Last year, tech stocks were under pressure due to the Fed's aggressive interest rate hikes. However, tech stocks have rebounded strongly this year due to easing inflation and the anticipation of a pause in interest rate hikes. Moreover, increased tech adoption in businesses and the rising global demand for tech services are expected to boost the prospects of the tech services industry.

To that end, it could be wise to buy fundamentally strong tech stocks Science Applications International Corporation (SAIC), Teradata Corporation (TDC), and Celestica Inc. (CLS).

Before delving further into the stock's fundamentals, let's discuss why the tech services industry is well-positioned for growth.

As enterprises invest more in digitizing their operations, the demand for tech-based services is expected to grow. Moreover, the growing adoption of advanced technologies like Virtual Reality (VR), Augmented Reality (AR), Artificial Intelligence (AI), generative AI, the Internet of Things (IoT), and Mixed Reality (MR) is driving the demand for tech services.

These emerging technologies are revolutionizing various industries and creating new opportunities for tech companies to provide innovative solutions and services, contributing to the overall growth of the tech services industry. According to Gartner, worldwide SaaS spending is projected to grow 17.9% to $197 billion this year.

The worldwide IT and business services revenue is projected to experience year-over-year growth of 5.7%, reaching $1.2 trillion in 2023.

Now, let’s take a closer look at the fundamentals of these stocks.

Science Applications International Corporation (SAIC)

SAIC provides technical, engineering, and enterprise information technology (IT) services primarily in the United States.

On June 7, 2023, SAIC introduced Trust ResilienceTM, a holistic approach for government agencies adopting Zero Trust architecture. It builds security into IT modernization, aligns with federal cybersecurity orders, and enhances cloud-based security. The Zero Trust Accelerator (ZTXL) is a core part, providing dynamic controls and analytics for improved system resilience.

On May 9, 2023, SAIC announced its encrypted query analytics and data retrieval platform EQADR, enabling secure and efficient data search and retrieval. The platform offers cross-domain capabilities and enhances data-driven decision-making. This marks SAIC's third data product launch in the past 12 months.

In terms of the trailing-12-month levered FCF margin, SAIC’s 9.24% is 73.2% higher than the 5.33% industry average. Likewise, its 19.51% trailing-12-month Return on Common Equity is 40.4% higher than the industry average of 13.89%. Furthermore, the stock’s 1.33x trailing-12-month asset turnover ratio is 67% higher than the industry average of 0.79x.

For the fiscal first quarter ended May 5, 2023, SAIC’s revenues rose 1.6% year-over-year to $2.03 billion. Its adjusted operating income increased 13.4% year-over-year to $152 million. Its net income rose 32.4% year-over-year to $98 million. Its adjusted EBITDA increased 9.2% year-over-year to $189 million. Also, EPS came in at $1.79, representing an increase of 38.8% year-over-year.

Street expects SAIC’s EPS and revenue for fiscal 2025 to increase 6.6% and 0.4% year-over-year to $7.63 and $7.23 billion, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past year, the stock has gained 29.1% to close the last trading session at $122.01.

SAIC’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.

It is ranked #6 out of 79 stocks in the Technology - Services industry. It has a B grade for Value, Stability, and Quality. Click here to see SAIC’s rating for Growth, Momentum, and Sentiment.

Teradata Corporation (TDC)

TDC provides a connected multi-cloud data platform for enterprise analytics. The company offers Teradata Vantage, a data platform that allows companies to leverage their data across an enterprise, as well as connects various sources of data to drive ecosystem simplification and support customers on their journey to the cloud through an integrated migration.

On July 25, 2023, TDC announced the acquisition of Stemma Technologies, a cloud-native data catalogue solution known for AI and machine learning use. The acquisition will enhance TDC’s analytics value and self-serve analytics in AI and ML analytics. Stemma's solution offers high-grade security and automated data intelligence with 20 built-in data connectors, strengthening TDC’s data fabric and Vantage platform.

On July 11, 2023, TDC will offer Teradata VantageCloud Lake on Microsoft Azure, providing customers with modern cloud-native architecture and robust analytics capabilities in ClearScape Analytics. The integration with Microsoft services like Azure ML enables easy deployment and management of AI/ML, including generative AI, meeting the growing demand for such capabilities in organizations.

In terms of the trailing-12-month EBITDA margin, TDC’s 13.46% is 49.3% higher than the 9.02% industry average. Likewise, its 21.44% trailing-12-month levered FCF margin is 207.2% higher than the industry average of 6.98%. Furthermore, the stock’s 61.07% trailing-12-month gross profit margin is 26.1% higher than the industry average of 48.45%.

TDC’s non-GAAP net income for the first quarter ended March 31, 2023, came in at $63 million. Its total revenues came in at $476 million. The company’s non-GAAP gross profit came in at $306 million. Its non-GAAP income from operations came in at $108 million.

Also, its non-GAAP EPS came in at $0.61. In addition, its public cloud ARR rose 86% year-over-year to $388 million.

Analysts expect TDC’s EPS and revenue for the quarter ended June 30, 2023, to increase 36.6% and 3.5% year-over-year to $0.45 and $444.88 million, respectively. It surpassed the Street EPS estimates in three of the four trailing quarters. Over the past nine months, the stock has gained 80.9% to close the last trading session at $55.42.

TDC’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It has an A grade for Quality and a B for Growth and Value. Within the same industry, it is ranked #7. To see the other ratings of TDC for Momentum, Stability, and Sentiment, click here.

Celestica Inc. (CLS)

CLS provides supply chain solutions in North America, Europe, and Asia. It operates through Advanced Technology Solutions, and Connectivity & Cloud Solutions segments.

In terms of the trailing-12-month EBIT margin, CLS’s 4.98% is 11.1% higher than the 4.48% industry average. Likewise, its 2.17% trailing-12-month net income margin is 2.3% higher than the industry average of 2.12%. Furthermore, its 1.46x trailing-12-month asset turnover ratio is 136.2% higher than the industry average of 0.62x.

CLS’s total revenue for the second quarter ended June 30, 2023, rose 12.9% year-over-year to $1.94 billion. The company’s adjusted gross profit increased 20.7% year-over-year to $187.30 million. Its adjusted net earnings increased 22.9% year-over-year to $66.60 million. Additionally, its adjusted EPS came in at $0.55, representing an increase of 25% year-over-year.

Its net cash provided by operating activities rose 49.8% year-over-year to $130.20 million.

For the quarter ending September 30, 2023, CLS’s EPS and revenue are expected to increase 15.4% and 3.7% year-over-year to $0.60 and $2 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 98.7% to close the last trading session at $20.88.

CLS’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

It has an A grade for Momentum and a B for Growth, Value, and Sentiment. It is ranked #4 in the Technology - Services industry. Click here to see CLS’s ratings for Stability and Quality.

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SAIC shares were trading at $122.82 per share on Thursday afternoon, up $0.81 (+0.66%). Year-to-date, SAIC has gained 11.85%, versus a 18.36% rise in the benchmark S&P 500 index during the same period.

Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.

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