Despite confronting significant macroeconomic hurdles, the technology sector exhibited unwavering resilience. The emergence of advanced technologies and increased global technology expenditure could potentially offer a sustained uplift to the technology services industry.

Given the industry’s impressive prospects, in this piece, we assessed four technology service stocks to determine how they can help an investor capitalize on the industry's tailwinds. 

Xerox Holdings Corporation (XRX) and Information Services Group, Inc. (III) appear to be solid buy candidates now, given their strong fundamentals. On the other hand, I think Thoughtworks Holding, Inc. (TWKS) should be kept on one's watchlist for better entry opportunities, while Lyft, Inc. (LYFT) should be best avoided, given its weak fundamentals.

Before discussing the fundamentals of the four stocks, let’s see why the technology sector is primed for expansion.

Technological advancements not only streamline our everyday lives but also simplify access to services that were once costly or seemed unattainable. As a result, every sector, from healthcare to automotive to real estate, is experiencing a sweeping digital revolution that signals potential growth.

According to Gartner, Inc.’s (IT) latest forecast, worldwide IT spending is expected to reach $5 trillion in 2024, an increase of 6.8% from 2023. IT services are expected to be the primary contributor to IT spending for the first time, forecasted to grow by 8.7% in 2024 to reach $1.50 trillion. This significant growth can be attributed largely to enterprises making significant investments in organizational optimization and efficiency projects.

In addition, several industries are leveraging advanced technologies such as Artificial Intelligence (AI), The Internet of Things (IoT), Augmented and Virtual Reality (AR & VR), 5G, and machine learning. By adopting such innovative technologies, companies can engage customers, stimulate advancements, and elevate operational efficiency. Furthermore, the advent of Generative AI could bolster the tech services industry in the foreseeable future.

Meanwhile, many companies are undergoing substantial digital transformation initiatives. This trend appears to intensify as hybrid work models increasingly gain acceptance. In fact, the digital transformation market is anticipated to reach $4.62 trillion by 2030, growing at a 26.7% CAGR. Key factors propelling this upward trend include evolving customer expectations, refreshed business models, rigorous competition, enhanced operational efficiencies, and commitments toward environmental sustainability.

Investors recognize the potential in tech stocks, evidenced by the Technology Select Sector SPDR Fund’s (XLK) 47.6% past year return, which outpaced the broader S&P 500’s 20.2% gains.

With these favorable trends in mind, let's delve into the fundamentals of the four Technology – Services stock picks, beginning with the weakest from the investment point of view.

Stock #4: Lyft, Inc. (LYFT)

LYFT operates a peer-to-peer marketplace for on-demand ridesharing. The company operates multimodal transportation networks that offer riders personalized and on-demand access to various mobility options. 

LYFT’s trailing-12-month levered FCF margin of 0.14% is 97.6% lower than the industry average of 6.01%, while its trailing-12-month cash per share of $1.50 is 29.9% lower than the industry average of $2.14.

For the fiscal third quarter that ended September 30, 2023, LYFT’s revenue and loss from operations stood at $1.16 billion and $40.18 million, respectively. Moreover, its adjusted EBITDA stood at $92 million.

For the same quarter, its adjusted net income and net loss per share stood at $92.30 million and $0.03, respectively. As of September 30, 2023, LYFT’s total current assets stood at $2.50 billion, compared to $2.58 billion as of December 31, 2022.

Street expects LYFT’s revenue and EPS in the fiscal first quarter ending March 2024 to be $1.11 billion and $0.08, respectively.

The stock has declined 18% over the past year to close the last trading session at $12.60. Over the past month, it has declined 17.8%.

LYFT’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall D rating, equating to Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has a D grade for Momentum, Stability, and Sentiment. Within the Technology - Services industry, it is ranked #60 out of 75 stocks.

To see additional POWR Ratings for Growth, Value, and Quality for LYFT, click here.

Stock #3: Thoughtworks Holding, Inc. (TWKS)

TWKS provides technology consultancy services in North America, the Asia Pacific, Europe, and Latin America. It provides strategy, design and software engineering and technology disruptors across the globe to thrive as modern digital businesses.

On November 28, 2023, TWKS expanded its business to Switzerland. This was part of TWKS’ plan to scale up in key industry verticals in the European region. TWKS’ clients based in Switzerland would gain a digital service provider with both local operations and global expertise from all industries, including financial services, life sciences and manufacturing.

Opening an office in Zurich is a crucial step to growing TWKS’ market presence in Europe and providing even better service to its clients in Switzerland. This should bode well for the company in the future.

TWKS’ trailing-12-month asset turnover ratio of 0.86x is 39.3% higher than the industry average of 0.62x. However, its trailing-12-month CAPEX/Sales of 0.94% is 60.5% lower than the industry average of 2.39%.

For the fiscal third quarter that ended September 30, 2023, TWKS’ revenues and adjusted gross profit stood at $280.16 million and $104.89 million, respectively. Moreover, its adjusted EBITDA stood at $33.56 million.

