3 Tech Service Stocks to Add to Your Portfolio

Despite several macroeconomic headwinds, the technology services industry is positioned for solid growth and profitability in the long term. Demand for tech services is driven by growing digital transformation globally and the increased adoption of emerging technologies among enterprises and consumers.

Considering the industry’s bright growth prospects, it seems wise to add fundamentally sound tech service stocks Uber Technologies, Inc. (UBER), Information Services Group, Inc. (III), and Outbrain Inc. (OB) to your portfolio for potential gains.

Despite a tough macroeconomic environment, the technology industry is expected to remain resilient and witness considerable growth, thanks to rising global demand for tech services. The COVID-19 pandemic helped accelerate digital transformation, creating a landscape encouraging innovation and technological adoption by businesses and consumers.

Organizations across several industries, including retail, healthcare, automotive, manufacturing, and real estate, are increasingly embracing the integration of digital technology to improve operational efficiency and spur innovation. Digitalization reduces business costs by reducing manual labor, streamlining processes, and optimizing supply chain management.

Furthermore, the introduction of emerging technologies like artificial intelligence (AI), big data, machine learning (ML), 5G, augmented reality (AR), and blockchain should boost the demand for upgraded IT services and infrastructure.

As per a report by Mordor Intelligence, the IT services market is projected to grow at a CAGR of 8.4% to reach $1.67 trillion by 2028. An increased IT spending worldwide, coupled with the widespread adoption of Software-as-a-Service (SaaS) and growing cloud-based offerings, should drive demand for IT services.

According to the latest forecast by Gartner, worldwide IT spending is expected to total $4.70 trillion in 2023, an increase of 4.3% over the previous year. Meanwhile, governments are also increasing their digital investments this year in response to global turmoil. Worldwide government IT spending is expected to grow 7.6% year-over-year to $589.80 billion.

Moreover, according to Statista, the U.S. government allocated approximately $24.40 billion for major federal IT investments.

Given the industry’s promising growth outlook, investing in fundamentally strong tech service stocks UBER, III, and OB could be wise now for solid returns.

Let’s take a closer look at the fundamentals of these stocks:

Uber Technologies, Inc. (UBER)

UBER develops and operates proprietary technology applications in the United States, Canada, Latin America, Europe, the Middle East, Africa, and certain parts of Asia.  The company operates through Mobility; Delivery; and Freight segments. It provides ridesharing, deliveries, and freight management.

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

This strategic partnership would help UBER expand into untapped markets, driving the company’s growth and profitability.

On July 12, UBER partnered with Domino’s Pizza Inc. (DPZ), the world’s largest pizza company, to enable U.S. customers to order Domino’s products through Uber Eats and Postmates apps. The rollout would start in four pilot markets and expand nationwide by the end of 2023. Such partnerships are expected to enable Uber to expand horizontally into related industries.

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

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 came in at $326 million, compared to a loss from operations of $713 million in the year-ago period. The company’s adjusted EBITDA grew 151.7% year-over-year to $916 million.

In addition, the company’s free cash flow came in at $1.14 billion, an increase of 198.4% from the prior-year quarter.

Analysts expect UBER’s revenue for the fiscal year (ending December 2024) to increase 17.1% year-over-year to $43.97 billion. Likewise, the consensus EPS estimate of $1.06 for the next year indicates a 186.2% rise year-over-year. In addition, the company topped the consensus revenue estimates in three of the four trailing quarters, which is impressive.

UBER’s stock has gained 76.2% year-to-date and 55.6% over the past year to close the last trading session at $44.68.

UBER’s POWR Ratings reflect this robust outlook. UBER has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

UBER has an A grade for Quality and Sentiment. It also has a B grade for Growth. It is ranked #20 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.

Information Services Group, Inc. (III)

III is a technology research and advisory company offering digital transformation, risk management, and technology research services to private and public sector organizations. Its platforms, ISG Digital and ISG Enterprise, aid in technology solutions and operational optimization. It also provides ISG GovernX, a software platform for supplier relationship management.

