The technology industry is on the path to robust growth, given the continuous innovations in artificial intelligence, cloud computing, and cybersecurity. Amid this backdrop, investors could consider adding fundamentally strong tech stocks such as Leidos Holdings, Inc. (LDOS), Zoom Video Communications, Inc. (ZM), and AudioCodes Ltd. (AUDC) to their portfolios.
Before exploring the fundamentals of these stocks, let’s first understand what’s shaping the tech industry’s prospects.
Tech companies are often on investors’ radar due to their disruptive innovations. Over the past year, the tech-heavy Nasdaq has climbed more than 33%, owing to advancements in AI. Gartner has predicted global IT spending to hit $5.06 trillion in 2024, representing an 8% rise from last year. This puts worldwide IT spending on track to exceed $8 trillion well before the end of the decade.
Integrating digital technologies into operations and the rising popularity of digital services have boosted the demand for tech services. Worldwide IT services revenue is expected to reach $1.88 trillion by 2029, exhibiting a CAGR of 9.5%. Moreover, the U.S. IT services market is projected to hit $630.76 billion by 2029, growing at a 6.5% CAGR.
The focus on providing networks with greater bandwidth, expanding 5G networks, dealing with ever-rising data consumption, modernizing app networks, and advancements in networking infrastructure have significantly fueled communication and networking equipment. The global communication equipment market is expected to grow at a CAGR of 6% to reach $348.70 billion by 2030.
Considering these conducive trends, let’s examine the fundamentals of the three tech sector stock picks.
Leidos Holdings, Inc. (LDOS)
LDOS provides services and solutions in the defense, intelligence, civil, and health markets in the U.S. and internationally. The company operates through the Defense Solutions, Civil, and Health segments.
On May 7, 2024, LDOS secured a $631 million contract from the U.S. Army for the DIABLO program, enhancing its role as a premier mission equipment provider with a focus on developing, integrating, and supporting aerial intelligence, surveillance, and reconnaissance (AISR) sensors over a decade.
On May 1, 2024, LDOS announced a $206 million contract from the National Geospatial-Intelligence Agency's (NGA) Exploitation Services Program for geospatial processing modernization. The contract will focus on enhanced efficiency and interoperability through mission software development and deployment over five years.
LDOS’ trailing-12-month asset turnover ratio of 1.21x is 52.8% higher than the industry average of 0.79x. Similarly, its trailing-12-month Return on Total Capital of 9.29% is 29.9% higher than the industry average of 7.15%.
LDOS’ revenues for the fiscal first quarter that ended March 29, 2024, increased 7.5% from the year-ago value to $3.98 billion. Its operating income rose 56.6% year-over-year to $415 million.
Moreover, its non-GAAP net income attributable to LDOS common stockholders stood at $314 million, up 54.7% over the prior-year quarter. Also, its non-GAAP EPS attributable to LDOS common stockholders grew 55.8% year-over-year to $2.29.
Analysts expect LDOS’ revenue and EPS for the quarter ending June 30, 2024, to increase 5.7% and 24.3% year-over-year to $4.06 billion and $2.24, respectively. The company surpassed Street revenue and EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 82.9%, closing the last trading session at $146.83.
LDOS’ POWR Ratings reflect this promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
LDOS has an A grade for Sentiment and a B for Growth, Value, Momentum, and Stability. It is ranked first out of 78 stocks in the Technology - Services industry. Beyond what we stated above, we have also rated LDOS for Quality. Get all the LDOS ratings here.
Zoom Video Communications, Inc. (ZM)
ZM provides a unified communications platform in the Americas, the 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 March 25, 2024, ZM launched Zoom Workplace, its AI-powered collaboration platform in the Amazon Web Services (AWS) Marketplace. Thanks to this, customers can seamlessly purchase Zoom Workplace products such as Meetings, Team Chat, Phone, etc., as well as Zoom Contact Center and Revenue Accelerator in AWS Marketplace.
