Despite the current macroeconomic challenges, the technology services industry is experiencing strong growth because of increasing investments in digital transformation initiatives. Demand for tech services is expected to grow further due to the adoption of emerging technologies.
Considering these factors, it could be wise to buy fundamentally strong tech stocks Mastech Digital, Inc. (MHH), Xerox Holdings Corporation (XRX), and N-able, Inc. (NABL).
Before delving deeper into their fundamentals, let’s discuss why the tech services industry is growing.
Businesses invest in digital transformation to modernize, become agile, gain a competitive edge, enhance customer satisfaction, and improve operational efficiency. They rely on tech services for various tasks right, from managing employee records to intricate processes like supply chain and operations management.
According to Gartner, IT spending for this year is projected to increase by 4.3% year-over-year, reaching $4.72 trillion. Furthermore, IT services spending is expected to grow 8.8% year-over-year to reach $1.42 trillion. This increased spending on tech services is driven by the growing demand for digital transformation across sectors to enhance operational efficiency and profitability.
A Mordor Intelligence report forecasts the IT services market to reach $1.67 trillion by 2028, with an 8.4% CAGR.
Furthermore, the tech services industry is likely to grow further thanks to the adoption of advanced technologies such as artificial intelligence (AI), the Internet of Things (IoT), machine learning and blockchain.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Technology - Services industry picks, beginning with the third choice.
Stock #3: Xerox Holdings Corporation (XRX)
XRX designs, develops, and sells document management systems and solutions in the Americas, Europe, the Middle East, Africa, India, and internationally. It offers workplace solutions, including color and multifunction printers, digital services that leverage workflow automation, personalization and communication software, content management solutions, and digitization services.
On August 14, 2023, XRX announced that it sold Elem Additive Solutions to ADDiTEC, a leader in metal additive manufacturing solutions and applications. This sale is part of XRX's strategic shift to focus on its core capabilities and offerings, such as print, IT, and digital services while divesting non-core assets.
In terms of the trailing-12-month EBIT margin, XRX’s 5.53% is 12.6% higher than the 4.91% industry average. Likewise, its 3.26% trailing-12-month Return on Total Capital is 33.7% higher than the 2.44% industry average. Additionally, its 0.63x trailing-12-month asset turnover ratio is 1.4% higher than the industry average of 0.62x.
For the fiscal second quarter ended June 30, 2023, XRX’s revenues increased 0.4% year-over-year to $1.75 billion. Its adjusted net income rose 200% over the prior-year quarter to $72 million. In addition, its adjusted operating income increased 205.7% year-over-year to $107 million. Also, its adjusted earnings per share increased 238.5% year-over-year to $0.44.
Street expects XRX’s EPS for the quarter ended September 30, 2023, is expected to increase 98.9% year-over-year to $0.38. Its revenue for the quarter ending June 30, 2024, is expected to increase 0.5% year-over-year to $1.76 billion. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 5.9% to close the last trading session at $15.13.
XRX’s positive outlook is reflected in its POWR Ratings. It 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.
It has a B grade for Growth and Value. It is ranked #16 out of 73 stocks in the Technology - Services industry. To see XRX’s Momentum, Stability, Sentiment, and Quality ratings, click here.
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. The company offers data management and analytics services, including project-based consulting services in the areas of master data management, enterprise data integration, big data and analytics, and digital transformation.
On May 31, 2023, MHH announced its entry into the Engineering Staffing Services business. Leveraging expertise in Data and Analytics services and IT talent, the company aims to be a trusted partner for providing engineering talent nationwide, focusing on becoming the preferred choice for enterprises seeking exceptional engineering talent.
In terms of the trailing-12-month levered FCF margin, MHH’s 10.91% is 96.4% higher than the 5.56% industry average. Likewise, its 1.98x asset turnover ratio is 143.5% higher than the 0.81x industry average.
MHH’s total revenues for the second quarter ended June 30, 2023, came in at $52.20 million. Its gross profit came in at $13.64 million. Its non-GAAP net income and EPS came in at $1.29 million and $0.11, respectively.
Analysts expect MHH’s EPS and revenue for the fiscal year ending December 31, 2024, to increase 98% and 2.8% year-over-year to $0.98 and $211.33 million, respectively. Over the past three months, the stock has declined 11.4% to close the last trading session at $9.02.
MHH’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #15 in the same industry. It has a B grade for Value and Quality. Click here to see MHH’s Growth, Momentum, Stability, and Sentiment ratings.
Stock #1: N-able, Inc. (NABL)
NABL provides cloud-based software solutions for managed service providers. The company's solutions enable MSPs to support digital transformation and growth within small and medium-sized enterprises. Its software platform is designed to be an enterprise-grade solution that serves as an operating system for its MSP partners and scales as their businesses grow.
On May 23, 2023, NABL announced a collaboration with the Joint Cyber Defense Collaborative (JCDC) to enhance global cybersecurity, reduce security risk for MSPs and their customers, and advance cybersecurity for small and medium critical infrastructure entities. This partnership provides access to expertise and information sharing on cybersecurity threats, helping MSPs proactively address evolving threats.
In terms of the trailing-12-month EBITDA margin, NABL’s 19.66% is 114.4% higher than the 9.17% industry average. Likewise, its 1.38% trailing-12-month Return on Total Assets is 275.6% higher than the 0.37% industry average. Additionally, its 14.94% trailing-12-month EBIT margin is 204.2% higher than the industry average of 4.91%.
For the fiscal second quarter ended June 30, 2023, NABL’s total revenues increased 15.8% year-over-year to $106.08 million. Its non-GAAP gross profit rose 14.8% year-over-year to $89.91 million. The company’s non-GAAP operating income rose 23.1% year-over-year to $28.70 million.
Moreover, its non-GAAP net income increased 1.8% over the prior-year quarter to $16.26 million. Also, its non-GAAP earnings per share remained flat year-over-year to $0.09.
Street expects NABL’s EPS and revenue for the quarter ended September 30, 2023, to increase 14.4% and 14.3% year-over-year to $0.08 and $106.86 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 33.8% to close the last trading session at $13.43.
NABL’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Stability, and Sentiment. It is ranked #14 in the Technology - Services industry. To see NABL’s Value, Momentum, and Quality ratings, click here.
What To Do Next?
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NABL shares were trading at $13.35 per share on Tuesday afternoon, down $0.08 (-0.60%). Year-to-date, NABL has gained 29.86%, versus a 15.56% 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.
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