Zoom Video Communications (ZM) and Science Applications International (SAIC): Buy, Hold or Sell?

In this article, I have evaluated two leading tech stocks, Zoom Video Communications, Inc. (ZM) and Science Applications International Corporation (SAIC), to determine which of them is a Buy, Hold, or Sell. Following the fundamental analysis, I believe both stocks could be solid buys for reasons discussed below.

With widespread digitization and ever-growing input of data, software services are on the rise. As a result, the IT services market is projected to expand at a CAGR of 8.4%, reaching $1.67 trillion by 2028.

Moreover, driven by the rapid adoption of emerging technologies such as artificial intelligence (AI), the Internet of Things (IoT), and machine learning (ML), the reliance on technology has steadily increased in recent years.

In addition, rising cloud service adoption in developing countries, increasing smart cities, and surging penetration of e-commerce are fuelling the cloud services industry. The global cloud computing industry was valued at $483.98 billion in 2022 and is expected to grow at a CAGR of 14.1% from 2023 to 2030.

Furthermore, with the introduction of generative AI, which enhances customer and client experiences, bolsters cybersecurity measures, and optimizes spending on public cloud resources, the tech service industry’s future looks bright.

Given the industry tailwinds, it's time to examine the fundamentals of the top two stocks in the Technology – Services industry, starting with the second in line.

Stock #2: Science Applications International Corporation (SAIC)

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

SAIC’s 19.51% trailing-12-month levered FCF margin of 9.02% is 65.2% higher than the 5.46% industry average. Its 1.36x trailing-12-month asset turnover ratio is 67.3% higher than the industry average of 0.81x.

On September 11, 2023, SAIC announced that it had been awarded a $574 million contract with the United States Space Force (USSF) to support its Ground Based Radar Maintenance and Sustainment Services (GMASS).

On August 22, SAIC announced that it had signed a Strategic Collaboration Agreement (SCA) with Amazon Web Services (AWS) to provide industry-leading services, resources, and expertise to help government customers better utilize SAIC’s secure cloud solutions in AWS GovCloud.

SAIC pays an annual dividend of $1.48, which translates to a yield of 1.37% on the current market price, compared to a four-year average yield of 1.64%.

In the fiscal second quarter ended August 4, 2023, SAIC’s adjusted operating income increased 7% year-over-year to $134 million. Its adjusted EBITDA increased 5% year-over-year to $174 million. Also, adjusted EPS rose 17% year-over-year to $2.05, and free cash flow grew 95% from the previous-year quarter to $144 million.

Street expects SAIC’s EPS and revenue to amount to $1.70 and $1.79 billion in the current quarter ending October 2023. It surpassed the consensus EPS and revenue estimates in each of the four trailing quarters, which is impressive.

Over the past year, the stock has gained 14.8% to close the last trading session at $108.11.

SAIC’s POWR Ratings reflect a promising outlook. It has an overall rating of B, translating 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 also has a B grade for Value and Momentum. It is ranked #12 in the 77-stock Technology – Services industry.

Click here to see SAIC’s rating for Growth, Stability, Quality, and Sentiment.

Stock #1: Zoom Video Communications, Inc. (ZM)

ZM provides unified communications platforms in the Americas, the Asia Pacific, Europe, the Middle East, and Africa.

ZM’s trailing 12-month levered FCF margin of 34.48% is 378.6% higher than the industry average of 7.20%. Moreover, the stock’s trailing 12-month net income margin of 3.17% is 56.1% higher than the 2.03% industry average.

On September 5, ZM announced the launch of its generative AI digital assistant, Zoom AI Companion (formerly Zoom IQ), available at no extra cost to customers using paid Zoom services.

On June 27, ZM introduced the Intelligent Director for Zoom Rooms, an award-winning solution for hybrid meetings. This technology utilizes AI and multiple cameras to provide optimal angles and images of participants in Zoom Rooms, ensuring remote attendees have a clear view, even in large meeting spaces.

During the fiscal second quarter that ended July 31, 2023, ZM’s total revenues increased 3.6% year-over-year to $1.14 billion. Its non-GAAP income from operations grew 17.3% from the year-ago quarter to $461.70 million.

In addition, the company’s non-GAAP net income and non-GAAP net income per share stood at $409.60 million and $1.34, compared to $323.50 million and $1.05 in the previous-year quarter, respectively.

ZM’s EPS is expected to increase marginally year-over-year to $1.07 for the fiscal third quarter ending October 2023. The company’s revenue for the current quarter is expected to grow 1.6% year-over-year to $1.12 billion. Also, the company has surpassed the consensus EPS estimates in each of the trailing four quarters.

The stock has soared 4.6% over the past month to close the last trading session at $69.34.

ZM’s robust fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

ZM has a B grade for Growth, Value, and Quality. It is ranked #8 in the same industry.

Access ZM’s ratings for Momentum, Stability, and Sentiment here.

What To Do Next?

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ZM shares were trading at $69.53 per share on Wednesday morning, up $0.19 (+0.27%). Year-to-date, ZM has gained 2.64%, versus a 17.30% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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