The tech sector gained immense traction through the first half of this year due to slowing inflation and booming demand for advanced technologies across several industries. However, with the Federal Reserve persistent on its fiercest inflation fight in four decades, the tech landscape continues to remain under pressure.

In this context, I have discussed why investors should watch and wait for an entry point in Zillow Group, Inc. (Z), while fundamentally weak tech stock ContextLogic Inc. (WISH) could be best avoided.

In recent weeks, the Federal Reserve approved a much-anticipated interest rate hike taking the benchmark borrowing costs to their highest level in more than 22 years. The Fed lifted the interest rates by 25 basis points while leaving the door open to another hike in September.

However, with the rapid evolution of technology, organizations are investing in keeping up with the trends in this fast-changing environment. Given the surging demand for tech products and solutions and consistent breakthroughs, the industry is expected to generate substantial revenues in the long run.

The global IT services market is projected to grow from $3.32 trillion in 2022 to $3.61 trillion in 2023 at a CAGR of more than 8%. Further, the market is expected to reach $4.91 trillion in 2027, exhibiting a CAGR of 8%.

The rising penetration of e-commerce, the increasing development of smart cities, the emergence of start-ups, and the rising adoption of IoT are the key drivers of the IT services market growth.

Moreover, Internet consumption keeps growing as more and more people buy smartphones and spend time online. As of January 2023, the number of online users across the United States was 311.3 million, while the nation’s internet penetration rate stood at 91.8% of the total population.

Given this backdrop, investors could keep an eye on fundamentally sound tech stock Z, while WISH might be best avoided due to weak fundamentals and bleak growth prospects.

Stock to Watch:

Zillow Group, Inc. (Z)

Z owns and operates a portfolio of real estate brands on mobile applications and Websites in the United States. The company operates through Internet, Media & Technology (IMT); Mortgages; and Homes segments.

Recently, Z and Redfin announced a partnership to help buyers and home builders connect to both platforms. The strategic alliance would allow home builders partnering with Z to have their listings and communities automatically syndicated to Redfin, expanding the visibility of these homes to potential buyers. Further, increasing its overall demand should bode well for the company.

On May 2, the company launched the Zillow ChatGPT plugin, which provides users with a new way to discover real estate listings. With the growing landscape of generative AI, this strategic introduction should help create a seamless home-buying experience for its customers.

Z’s revenue increased marginally year-over-year to $506 million in the second quarter that ended June 30, 2023. The company’s gross profit came in at $402 million, while its adjusted EBITDA amounted to $111 million, $40 million above the midpoint of the company’s outlook range, driven by higher-than-expected Residential revenue.

As of June 30, 2023, its cash and cash equivalents of $1.57 billion increased 6.8% from $1.47 billion for the period that ended December 31, 2022.

Street expects Z’s revenue to increase 7.2% year-over-year in the fourth quarter (ending December 2023) to $466.35 million, while its EPS is expected to be $0.20 in the same period. The company has an excellent surprise history, surpassing the EPS and revenue estimates in each of the trailing four quarters.

Over the past five years, its revenue has increased at a CAGR of 9.7%, while its total assets have grown at a marginal CAGR over the past three years.

The stock’s trailing-12-month CAPEX/Sales of 6.39% is 25.4% higher than the industry average of 5.10%. Likewise, its asset turnover ratio of 0.28x compares to the industry average of 0.13x.

Z’s shares have gained 68.7% over the past nine months and 70.7% year-to-date to close the last trading session at $55.

Z’s POWR Ratings reflect this promising outlook. It has a B grade for Growth. Within the Internet industry, it is ranked #36 among 58 stocks. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

To see Z’s ratings for Value, Momentum, Stability, Sentiment, and Quality, click here.

Stock to Avoid:

ContextLogic Inc. (WISH)

WISH is a mobile e-commerce company that operates the Wish platform, which connects users to merchants. It combines technology and data science capabilities and a discovery-based mobile shopping experience to create a visual, entertaining, and personalized user shopping experience.

On April 20, considering the market scenario, WISH approved a $50 million share repurchase program with an expectation to unlock long-term shareholder value and opportunity. In the same month, the company enacted a 1-for-30 reverse split of its Class A common stock, reducing the number of shares of outstanding common stock.

In the second quarter ended June 30, 2023, WISH’s revenue decreased 41.8% year-over-year to $78 million, while its gross profit fell 61.9% from the year-ago value to $16 million. Its loss from operations and net loss narrowed 8.8% and 11.1% year-over-year to $83 million and $80 million, respectively.

The company’s loss per share amounted to $3.38, down 16.5% year-over-year. However, its adjusted EBITDA loss came in at $66 million, widening 13.8% from the prior-year quarter.

Analysts expect WISH’s loss per share to increase 54.3% year-over-year to $2.42 for the fiscal third quarter (ending September 2023). Its revenue for the current quarter is expected to decline by 27.7% from the prior-year period to $90.43 million. Moreover, it failed to surpass the consensus EPS estimates in three of the trailing four quarters.

Its revenue has decreased at CAGRs of 33% and 12.3% over the past three and five years, respectively. Also, its total assets have fallen at a 16.4% CAGR over the past three years.

WISH’s trailing-12-month gross profit margin of 25.52% is 27.9% lower than the industry average of 35.41%. Likewise, its trailing-12-month net income margin, ROCE, and ROTA of negative 86.40%, 70.84%, and 59.60% compares to the industry averages of 4.28%, 10.32%, and 3.72%, respectively.

Over the past year, the stock has lost 83.8% to close the last trading session at $8.38.

WISH’s weak fundamentals are reflected in its POWR Ratings. It has an overall rating of D, equating to Sell in our proprietary rating system.

It has an F grade for Stability and a D for Momentum, Sentiment, and Quality. WISH is ranked #53 out of 58 stocks in the Internet industry. Click here to see other ratings of WISH for Growth and Value.

What To Do Next?

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Z shares were trading at $56.62 per share on Friday afternoon, up $1.62 (+2.95%). Year-to-date, Z has gained 75.78%, versus a 18.11% rise in the benchmark S&P 500 index during the same period.

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.

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