Invest in These 3 Stocks That Lagged 1H23's Tech Rally
Tech stocks have made a remarkable comeback in the first half of 2023 after a massive sell-off in 2022 on recession concerns, inflationary pressure, increased oil prices and higher interest rates. With a year-to-date (YTD) rise of 30.5%, the tech-laden Nasdaq Composite has outperformed The Dow Jones Industrial Average and the S&P 500 index’s increase of 1.8% and 14.6%, respectively.
Technology stocks have more than 50% of weightage in the Nasdaq Composite index. Technology Select Sector SPDR XLK, the most important component of the broad market index, has returned 37.6% YTD.
What’s Driving the Tech Rally?
With persistent inflationary pressure and softening demand, the fears of recession have not subsided yet. However, technology companies have been focusing on cost-cutting measures to improve profitability and stay afloat amid these turbulent times. The strategies have boosted investors’ confidence, thereby boosting their share prices.
Furthermore, the success of OpenAI’s ChatGPT has demonstrated the AI technology’s potential to improve operations in almost every industry. Though AI has been around for years, the meteoric rise of OpenAI’s ChatGPT has captivated the world’s attention on the power of generative AI to augment human capability, suggesting that the AI boom may just get started.
Generative AI is a type of AI technology that can produce various types of content, including text, imagery, audio and synthetic data. The long-term growth prospect attached to this technology has led to a sharp rise in the share prices of AI-related technology and solutions providing mega-cap companies.
Moreover, the long-term growth prospect of the tech sector looks promising due to continued digital transformations. The accelerated deployment of 5G technology — the next-generation wireless revolution — is likely to spur growth. Apart from this, blockchain, the Internet of Things, autonomous vehicles, AR/VR and wearables offer significant growth opportunities.
Additionally, the latest forecast for worldwide IT spending by Gartner is an upside for tech stocks. Despite the ongoing macroeconomic and geopolitical challenges, the independent research firm forecasts worldwide IT spending to increase 5.5% year over year to $4.6 trillion in 2023.
Tech Giants Driving the Tech Rally
The tech rally has led the Nasdaq 100 and S&P 500 indexes to rise 37.5% and 14.6%, respectively, YTD and recoup much of their 2022 losses. However, only a very small number of tech companies are responsible for this rally. The Russel 2000, which is often considered as a performance demonstrator of small-cap stocks, has risen a mere 5.9% YTD, signifying that a lot of stocks have been left behind this year’s tech rally.
Therefore, investors should look for fundamentally strong technology stocks like — Nutanix NTNX, Paycom Software PAYC and Paylocity Holding PCTY — that have been left behind this year’s tech rally and ensure solid portfolio returns.
We ran the Zacks Stock Screener to identify the aforementioned tech stocks that have gained less than 5% YTD and have a favorable combination of a Growth Score of A or B and a Zacks Rank #1 (Strong Buy) or #2 (Buy).
The Growth Style Score condenses all the essential metrics from a company’s financial statements to get a true sense of the quality and sustainability of its growth. Additionally, per Zacks’ proprietary methodology, stocks with a combination of a Zacks Rank #1 or #2 and a Growth Score of A or B offer solid investment opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
The abovementioned tech stocks look promising based on their encouraging growth prospect, Zacks Rank, Growth Score and valuation multiple. Let’s discuss the aforementioned tech stocks in detail:
Nutanix provides the enterprise cloud operating system that combines server, storage, virtualization and networking software into one integrated solution. Nutanix’s solution can be delivered either as an appliance that is configured to order or as software only.
Nutanix is benefiting from the solid adoption of its hybrid cloud solutions and an expanding clientele. Moreover, the adoption rate of the company’s AHV hypervisor has been strong as customers continue to opt for it as a low-cost alternative to other vendor offerings. Further, a healthy pipeline of big deals is a tailwind. It is expected to benefit from the growth prospects of the hyper-converged infrastructure market over the long term. Its transition to software-only sales will boost its margins over the long run.
Currently, NTNX carries a Zacks Rank #2 and has a Growth Score of A. Though the stock has risen 4.8% YTD, it trades way lower than the 52-week high, which reflects its potential to go upward. The stock’s closing price of $27.30 on Jul 7 is 18.3% lower than the 52-week high of $33.73 attained on Dec 14, 2022.