For the same quarter, its adjusted net income and adjusted EPS stood at $11.53 million and $0.04, respectively. As of September 30, 2023, TWKS’ total current liabilities stood at $147.59 million, compared to $179.57 million as of December 31, 2022.

Street expects TWKS’ revenue for the fiscal first quarter ending March 2024 to decline 12.8% year-over-year to $267.81 million, while EPS is projected to increase 64.8% year-over-year to $0.05. The company surpassed consensus revenue estimates in three of the trailing four quarters.

The stock has declined 54.7% over the past year but gained 30.2% over the past three months to close the last trading session at $4.92.

TWKS’ fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system.

TWKS has a C grade for Growth, Value, Momentum, Stability, and Sentiment. Within the same industry, it is ranked #55.

Beyond what we’ve stated above, we have also rated the stock for Quality. Get all ratings of TWKS here.

Stock #2: Xerox Holdings Corporation (XRX)

XRX designs, develops, and sells document management systems and solutions. The company’s segments include Workplace Solutions; Entry and Mid-Range; Production Solutions; Xerox Services; and FITTLE.

On January 3, XRX announced a new operating model and organizational structure to further the company’s Reinvention. The shift to a business unit operating model is a continuation of XRX’s client-focused, balanced execution priorities and is designed to accelerate product and services, go-to-market, and corporate functions’ operating efficiencies across all geographies it serves.

On October 19, 2023, XRX’s board of directors declared a quarterly dividend of $0.25 per share on the company’s common stock, payable to shareholders on January 31, 2024. Its annualized dividend rate of $1 per share translates to a dividend yield of 5.25% on the current share price. Its four-year average yield is 5.86%. The company has a record of paying dividends for 15 consecutive years.

XRX’s trailing-12-month cash from operations of $686 million is 767.6% higher than the industry average of $79.07 million, while its trailing-12-month cash per share of $4.21 is 118.1% higher than the industry average of $1.93.

For the fiscal fourth quarter that ended December 31, 2023, XRX’s total revenues and adjusted operating income stood at $1.77 billion and $96 million, respectively. Moreover, its free cash flow increased 125.6% year-over-year to $379 million.

For the same quarter, its adjusted net income and adjusted EPS stood at $56 million and $0.43, respectively. As of December 31, 2023, XRX’s total current liabilities came at $2.79 billion, compared to $3.33 billion as of December 31, 2022.

Street expects XRX’s EPS for the fiscal year of 2024 (ending December 2024) to increase 22.5% year-over-year to $2.23. Its revenue is expected to be $6.60 billion for the same year. The company surpassed consensus EPS estimates in three of the trailing four quarters, which is impressive.

The stock has gained 55.6% over the past three months to close the last trading session at $19.05. Over the past nine months, it has gained 23.9%.

XRX’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

XRX has a B grade for Value, Momentum, and Quality. Within the same industry, it is ranked #22.

Beyond what we’ve stated above, we have also rated the stock for Growth, Stability, and Sentiment. Get all ratings of XRX here.

Stock #1: Information Services Group, Inc. (III)

III offers digital transformation services, including automation, cloud, and data analytics; sourcing advisory; managed governance and risk; network carrier; technology strategy and operations design; change management; and market intelligence and technology research and analysis services.

On January 4, III launched a new suite of advisory services to help clients navigate the complexities and implications of adopting artificial intelligence at scale. III’s Applied AI Advisory services help clients assess their AI readiness, identify practical use cases, experiment with proofs of concept, create an AI strategy, and establish a business case for investment.

The company pays an annual dividend of $0.18 per share, which translates to a dividend yield of 3.85% on the current share price. Its four-year average yield is 1.53%.

III’s trailing-12-month asset turnover ratio of 1.31x is 111% higher than the industry average of 0.62x. Its trailing-12-month EBIT and net income margins of 8.56% and 4.45% are 77.6% and 116.9% higher than the industry averages of 4.82% and 2.05%, respectively.

For the fiscal third quarter that ended September 30, 2023, III’s revenues increased 4.3% year-over-year to $71.77 million, while operating income stood at $6.22 million. Moreover, its adjusted EBITDA stood at $10.65 million.

For the same quarter, its adjusted net income and adjusted net income per share stood at $5.70 million and $0.11, respectively. As of September 30, 2023, its total current assets came at $118.42 million, compared to $115.48 million as of December 31, 2022.

Street expects III’s revenue and EPS for the fiscal year of 2024 (ending December 2024) to increase 3.4% and 9.9% year-over-year to $303.93 million and $0.47, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters and consensus revenue estimates in three of the trailing four quarters.

The stock has gained 13.4% over the past three months to close the last trading session at $4.67.

III’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.

III has a B grade for Value, Stability, and Sentiment. It is ranked #21 within the same industry.

Click here for the additional POWR Ratings for III (Growth, Momentum, and Quality).

What To Do Next?

43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.

2024 Stock Market Outlook >

LYFT shares were trading at $12.55 per share on Monday morning, down $0.05 (-0.40%). Year-to-date, LYFT has declined -16.28%, versus a 2.60% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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