Given the ever-growing demand for tech services outsourcing, learning services outsourcing, and recruitment process outsourcing (RPO) across various end-use industries, the outsourcing sector’s outlook looks bright. Further, the rapid adoption of innovative technologies has stimulated the market prospects and opened new opportunities for service providers.

Considering the industry’s bright prospects, fundamentally strong outsourcing stocks Cognizant Technology Solutions Corporation (CTSH), Stride Inc. (LRN), and Barrett Business Services, Inc. (BBSI) could be ideal buys for potential gains.

2024 is said to be a transformative year for the outsourcing industry, driven by various factors, including increased reliance on technology, emphasis on agility and resilience in business operations, improved customer experiences, specialized niche services, and an enhanced focus on data security and compliance.

Outsourcing for technology services continues to be a growing trend as businesses increasingly seek to leverage external expertise, lower costs, and focus on core competencies. Moreover, advances in technology, such as cloud computing, AI, and automation, have made it much easier and more cost-effective to outsource tech services.

According to a report by Mordor Intelligence, the IT outsourcing market size is estimated to value at $617.69 billion in 2024 and is expected to grow at a CAGR of 5.5% during the forecast period (2024-2029), resulting in a market volume of $806.53 billion by 2029.

Technological advances have further transformed the education landscape, making it more efficient to outsource several educational services. More businesses are partnering with strategic players like corporate training providers, educational institutions, or technology suppliers to facilitate training among their employees in response to evolving needs.

The global learning services outsourcing is projected to reach $30.70 billion by 2027, growing at a CAGR of 8.4%. The market’s growth is attributed to the growing demand for cost-effective, quality, and customized learning services by educational institutions, the corporate sector, and other organizations.

The rising demand for an effective recruiting process across end-use sectors like healthcare, IT and telecom, education, and more and lower overhead expenses are primary drivers of the recruitment process outsourcing (RPO) industry. IMARC Group expects the global RPO market to hit $32.50 billion by 2032, exhibiting a CAGR of 16.3% from 2024 to 2032.

RPO service providers are increasingly implementing advanced technologies like AI and machine learning for self-scheduling interviews and automated screening of CVs. Also, they channel better candidate engagement through chatbots and other assessment tools.

Given these favorable industry trends, investing in quality outsourcing stocks CTSH, LRN, and BBSI could be wise for solid returns.

Let’s discuss the fundamentals of these stocks in detail:

Cognizant Technology Solutions Corporation (CTSH)

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

On February 1, 2024, CTSH announced a generative AI (gen AI) - enabled platform, Cognizant Flowsource™, aimed to fuel the next generation of software engineering for enterprises. The platform offers an integrated and holistic approach to tracking and expediting every stage of the software delivery lifecycle.

It also incorporates digital assets and tools to assist cross-functional engineering teams in delivering high-quality code faster, with more control and transparency. Through Cognizant Flowsource, business and engineering stakeholders can have better transparency into an organization’s software engineering ecosystem along with better problem-solving and impact.

On January 30, CTSH announced its collaboration with the Canberra Institute of Technology Student Association (CITSA) for systems integration and payment support for Amazon’s Just Walk Out technology in the Café Yala Plus Student Association store. The technology will enable students to have nearly 24/7 access at the Student Association store.

“By automating the checkout process, the Student Association can offer almost 24-hour access to store resources that students need to stay focused on their studies. This is a testament to Cognizant's strong focus on deploying technology that is fit for purpose and designed to improve the customer experience,” said Rob Marchiori, head of Australia at Cognizant.

Also, on January 25, CTSH expanded an agreement with Takeda (TAK), a global biopharmaceutical company, to support its digital transformation strategy by reinforcing and supporting its technology efforts. The companies will embark upon a new project to attract additional technology talent, and CTSH will support Takeda’s ambition to modernize technology capabilities.

For the fourth quarter that ended on December 31, 2023, CTSH reported revenue of $4.76 billion, of which revenue from the Communications, Media and Technology segment increased 2.6% year-over-year to $804 million. Its adjusted income from operations grew 11.4% from the year-ago value to $764 million.

In addition, the company’s net income and adjusted earnings per share came in at $558 million and $1.18, up 7.1% and 16.8% from the prior year’s quarter. Its free cash flow of $659 million indicates an increase of 7.7% year-over-year.

As per its financial 2024 guidance, Cognizant expects its revenue to range between $4.68 billion and $4.76 billion for the first quarter. Its full-year revenue is expected to be $19.0 -  $19.8 billion, and adjusted EPS is expected to be in the range of $4.50 to $4.68.

For the fiscal year ending December 2024, analysts expect CTSH’s revenue to increase marginally year-over-year to $19.51 billion, and its EPS for the current year is expected to grow 1.2% year-over-year to $4.61. Further, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.

CTSH’s stock has gained 11.6% over the past six months and 18.7% over the past year to close the last trading session at $76.74.

CTSH’s bright prospects are reflected in its POWR Ratings. 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, each weighted to an optimal degree.

The stock has a B grade for Quality. Within the A-rated Outsourcing - Tech Services industry, CTSH is ranked #2 out of 9 stocks.

Click here to access additional ratings of CTSH for Value, Sentiment, Growth, Momentum, and Stability.

