition to the POWR Ratings highlighted above, one can see ZM’s ratings for Momentum, Stability, and Sentiment here.
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 14.73% is 229.9% higher than the 4.47% industry average. Its trailing-12-month EBITDA margin of 21.49% is 137.7% higher than the 9.04% industry average.
On June 21, 2023, DBX announced the launch of Dropbox Dash and Dropbox AI, new AI-powered product experiences designed to improve modern work and help customers get more out of their content.
Dropbox Dash is a universal search tool that connects all tools, content, and apps in a single search bar; Dropbox AI applies generative AI to summarize and answer questions about content saved in Dropbox, starting with file previews.
The company is also building on its investment in AI with the launch of Dropbox Ventures, a new startup initiative to support the growing AI ecosystem, and renewing its commitment to applying AI responsibly with the introduction of its AI Principles.
DBX’s revenue rose 8.7% year-over-year to $622.50 million in the second quarter that ended June 30, 2023. The company’s non-GAAP net income increased 26% year-over-year to $174 million, while non-GAAP net income per share rose 34.2% year-over-year to $0.51.
Street expects DBX’s EPS to increase 13.8% year-over-year to $0.49 in the fiscal third quarter ending September 2023. Its revenue is likely to rise 6.2% from the previous year’s quarter to $627.74 million in the same quarter. The company has surpassed the consensus EPS and revenue estimates in each of the trailing four quarters.
Over the past three months, the stock has gained 21.2% to close the last trading session at $27.29.
DBX’s robust outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.
DBX has an A grade for Quality and a B in Value. It ranks #11 in the same industry.
Click here to access additional DBX ratings (Growth, Sentiment, Momentum, and Stability).
GigaCloud Technology Inc. (GCT)
GCT provides end-to-end B2B e-commerce solutions for large parcel merchandise. Its marketplace connects manufacturers primarily in Asia with resellers in the United States, Asia, and Europe to execute cross-border transactions across furniture, home appliance, fitness equipment, and other large parcel categories.
Its trailing-12-month levered FCF margin of 15.91% is 220.1% higher than the 4.97% industry average. Its trailing-12-month EBIT margin of 11.33% is 54% higher than the 7.36% industry average.
GCT’s total revenues increased 23.5% year-over-year to $153.10 million in its fiscal second quarter (ended June 30, 2023). The company’s adjusted EBITDA increased 219.3% year-over-year to $24.90 million, while its net income grew 201.5% year-over-year to $18.40 million.
GCT’s EPS is expected to rise significantly year-over-year to $0.36 in the current quarter ending September 2023. Its revenue is expected to increase 27.8% year-over-year to $163.53 million for the same quarter.
The stock has gained 141.3% over the past six months to close its last trading session at $12.09.
It’s no surprise that the stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
GCT has an A grade for Sentiment and Quality and a B in Growth and Value. It is ranked #4 within the same industry.
Beyond what is stated above, we’ve also rated GCT for Momentum and Stability. Get all GCT ratings here.
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ZM shares were trading at $67.80 per share on Monday morning, up $0.10 (+0.15%). Year-to-date, ZM has gained 0.09%, versus a 16.74% 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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