The Technology Services space has witnessed robust growth since the pandemic, driven by the swift adoption of remote work, augmenting the global digital transition. Technological advancements like 5G, blockchain, artificial intelligence (AI), and machine learning (ML) have expanded the industry. Furthermore, the industry’s growth has raised concerns about data security.
AppLovin Corp., Dave Inc. and Climb Global Solutions, Inc. are poised to take advantage of the prevailing trends.
About the Industry
The Zacks Technology Services industry encompasses companies producing, developing, and designing various software support, data processing, computing hardware, and communications equipment. These offerings range from integrated powertrain technologies, advanced analytics, technology solutions, and contract research services to semiconductor packaging and interconnect technologies, collaboration software, specialty printers, and data acquisition and analysis systems.
This industry caters to consumer and business markets and serves diverse end markets and customer segments. Furthermore, some industry players offer advanced analytics, clinical research services, data storage technology and solutions, and technology-enabled financial services for consumers and small business owners.
Factors Structuring the Future of Technology Services
Rising Demand Environment: The industry is mature, with the demand for services remaining healthy over time. Revenues, income, and cash flows are anticipated to recover to pre-pandemic levels, aiding most industry players to pay out stable dividends.
Economic Recovery: The sector is a major beneficiary of the broader economy and service activities. According to the Bureau of Economic Analysis, GDP grew at an annual rate of 2.5% in 2023 compared with 1.9% growth in 2022. Economic activities in the non-manufacturing sector are on a good trajectory. The Services PMI measured by the Institute for Supply Management has stayed above the 50% mark in 51 out of 54 months.
Technological Advancement Takes the Lead: The global shift toward digitization creates opportunities in various markets, including 5G, blockchain, and AI. The United States, an important player in the IT sector, is positioned for growth in the widespread adoption of smart technologies and increased investments in security. Companies adopt generative AI, ML, blockchain, and data science faster to gain a competitive advantage. According to Bloomberg, the worldwide generative AI is expected to grow, witnessing a 42% CAGR over the next 10 years, and become a $1.3-trillion market by 2032.
Zacks Industry Rank Indicates Promising Outlook
The Zacks Technology Services industry, which is housed within the broader Zacks Business Services sector, carries a Zacks Industry Rank #63 at present. This rank places it in the top 25% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates continued outperformance in the near term. Our research shows that the top 50% of Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
Before we present a few stocks that you may want to consider for your portfolio, let us look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector & S&P 500
The Zacks Technology Services industry has outperformed the broader Zacks Business Services sector and the Zacks S&P 500 composite over the past year.
The industry has returned 73.9% over this period compared with the 30.2% rise of the broader sector and the 33.8% rally of the Zacks S&P 500 Composite.
Industry's Current Valuation
On the basis of EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization), which is used for valuing staffing stocks because of their high debt levels, the industry is trading at 91.46X at present compared with the S&P 500’s 18.94X and the sector’s 25.17.
Over the past five years, the industry has traded as high as 98.79X and as low as 60.04X, with the median being 71.54X.
3 Technology Services Stocks Leading the Pack
Here, we have recommended three high-potential technology services stocks anticipated to gain from a flourishing market.
AppLovin: This company engages in building a software-based platform for advertisers to improve the marketing and monetization of their content in the United States and across the globe. APP’s top line is growing because of AXON’s advancements, which are improved through self-learning and enhancements by its engineering team.
The margins from the software platform are benefiting from several non-recurring cost benefits to the renewal of its Google Cloud contract. The company relies on a strong capital structure and effective capital allocation plan to create long-term shareholder value.
APP flaunts a Zacks Rank #1 (Strong Buy) at present. The Zacks Consensus Estimate for its 2024 bottom line has increased 23% in the past 60 days. Earnings are expected to rise more than 100% year over year in 2024. APP shares have gained 399.5% in the past six months.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Climb Global Solutions, Inc.: This value-added information technology distribution and solutions company’s organic growth in the United States and Europe is led by strengthening relationships with existing partners while signing new disruptive vendors to its Line Card.
The company partnered with A-LIGN, a leading security and compliance solution provider to ensure its channel partners have the resources required to efficiently move from audit to strategic compliance. CLMB is witnessing growth in its margin on the back of organic growth from its new and existing vendors in its primary business.
CLMB sports a Zacks Rank #1 at present. The Zacks Consensus Estimate for its 2024 bottom line has increased 26.2% in the past 60 days. Earnings are expected to rise 52.2% year over year in 2024. CLMB shares have gained 144.7% in the past six months.
Dave Inc: This company provides a suite of financial products and services via its financial services platform. DAVE is witnessing a surge in its Average Revenues Per unit (ARPU), which shows the ability of the company to expand the monetization of its growing base. The rise in ARPU is led by an increase in average ExtraCash disbursement amounts.
DAVE’s flexible business model and the strength of the demand of the underlying members allow the company to optimize the structure of monetization. The company’s ability to acquire new members effectively has improved the impact of its marketing investments while strengthening retention and reactivation initiatives that have driven additional growth in its Mark to Market base.
DAVE flaunts a Zacks Rank #1 at present. The Zacks Consensus Estimate for 2024 earnings per share has increased 26.6% in the past 60 days. Earnings are expected to rise more than 100% year over year in 2024. DAVE shares have gained more than 152% in the past six months.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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