Despite the cyclical ups and downs, the technology industry is well-positioned for continued resilience and solid growth in the long term, driven by sustained demand for innovative tech services amid rapid digitalization worldwide and new technological breakthroughs.

Given the industry’s strong footing, investing in fundamentally sound tech stocks Uber Technologies, Inc. (UBER) and Zoom Video Communications, Inc. (ZM) could be wise now. However, investors could hold Lyft, Inc. (LYFT) and wait for a better entry point in this stock.

Before diving deeper into their fundamentals, let’s discuss what’s shaping the tech industry’s prospects.

The COVID-19 pandemic has accelerated digital transformation by several months or even years. It has fundamentally changed how we work, connect, learn, and shop. Companies globally increasingly invest in advanced tech products and services to help their customers and workforce.

Enterprises across various industries, including automotive, retail, manufacturing, real estate, and healthcare, are accelerating the integration of digital technology to streamline business processes, reduce manual labor, innovate customer experiences, empower workforces, and achieve operational excellence, propelling the growth of the tech services market.

Amid consistent digital transformation globally, Gartner, Inc. (IT) forecasts global IT spending to grow 4.3% year-over-year to total $4.70 trillion in 2023. Governments are also increasing their digital investments this year in response to economic turmoil. Worldwide government IT spending is expected to increase 7.6% year-over-year to $589.80 billion.

Moreover, tech dependency has increased steadily in recent years, thanks to the rapid adoption of emerging technologies like artificial intelligence (AI), cloud computing, the Internet of Things (IoT), machine learning (ML), blockchain, metaverse, 5G, and extended reality.

According to a report by Mordor Intelligence, the IT services market is projected to grow at a CAGR of 8.4%, reaching $1.67 trillion by 2028. The increased IT spending, combined with the widespread adoption of software-as-a-service (SaaS) and growing cloud-based offerings, indicates the solid demand for IT services, driving the market’s profitability.

Meanwhile, the United States IT services market size is expected to reach $306.10 billion by 2028, growing at a CAGR of 7.1% during the forecast period (2023-2028).

With these favorable trends in mind, let’s take a look at the fundamentals of the three Technology - Services stocks, starting with number 3.

Stock to Hold:

Stock #3: Lyft, Inc. (LYFT)

LYFT operates a peer-to-peer marketplace for on-demand ridesharing in the U.S. and Canada. The company offers Ridesharing Marketplace, which connects drivers with riders; Express Drive, a flexible car rentals program for drivers; and Lyft Rentals, which provides vehicles for long-distance trips.

On August 10, 2023, Lyft Media launched in-app advertising across the Lyft app, providing brands the ability to connect to riders. Brands and agencies can partner with Lyft across a broad range of digital and out-of-home advertising options like in-app ads, in-car tablets, on-car digital screens, and on-street bikeshare stations. This launch should bode well for LYFT.

LYFT’s trailing-12-month gross profit margin of 31.80% and 4.9% is higher than the industry average of 30.31. But the stock’s trailing-12-month EBITDA margin and net income margin of negative 22.14% and negative 30.87% compare to the respective industry averages of 13.62% and 6.16%.

For the second quarter that ended June 30, 2023, LYFT’s revenue increased 3% year-over-year to $1.02 billion. Its adjusted EBITDA came in at $41 million, compared to an adjusted EBITDA loss of $196.30 million in the prior-year quarter. However, the company reported a net loss and net loss per share of $114.26 million and $0.30, respectively.

Analysts expect LYFT’s EPS for the fiscal year (ending December 2023) to decline 35% year-over-year to $0.39. However, the company’s revenue for the ongoing year is expected to increase 6.1% year-over-year to $4.34 billion. In addition, the company has surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.

For the fiscal year 2024, the company’s revenue and EPS are estimated to grow 11.5% and 23.1% from the previous year to $4.84 billion and $0.48, respectively.

Shares of LYFT have gained 9.2% over the past six months to close the last trading session at $10.79. However, the stock has declined 26.6% over the past year.

LYFT’s POWR Ratings reflect its mixed prospects. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

LYFT has a B grade for Growth. It has a C grade for Momentum, Value, and Quality. It is ranked #52 out of 76 stocks in the Technology - Services industry.

Click here for the additional POWR Ratings for LYFT (Stability and Sentiment).

Stocks to Buy:

Stock #2: Uber Technologies, Inc. (UBER)

UBER develops and operates proprietary technology applications in the U.S., Canada, Latin America, Europe, the Middle East, Africa, and certain parts of Asia. The company operates through Mobility; Delivery; and Freight segments. It provides a range of transportation modalities like ridesharing, micro-mobility, and public transit; advertising services; and manages logistics networks.