Stride Inc. (LRN)

LRN is a technology-based education service company that provides proprietary and third-party online curriculum, software systems, and educational services to facilitate individualized learning for students primarily in kindergarten through 12th grade (K-12) internationally.

On February 7, 2024, LRN announced that it had been selected as a qualified, approved vendor for the Arkansas High-Impact Tutoring Grant Program. The program, launched by the Arkansas Division of Elementary and Secondary Education (DESE), aims to improve academic outcomes for students across the state through high-impact tutoring.

“Stride Tutoring is dedicated to empowering students and helping them achieve their full potential, especially during these challenging times. We look forward to collaborating with Arkansas schools and districts to deliver impactful tutoring experiences that drive academic success,” said Jennifer Moore, General Manager at Stride Tutoring.

On the same day, MedCerts, a LRN company and The University of the Potomac announced a strategic partnership that underscores their dedication to providing cutting-edge education and meeting the dynamic demands of today’s industries. This collaboration marks a significant milestone, with MedCerts' specialized expertise enhancing UOTP’s academic programs.

The partnership reflects the companies’ commitment to offer students more than just theoretical knowledge. With this, the UOTP and MedCerts are pioneering innovative educational solutions that bridge the gap between academia and industry needs together.

In the fiscal 2024 second quarter that ended on December 31, 2023, LRN’s revenues increased 10.1% year-over-year to $504.87 million. Its adjusted operating income grew 24.3% from the year-ago value to $94.87 million. Its net income was $66.84 million and $1.54 per share, up 31.8% and 29.4% from the prior year’s quarter, respectively.

Also, the company’s adjusted EBITDA increased 17.8% year-over-year to $118.35 million. Its total assets as of December 31, 2023, were $1.78 billion, compared to total assets of $1.76 billion as of June 30, 2023.

The company raised its revenue and adjusted operating forecast for the full year 2024. It now expects the revenue to be in the range of $1.99 billion to $2.04 billion, and adjusted operating income is expected to be between $265 million and $285 million.

Street expects LRN’s revenue and EPS for the third quarter (ending March 2024) to increase 8% and 13.3% year-over-year to $507.89 million and $1.47, respectively. Moreover, the company topped the consensus revenue and EPS estimates in all four trailing quarters, which is remarkable.

LRN’s stock has surged  36.2% over the past six months and 27.8% over the past year to close the last trading session at $55.38.

LRN’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

LRN has a B grade for Value. It is ranked #6 out of 21 stocks in the A-rated Outsourcing - Education Services industry.

In addition to the POWR Ratings we’ve stated above, we also have LRN ratings for Growth, Momentum, Sentiment, Stability, and Quality. Get all LRN ratings here.

Barrett Business Services, Inc. (BBSI)

BBSI offers business management solutions for small and mid-sized companies. It develops a management platform that integrates a knowledge-based approach from the management consulting industry with tools from the human resource outsourcing industry.

During the third quarter of 2023, BBSI’s board of directors declared its regular quarterly cash dividend of $0.30 per share. The cash dividend was paid on December 1, 2023, to all stockholders of record as of November 17, 2023.

BBSI pays an annual dividend of $1.20, which translates to a yield of 1.06% at the current share price. Its four-year average dividend yield is 1.65%. Moreover, the company’s dividend payouts have increased at a CAGR of 3.7% over the past five years.

BBSI further continued its stock repurchase program established in July 2023, where it repurchased 115,400 shares in the third quarter at an average price of $94.60. As of September 30, 2023, approximately $64.1 million remained available under the repurchase program.

In terms of forward Price/Sales, BBSI is trading at 0.70x, 52.1% lower than the industry average of 1.46x. Likewise, the stock’s forward EV/EBIT multiple of 10.93 is 32.6% lower than the industry average of 16.21. Also, its forward EV/Sales of 0.60x is 66.7% lower than the industry average of 1.79x.

BBSI reported total revenues of $273.33 million for the third quarter that ended September 30, 2023. Its revenue from professional employer services increased 2.8% year-over-year to $251.42 million. Its gross margin was $68.33 million, up 2.1% year-over-year. Its income before income tax grew 3.2% from the year-ago value to $24.67 million.

Also, the company’s net income came in at $18.22 million and $2.68 per share, up 4.5% and 9.4% from the prior year’s quarter, respectively. As of September 30, 2023, the company’s total assets totaled $690 million.

Analysts expect BBSI’s EPS to increase 15.9% in the fourth quarter (ended December 2023) to $1.90. For the same period, the company’s revenue is expected to grow 3.4% year-over-year to $281.20 million. Additionally, the company has topped the consensus EPS estimates in each of the trailing four quarters.

Over the past six months, the stock has surged 18.8% and 15.2% over the past year to close the last trading session at $113.01.

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

BBSI has an A grade for Sentiment. The stock also has a B grade for Value and Stability. It is ranked #3 among 18 stocks within the A-rated Outsourcing - Staffing Services industry.

To see other ratings of BBSI for Quality, Growth, and Momentum, click here.

What To Do Next?

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CTSH shares were unchanged in premarket trading Wednesday. Year-to-date, CTSH has gained 1.99%, versus a 4.51% 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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