The technical services industry will grow due to the increasing use of generative AI, ongoing cloud migration, and increasing regulatory requirements. Likewise, higher spending on software and IT services this year reflects the positive sentiment in the industry. These trends are driving investments and modernizations in infrastructure, making the sector a strong investment opportunity this year.

Given these positive trends, investors might consider undervalued technology stocks like Zoom Video Communications, Inc. (ZM), Dropbox, Inc. (DBX), and Leidos Holdings, Inc. (LDOS), which received Strong Buy ratings this month.

Optimism for the IT services sector is being driven by several key trends this year: increasing AI usage, rising demand for specialized consulting services, rapid expansion of cloud and edge computing, and an increase in merger and acquisition (M&A) activity. Together, these factors support a projected increase in IT services spending and industry growth.

Consequently, the US IT services market, which was valued at $461.03 billion in 2024, is expected to reach $630.76 billion by 2029, growing at a compound annual growth rate of 6.5%. Meanwhile, Gartner predicts IT services spending will increase by 7.1% to $1.61 trillion this year. This growth, fueled by investments in innovation, is creating new opportunities for technology services companies to offer cutting-edge solutions that promise future growth.

With these supportive trends in mind, let us now evaluate the fundamentals of the three technology and services stocks mentioned above, starting with the third pick.

Share #3: Zoom Video Communications, Inc. (CM)

ZM provides a unified communications platform across the Americas, 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 launched Zoom Docs, an AI-powered document solution within Zoom Workplace. It transforms meeting content into actionable documents and is included in Zoom Workplace plans at no additional cost.

On June 20, 2024, ZM announced that Workvivo, its employee experience platform, can now be resold through its channel partners. This enables partners to offer Workvivo’s employee engagement solutions alongside ZM’s existing services.

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

ZM’s revenue increased 2.7% year-over-year to $1.14 billion in the first quarter ended April 30, 2024. Similarly, gross profit increased 3.2% year-over-year to $867.93 million.

In the same quarter, the company’s non-GAAP operating income 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, representing an increase of 20.7% and 16.4%, respectively, over the same quarter last year.

Street expects ZM’s revenue for the quarter ending July 31, 2024, to increase marginally year-over-year to $1.15 billion. Earnings per share for fiscal 2026 are expected to increase marginally year-over-year to $5.11. It has beaten consensus earnings per share estimates in each of the last four quarters. Over the past month, the stock has fallen 2.6%, closing the last trading session at $55.41.

ZM’s POWR Ratings reflect a strong outlook. It has an overall rating of A, which equates to a Strong Buy in our proprietary system. POWR Ratings evaluate stocks on 118 different factors, each with its own weighting.

It ranks 8th 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.

Share #2: Dropbox, Inc. (DBX)

DBX provides a global content collaboration platform. The company’s platform allows individuals, families, teams and organizations to collaborate and sign up for free through the website or app and upgrade to a paid subscription for premium features.

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

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

Analysts expect DBX’s revenue for the quarter ending September 30, 2024 to increase marginally year-over-year to $637.01 million. Earnings per share for the quarter ending December 31, 2024 are expected to increase 4.2% to $0.52. In each of the last four quarters, the stock has beaten Wall Street’s EPS estimates. Over the past month, the stock has gained marginally, closing the last trading session at $22.05.

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

In the same industry, it ranks 6th. It has an A grade for quality and a B grade for growth and value. Click here to view DBX’s momentum, stability and sentiment.

Share No. 1: Leidos Holdings, Inc. (LDOS)

LDOS provides defense, intelligence, civil and health services and solutions in the United States and internationally. The company operates through the Defense Solutions, Civil and Health segments.

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

On July 11, 2024, LDOS was awarded a $476 million contract by NASA to provide cargo mission engineering and integration services for the ISS program and the Artemis campaign. This two-year contract includes supporting NASA’s space missions with analytical, engineering, and hardware development services.

In terms of forward EV/sales ratio, LDOS’s 1.46 is 16.8% below the industry average of 1.76. Likewise, its forward non-GAAP P/E ratio of 16.01 is 13.4% below the industry average of 18.48. Furthermore, its forward EV/EBIT of 14.35 is 7.5% below the industry average of 15.52.

LDOS’s revenue for the second fiscal quarter ended June 28, 2024, increased 7.7% year-over-year to $4.13 billion and non-GAAP operating income increased 35.1% year-over-year to $524 million.

For the same period, non-GAAP net income attributable to LDOS common stockholders was $358 million, an increase of 43.8% over the same quarter last year. Non-GAAP earnings per share attributable to LDOS common stockholders also increased 46.1% year-over-year to $2.63.

For the quarter ending September 30, 2024, LDOS’s revenue is expected to increase 3.6% year-over-year to $4.06 billion. Earnings per share for the quarter ending December 31, 2024 are expected to increase 6% to $2.11. LDOS has beaten consensus earnings per share estimates in each of the last four quarters. Over the past year, the stock has gained 48.5%, closing the last trading session at $144.90.

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

It has a B grade for Growth, Value, Momentum, Stability, and Sentiment. It ranks #1 within the Technology & Services industry. Click here to access LDOS’s additional POWR ratings for Quality.

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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%, while the benchmark S&P 500 index has risen 12.84% over the same period.

About the author: Abhishek Bhuyan

Abhishek started his professional career as a financial journalist due to his keen interest in identifying the fundamental factors that influence the future performance of financial instruments. More…

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