The growth prospects of the outsourcing industry look bright as companies continue to focus on their core competence, improve their operational efficiency, access to external expertise, and reduce costs. Therefore, it could be prudent to consider buying fundamentally strong outsourcing stocks QuantaSing Group (QSG), DHI Group (DHX), and ARC Document Solutions (ARC). Keep reading….
The outsourcing industry’s long-term growth prospects look promising as it enables companies to achieve several benefits ranging from cost savings, operational efficiencies, flexibility, scalability, improved focus on core business activities, etc. Additionally, the growing use of technology and the ability to tap into global talent resources will contribute to the further growth of the industry.
Amid this backdrop, investors could consider buying fundamentally strong outsourcing stocks QuantaSing Group Limited (QSG), DHI Group, Inc. (DHX), and ARC Document Solutions, Inc. (ARC).
Outsourcing is a popular business strategy that enables enterprises to focus on their core competencies by entrusting their non-core tasks to specialized service providers. Outsourcing services include IT, customer support, management, staffing, and education services.
Outsourcing allows companies to focus on critical business aspects, access to rare and specialized equipment and a vast talent pool, helps save money on innovation, improves productivity, provides a time zone advantage, reduces dependency, etc., thereby enabling them to gain a competitive edge by focusing on what they do best, helping them to achieve operational efficiency and reduce costs.
There is a rising demand for personalized learning and low-cost and scalable learning systems. Educators are outsourcing to improve learning and development, enhance efficiency, address skill shortages, and reduce costs. The global learning services outsourcing market is anticipated to grow at a CAGR of 5.6% between 2024 and 2031.
Meanwhile, enterprises are outsourcing the recruitment and staffing processes to meet their employment needs. The rising demand for effective recruiting and the trend of outsourcing recruitment to third-party providers is expected to drive growth in the Recruitment Process Outsourcing (RPO) market. The global RPO market is projected to expand at a CAGR of 16.1%, reaching $24.32 billion by 2030.
Moreover, organizations are contracting other businesses to run various business processes, including finance, payroll, compliance, etc. The business process outsourcing market is projected to reach $525.20 billion by 2030, growing at a CAGR of 9.1%.
With these favorable trends in mind, let’s delve deeper into the fundamentals of the featured outsourcing stocks.
QuantaSing Group Limited (QSG)
Headquartered in Beijing, the People’s Republic of China, QSG provides online learning services in China. The company offers online courses, including financial literacy, short-video production, personal well-being, electronic keyboard, and meditation courses. It also provides marketing and enterprise talent management services to enterprise customers. In addition, the company offers online and literacy courses to adult learners under various brands.
On September 18, 2023, QSG announced its acquisition of Kelly’s Education, an online language education platform headquartered in Hong Kong. This transaction marks QSG’s entry into the global online education market and the language learning sector. After the completion of the transaction, Kelly’s Education will become QSG’s wholly-owned subsidiary.
QSG’s Chairman and CEO Peng Li said, “We are excited to integrate Kelly’s Education and the new brand HKOE into our ecosystem. We congratulate Ken and his team for developing such a strong offering and look forward to our partnership. Their strong business model and seasoned team lays a solid foundation for our global market entry.”
“We plan to broaden our course offerings, including Chinese language learning, and diversify our revenue streams by appealing to a wider age group. We remain committed to fulfilling the ongoing demand from individuals seeking to improve their quality of life and overall well-being through our diverse course offerings,” he added.
In terms of forward non-GAAP P/E, QSG’s 10.01x is 36.6% lower than the 15.80x industry average. Its 2.06x forward EV/EBITDA is 79% lower than the 9.85x industry average. Likewise, its 2.84x forward EV/EBIT is 79.4% lower than the 13.81x industry average.
QSG’s revenues for the fiscal first quarter ended September 30, 2023, increased 31.8% year-over-year to RMB869.14 million ($120.89 million). Its gross profit rose 28.5% over the prior-year quarter to RMB750.94 million ($104.45 million). The company’s adjusted net income attributable to ordinary shareholders of QSG came in at RMB93.97 million ($13.07 million), compared to an adjusted net loss attributable to ordinary shareholders of QSG of RMB60.38 million ($8.40 million) in the prior-year quarter.