Moreover, Nutanix currently trades at an attractive valuation multiple. The stock trades at a one-year forward price-to-sales multiple of 3.14X compared with its five-year average of 7.66X. It also trades at a discount to the Zacks IT Services industry’s one-year forward price-to-earnings multiple of 5.26X.
Nutanix Price and Consensus
Nutanix price-consensus-chart | Nutanix Quote
Paycom offers an end-to-end software-as-a-service (SaaS) HCM (human capital management) solution that minimizes data integrity issues across applications. Paycom’s SaaS-based solution reduces the time, risk and headcount related to installing and maintaining applications for on-premise products.
We are positive about Paycom’s long-term prospects as the company continues to invest in SaaS technology and mobile applications by acquiring SaaS-based businesses. We also believe that its cloud-based solution has greater demand across a wide section of verticals. Larger companies have greater and more complex HCM needs, and Paycom’s solution is evolving to serve them.
Paycom’s latest reported financial results for the first quarter of 2023 reflect continued growth despite disruptions caused by macroeconomic headwinds and geopolitical issues. Its revenues increased, mainly driven by new client additions and a continued focus on cross-selling to existing clients. Its differentiated employee strategy, measurement capabilities and comprehensive product offerings are helping it win new customers.
Despite the 4.6% YTD gain, PAYC stock trades way lower than the 52-week high. The stock’s closing price of $324.51 on Jul 7 is 19.4% lower than the 52-week high of $402.78 attained on Aug 15, 2022. Currently, PAYC carries a Zacks Rank #2 and has a Growth Score of A.
Moreover, the stock trades at a one-year forward price-to-earnings multiple of 38.06X compared with its five-year average of 138.61X. It also trades at a discount to the Zacks Internet Software industry’s one-year forward price-to-earnings multiple of 40.62X.
Paycom Software, Inc. Price and Consensus
Paycom Software, Inc. price-consensus-chart | Paycom Software, Inc. Quote
Paylocity, almost similar to Paycom, offers an end-to-end SaaS HCM solution to organizations in the United States that minimizes data-integrity issues across applications. The company, through its broad product portfolio, helps organizations make strategic human capital decisions and enhances their human resource, payroll and finance capabilities.
In the last few years, a significant portion of revenues has been generated from clients moving from traditional payroll service providers to the company’s SaaS-based services. We are positive about PCTY’s continued investments in SaaS technology and mobile applications.
Paylocity is benefiting from the growing adoption of its solutions among clients with less than 50 employees. Healthy momentum in the company’s core and upper end of the market is a tailwind.
The company’s third-quarter fiscal 2023 revenues and non-GAAP EPS surged 38% and 42.6%, respectively, on a year-over-year basis. The robust increase in revenues was mainly driven by better sales execution and sustained investments in technological upgrades and product innovation.
Additionally, the growth of cloud computing has supported the SaaS delivery model. Per the latest Fortune Business Insights report, the global SaaS market is expected to grow from $237.48 billion in 2022 to $908.21 billion by 2030, witnessing a CAGR of 18.7% during the 2022-2028 forecast period. With its SaaS-based applications, we think that Paylocity is well-positioned to lead the market.
PCTY stock has declined 3.6% YTD and trades way lower than the 52-week high. The stock’s closing price of $187.13 on Jul 7 is 32.4% lower than the 52-week high of $276.88 attained on Aug 5, 2022. Currently, PCTY carries a Zacks Rank #2 and has a Growth Score of B.
Moreover, the stock trades at a one-year forward price-to-earnings multiple of 35.32X compared with its five-year average of 247.39X. It also trades at a discount to the Zacks Internet Software industry’s one-year forward price-to-earnings multiple of 40.62X.
Paylocity Holding Corporation Price and Consensus
Paylocity Holding Corporation price-consensus-chart | Paylocity Holding Corporation Quote
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Technology Select Sector SPDR ETF (XLK): ETF Research Reports
Paycom Software, Inc. (PAYC) : Free Stock Analysis Report
Paylocity Holding Corporation (PCTY) : Free Stock Analysis Report
Nutanix (NTNX) : Free Stock Analysis Report