In the latest financial results release, Michael P. Connors, III’s Chairman and CEO, said the company remains committed to delivering superior returns to investors. During the second quarter, the company paid dividends of $2.20 million to its shareholders.

“In addition to returning cash to shareholders through quarterly dividends, our Board of Directors authorized a $25 million expansion of our share repurchase program. Both our ongoing dividend payments and share buybacks underscore our steadfast commitment to shareholders and our confidence in the long-term future of ISG,” Connors added.

III’s revenues for the second quarter that ended June 30, 2023, increased 5.5% year-over-year to $74.61 million. The company reported an adjusted operating income of  $5.06 million. Also, its adjusted net income and adjusted EPS came in at $5.29 million and $0.11, respectively.

Furthermore, the company generated $2.80 million of cash from operations in the second quarter, compared to 800 thousand in the second quarter of 2022. Its cash balance totaled $19.60 million as of June 30, 2023.

Analysts expect III’s revenue for the fiscal year (ending December 2024) to increase 4.4% year-over-year to $318.01 million. The company’s EPS for the same period is expected to grow 12.6% year-over-year to $0.51. Moreover, III  has an impressive earnings surprise history as it surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has gained 6.9% year-to-date to close the last trading session at $4.97.

III’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

III is ranked 23 among 76 stocks in the Technology-Services industry. The stock has a B grade for Stability.

To see the other ratings of III for Growth, Momentum, Sentiment, Quality, and Value, click here.

Outbrain Inc. (OB)

OB operates a global recommendation platform. The company offers Outbrain Engage, a product suite for media partners that provides data-driven recommendations and user engagement solutions. In addition, it provides solutions for advertisers with access to ad inventory supporting several formats and a suite of programmatic buying capabilities.

On June 14, OB launched Onyx, a new branding platform aimed at enhancing the business impact of awareness and consideration campaigns. Onyx operates exclusively within dedicated, in-article environments across Outbrain’s premium publisher partners.

David Kostman, OB’s Co-CEO, said, “Onyx is part of our long-term strategy to become a full-funnel marketing partner, significantly growing our business with enterprise brands and agencies.

On April 17, OB repurchased $118 million in aggregate principal amount of 2.95% Convertible Senior Notes due 2026 through a privately negotiated repurchase agreement with Baupost Group Securities, L.L.C. The company paid around $96 million in cash, representing a 19% discount to par value.

Given the strength of OB’s balance sheet and financial discipline, repurchasing 50% of the Convertible Notes at a considerable discount is a positive capital allocation decision for its shareholders.

During the second quarter that ended June 30, 2023, OB reported an income before provision for income taxes of $15.35 million, compared to a loss of $8.66 million in the prior-year quarter. In addition, the company’s net income was $11.28 million or $0.21 per common share, compared to a net loss of $10.32 million or $0.18 a year ago, respectively.

Analysts expect OB’s revenue for the third quarter (ending September 2023) to increase 6.6% year-over-year to $244.07 million. Likewise, the consensus revenue estimate of $1.09 billion for the next fiscal year (ending December 2024) reflects a 9.6% year-over-year improvement. The company surpassed the consensus revenue estimates in three of the trailing four quarters.

Shares of OB have gained 25.2% over the past six months and 43.7% year-to-date to close the last trading session at $5.56.

OB’s POWR Ratings reflect this promising outlook. The stock has a B grade for Value and Sentiment. It is ranked #26 out 0f 76 stocks in the same industry.

In addition to the POWR Ratings I’ve just highlighted, you can see OB’s ratings for Quality, Momentum, Value, and Growth here.

What To Do Next?

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UBER shares were trading at $44.35 per share on Friday morning, down $0.33 (-0.74%). Year-to-date, UBER has gained 79.34%, versus a 15.56% 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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