The tech industry looks well-positioned for solid growth driven by the demand for tech services across the global market. Amid this backdrop, it could be wise for investors to buy fundamentally strong tech stocks Cognizant Technology (CTSH) and Hackett Group (HCKT). However, fundamentally weak Affirm Holdings (AFRM) might be best avoided. Keep reading...

The tech industry is experiencing strong demand fueled by increased IT spending, the adoption of SaaS and cloud-based solutions, and the growing interest in software development outsourcing. However, challenges around supply chains, workforce, and potential economic slowdown is weighing on the industry.

As the industry shows solid growth potential, fundamentally strong tech stocks Cognizant Technology Solutions Corporation (CTSH) and The Hackett Group, Inc. (HCKT) might be solid buys. However, given its weak fundamentals, Affirm Holdings, Inc. (AFRM) might be best avoided.

Increased spending globally, coupled with the widespread adoption of software-as-a-service (SaaS) and expanded cloud-based offerings, has led to strong demand for IT services across the industry.

As a result, the IT services industry is poised for substantial growth, projected to register a robust CAGR of approximately 10.4% from 2022 to 2027.

Moreover, in line with digital transformation and the need for innovative solutions, there is a rising interest in software development outsourcing among organizations. This trend is driven by the demand for custom software development to meet specific business requirements.

Revenue in the segment of IT Outsourcing is expected to grow at a CAGR of 7.5%, resulting in a market volume of $208.50 billion by 2027.

However, despite this year's progress, the tech industry will likely continue to grapple with issues around supply chains, workforce, and innovation, exacerbated by considerable macroeconomic and global uncertainties. Moreover, a potential economic slowdown pose a significant headwind.

Stocks to Buy:

Cognizant Technology Solutions Corporation (CTSH)

CTSH is a professional services company that provides consulting, technology, and outsourcing services in North America, Europe, and internationally. It operates through four segments: Financial Services; Health Sciences; Products and Resources; and Communications, Media and Technology.

On May 15, 2023, CTSH announced a new, enterprise-wide platform, Cognizant Neuro AI, designed to provide enterprises with a comprehensive approach to accelerate the adoption of generative AI technology and harness its business value in a flexible, secure, scalable and responsible way.

CTSH’s forward EV/Sales of 1.59x is 42.8% lower than the industry average of 2.78x. Its forward P/S multiple of 1.64 is 39% lower than the industry average of 2.69.

In May 2023, the company declared a quarterly cash dividend of $0.29 per share, a 7% increase year-over-year, payable on May 30, 2023.

CTSH pays $1.16 annually as dividends. This translates to a yield of 1.84% at the current market price, compared to the 4-year average dividend yield of 1.38%.

During the fiscal first quarter that ended March 31, 2023, CTSH’s revenues came in at $ 4.81 billion. Its net income increased 3% year-over-year to $580 million, whereas its adjusted earnings per share increased 2.8% year-over-year to $1.11.

CTSH’s revenue is expected to be $4.84 billion during the fiscal second quarter ending March 2023. Its EPS is expected to be $1.00 for the same quarter. Additionally, it has topped consensus EPS estimates in three of the trailing four quarters, which is impressive.

The stock has gained 10% year-to-date to close the last trading session at $62.45.

CTSH’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

It has an A grade in Quality. The stock is ranked #3 out of 9 stocks in the A-rated Outsourcing - Tech Services industry.

Click here to see the POWR Ratings of CTSH (Growth, Value, Momentum, Stability, and Sentiment).

The Hackett Group, Inc. (HCKT)

HCKT operates as a strategic advisory and technology consulting firm worldwide. The company operates through three segments: Global Strategy & Business Transformation; Oracle Solutions; and SAP Solutions.

On April 13, 2023, HCKT announced that its Market Intelligence Service had launched a new research project to evaluate and rank finance and accounting outsourcing solutions providers.

On May 9, HCKT announced a quarterly dividend of $0.11, payable on July 7, 2023.

HCKT pays $0.44 annually as dividends. This translates to a yield of 2.27% at the current market price, compared to the 4-year average dividend yield of 2.19%.

HCKT’s forward EV/Sales of 1.95x is 29.7% lower than the industry average of 2.78x. Its forward P/S multiple of 1.80 is 32.9% lower than the industry average of 2.69.

HCKT’s total revenue came in at $71.23 million for the fiscal first quarter that ended March 31, 2023. The company’s total costs and operating expenses declined 3.7% year-over-year to $59.98 million. Its non-GAAP net income per common share came in at $0.37.

Street expects HCKT’s revenue to come in at $73.87 million in the fiscal second quarter (ending June 2023). Its EPS is expected to be $0.37 for the same quarter. Additionally, it has topped consensus EPS estimates in each of the trailing four quarters.

The stock gained 6% over the past month to close its last trading session at $19.34.

It’s no surprise that HCKT has an overall rating of B, which translates to a Buy in our POWR Ratings system.

HCKT also has a B grade for Quality. It is ranked first in the Outsourcing - Tech Services industry.

For additional ratings for HCKT for Growth, Value, Momentum, Sentiment, and Stability, Click here.

Stock to Sell:

Affirm Holdings, Inc. (AFRM)

AFRM operates a platform for digital and mobile-first commerce in the United States, Canada, and internationally. The company's platform includes point-of-sale payment solutions for consumers, merchant commerce solutions, and a consumer-focused app.

AFRM’s forward EV/Sales of 5.07x is 77% higher than the industry average of 2.87x. Its forward P/S multiple of 2.69 is 28.4% higher than the industry average of 2.09.

During the fiscal third quarter that ended March 31, 2023, AFRM’s merchant network revenue declined 1.7% year-over-year to $119.01 million. Net loss increased 276.2% year-over-year to $205.68 million, while its net loss per share attributable to common stockholders for Class A and Class B decreased 263.2% year-over-year to $0.69.

AFRM’s EPS is expected to decline 15.1% year-over-year to negative $0.74 in the fiscal first quarter ending June 2023. Its revenue is expected to be $407.51 million for the same quarter. Also, the stock has failed to surpass the revenue and EPS estimates in three of the trailing four quarters, which is disappointing.

The stock has plunged 49.8% over the past year to close the last trading session at $14.74.

AFRM’s grim prospects are reflected in its POWR Ratings. The stock has an overall F rating, which translates to a Strong Sell in our POWR Ratings system.

AFRM also has a D grade for Stability, Quality, Growth, and Sentiment. It is ranked #80 out of 82 stocks in Technology - Services industry.

To access the POWR Ratings of AFRM (Value and Momentum), click here.

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CTSH shares were trading at $62.47 per share on Wednesday morning, up $0.02 (+0.03%). Year-to-date, CTSH has gained 10.22%, versus a 9.34% rise in the benchmark S&P 500 index during the same period.

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About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.

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