Also, its adjusted income per ordinary share came in at RMB0.54, compared to an adjusted net loss per share of RMB1.11 in the year-ago quarter.
Analysts expect QSG’s revenue for the quarter ended December 31, 2023, to increase 15.2% year-over-year to $130.48 million. Its EPS for fiscal 2025 is expected to increase 31% year-over-year to $0.21. The stock has gained 126.3% year-to-date to close the last trading session at $3.53.
QSG’s POWR Ratings reflect solid prospects. It has an overall rating of A, equating to a Strong 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 is ranked first out of 21 stocks in the A-rated Outsourcing – Education Services industry. It has an A grade for Value and Sentiment and a B for Growth and Quality. Click here to see the other ratings of QSG for Momentum and Stability.
DHI Group, Inc. (DHX)
DHX provides data, insights, and employment connections through specialized services for technology professionals and other select online communities. Its solutions include talent profiles, job postings, employer branding, and other services comprising virtual and live career events, sourcing services, and content and data services that provide tailored content to help professionals manage their careers and provide employers insight into recruitment strategies and trends.
In terms of forward EV/Sales, DHX’s 1.08x is 42.7% lower than the 1.87x industry average. Its 4.50x forward EV/EBITDA is 47.2% lower than the 8.52x industry average. Likewise, its 0.79x forward Price/Sales is 37.5% lower than the 1.26x industry average.
For the fiscal fourth quarter, which ended December 31, 2023, DHX’s revenue came in at $37.29 million. Its net cash flows from operating activities rose 3.7% year-over-year to $7.62 million. The company’s adjusted EBITDA increased 24.3% over the prior-year quarter to $10.06 million. In addition, its net income came in at $2.15 million. Also, its adjusted EPS came in at $0.04, representing an increase of 300% year-over-year.
For the fiscal year 2025, DHX’s EPS and revenue are expected to increase 18.2% and 4.4% year-over-year to $0.07 and $153.40 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past month, the stock has gained 10% to close the last trading session at $2.53.
DHX’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.
Within the A-rated Outsourcing – Staffing Services industry, it is ranked first out of 18 stocks. It has an A grade for Value and a B for Stability, Sentiment, and Quality. To see the other ratings of DHX for Growth and Momentum, click here.
ARC Document Solutions, Inc. (ARC)
ARC is a digital printing company that provides digital printing and document-related services. It provides managed print services, cloud-based document management software, and other digital hosting services. It also offers professional and software services to re-produce and distribute large-format and small-format documents, as well as specialized graphic color printing.
In terms of forward non-GAAP PEG, ARC’s 0.79x is 55.1% lower than the 1.76x industry average. Its 9.46x forward non-GAAP P/E is 50.3% lower than the 19.06x industry average. Likewise, its 0.41x forward Price/Sales is 72% lower than the 1.45x industry average.
ARC’s net sales for the third quarter ended September 30, 2023, stood at $71.06 million. Its adjusted EBITDA came in at $10.03 million. The company’s adjusted net income attributable to ARC amounted to $3.20 million. Also, its adjusted EPS to ARC stockholders came in at $0.07.
Street expects ARC’s EPS for the quarter ended December 31, 2023, to increase 16.7% year-over-year to $0.07. Its revenue for the quarter ending March 31, 2024, to increase 0.4% year-over-year to $69.20 million. Over the past three months, the stock has declined 7% to close the last trading session at $2.65.
ARC’s POWR Ratings reflect this positive outlook. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #2 out of 42 stocks in the B-rated Outsourcing – Business Services industry. It has an A grade for Value and a B for Stability, Sentiment, and Quality. Click here to see the other ratings of ARC for Growth and Momentum.
What To Do Next?
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QSG shares were unchanged in premarket trading Thursday. Year-to-date, QSG has gained 126.28%, versus a 4.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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