On the same date, ZM and Avaya announced a partnership to offer global enterprises improved collaboration experiences. Avaya has chosen Zoom Workplace to integrate with its Communication & Collaboration Suite, offering customers a simplified way to manage communications and workflows, leveraging ZM’s innovative solutions.
ZM’s trailing-12-month CAPEX / Sales of 2.80% is 21.5% higher than the industry average of 2.31%. Likewise, its trailing-12-month net income margin and levered FCF margin of 14.08% and 33.24% are 510% and 248.5% higher than the industry averages of 2.31% and 9.54%, respectively.
For the fiscal fourth quarter that ended January 31, 2024, ZM’s revenue and non-GAAP income from operations increased 2.6% and 9.6% year-over-year to $1.15 billion and $443.75 million, respectively. Its non-GAAP free cash flow stood at $332.69 million, up 81.5% over the prior-year quarter.
For the same quarter, its non-GAAP net income and net income per share stood at $443.97 million and $1.42, up 21.1% and 16.4% from the year-ago quarter, respectively.
Street expects ZM’s revenue and EPS for the quarter that ended April 30, 2024, to increase 2% and 2.5% year-over-year to $1.13 billion and $1.19, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters. ZM’s stock has gained marginally over the past six months, closing the last trading session at $61.13.
ZM’s POWR Ratings reflect its positive prospects. It has an overall B rating, equating to Buy in our proprietary rating system.
ZM has a B grade for Growth, Value, and Quality. Within the Technology - Services industry, it is ranked #5. Click here for the additional POWR Ratings for ZM (Momentum, Stability, and Sentiment).
AudioCodes Ltd. (AUDC)
Headquartered in Lod, Israel, AUDC provides advanced communications software, products, and productivity solutions for the digital workplace worldwide. The company offers solutions, products, and services for unified communications, contact centers, hosted business services, Voice.AI, and service provider businesses.
On March 25, 2024, AUDC announced a strategic collaboration with Tata Tele Business Services, enabling TTBS to offer Smartflo UCaaS on Microsoft Teams for integrated voice calling via Microsoft Operator Connect and Direct Routing.
This partnership expands AUDC's presence in India's enterprise market, providing a seamless solution for Microsoft Teams users with advanced automation tools and contact center services through the AudioCodes Live Platform.
On March 13, 2024, AUDC announced Voca Conversational Interaction Center (Voca CIC) as an omnichannel contact center for Microsoft Teams, adding email and webchat to the existing voice experience. This addition strengthens AudioCodes Live, providing complete calling and contact center capabilities for Microsoft Teams users.
AUDC’s trailing-12-month gross profit margin of 65.43% is 33.8% higher than the industry average of 48.89%. Its trailing-12-month Return on Common Equity and Return on Total Assets of 5.97% and 3.29% are 80% and 155.8% higher than the industry averages of 3.31% and 1.28%, respectively.
AUDC’s total revenues for the fiscal first quarter that ended March 31, 2024, increased 1.5% year-over-year to $60.08 million. The company’s gross profit rose 5.8% from the year-ago value to $38.67 million. AUDC’s non-GAAP net income stood at $5.22 million or $0.17 per share, up 94.7% and 112.5% over the prior-year quarter, respectively.
For the quarter ending June 30, 2024, AUDC’s EPS is expected to increase 19.8% year-over-year to $0.19. Its revenue for the same quarter is expected to grow marginally year-over-year to $60.56 million. It surpassed consensus EPS estimates in three of the trailing four quarters. The stock has gained 1.9% over the past six months to close the last trading session at $9.91.
AUDC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Quality. It is ranked first out of 47 stocks in the Technology - Communication/Networking industry. To see AUDC’s Momentum, Stability, and Sentiment ratings, click here.
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LDOS shares were trading at $147.37 per share on Friday morning, up $0.54 (+0.37%). Year-to-date, LDOS has gained 36.56%, versus a 10.07% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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