On August 11, UBER announced a new partnership with a grocery chain, Hy-Vee, to provide on-demand and scheduled grocery delivery to customers across the Midwest. More than 260 Hy-Vee grocery and liquor stores are now accessible to shop from through Uber and Uber Eats, enabling customers to order a variety of products for convenient doorstep delivery.

This new partnership might help UBER expand into untapped markets, propelling the company’s growth and profitability.

On July 12, UBER entered a new agreement with Domino’s Pizza Inc. (DPZ), the world’s leading pizza chain, enabling U.S. customers to order Domino’s products through Uber Eats and Postmates apps. The initial rollout will start this fall in four pilot markets, with ordering on the Uber Eats and Postmates apps expected to be enabled nationwide by the end of 2023.

This partnership is expected to extend UBER’s customer reach and boost its revenue stream.

Also, on July 11, UBER and RideCo, a leader in on-demand transit technology, announced a partnership to offer transit agencies overflow (TNC) options. This unique technology integration enables agencies to achieve greater operational efficiency and higher productivity while enhancing rider equity. This collaboration should bode well for the companies.

UBER’s trailing-12-month gross profit of 32.06% is 5.8% higher than the industry average of 30.31%. Likewise, the stock’s trailing-12-month asset turnover ratio of 1.08x is 33% higher than the 0.81x industry average.

For the second quarter that ended June 30, 2023, UBER’s revenue increased 14.4% year-over-year to $9.23 billion. Its income from operations was $326 million, compared to a loss from operations of $713 million in the prior year’s period. The company’s adjusted EBITDA grew 151.7% year-over-year to an all-time high of $916 million.

Additionally, the company’s operating cash flow for the quarter was $1.20 billion, while its free cash flow came in at $1.14 billion, up 198.4% from the prior-year quarter.

Analysts expect UBER’s revenue for the fiscal year (ending December 2024) to increase 17% year-over-year to $43.95 billion. The consensus EPS estimate of $1.07 for the next year indicates an 186.1% rise year-over-year. Moreover, the company topped the consensus revenue estimates in three of the trailing four quarters.

UBER’s stock has gained 35.5% over the past six months and 82.5% year-to-date to close the last trading session at $46.27.

UBER’s POWR Ratings reflect this promising outlook. UBER has an overall rating of B, which translates to a Buy in our proprietary rating system.

UBER has an A grade for Sentiment. It has a B grade for Quality and Growth. It is ranked #24 out of 76 stocks in the Technology - Services industry.

Beyond what we stated above, we also have UBER’s ratings for Stability, Momentum, and Value. Get all UBER ratings here.

Stock #1: Zoom Video Communications, Inc. (ZM)

ZM provides unified communications platforms in the Americas, the Asia Pacific, Europe, the Middle East, and Africa. The company provides Zoom Meetings, which offers HD video, voice, chat, and content sharing through mobile phones, desktops, and laptops; Zoom Phone, an enterprise cloud phone system; and Zoom Rooms, a software-based conference room system.

On September 5, ZM announced that Zoom AI Companion (previously Zoom IQ), the company’s generative AI digital assistant, is now included at no additional cost for customers with the paid services in their Zoom user accounts.

AI Companion reinforces Zoom’s vision to deliver limitless human connection on one platform, empowering people by boosting their productivity, improving their skills, and enhancing team effectiveness. The availability of Zoom AI Companion at no additional cost should drive the company’s customer retention and reach, driving its growth.

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 offer 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.” It 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. The new launch should bode well for the company.

ZM’s trailing 12-month gross profit margin of 75.62% is 57.9% higher than the 47.89% industry average. Moreover, the stock’s trailing 12-month levered FCF margin of 34.48% is 391% higher than the industry average of 7.02%.

ZM’s total revenues increased 3.6% year-over-year to $1.14 billion for the fiscal 2024 second quarter that ended July 31, 2023. Its non-GAAP income from operations grew 17.3% from the year-ago value to $461.70 million. The company’s cash inflow from operating activities was $336 million, an increase of 30.6% year-over-year.

Furthermore, the company’s non-GAAP net income and non-GAAP net income per share were $409.60 million and $1.34, compared to $323.50 million and $1.05 in the same quarter of fiscal year 2024, respectively.

Analysts expect ZM’s EPS to increase 6.8% year-over-year to $4.67 for the fiscal year ending January 2024. The company’s revenue for the current year is expected to grow 2.3% year-over-year to $4.49 billion. Also, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 7.9% over the past month and 10.5% year-to-date to close the last trading session at $73.68.

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.

ZM has a B grade for Value, Growth, and Quality. It is ranked #9 in the same industry.

In addition to the POWR Ratings highlighted above, you can see ZM’s ratings for Momentum, Stability, and Sentiment here.

What To Do Next?

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UBER shares fell $0.12 (-0.26%) in premarket trading Friday. Year-to-date, UBER has gained 87.10%, versus a 17.20% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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