As the global information technology revolution heats up and more and more companies embrace Cloud computing, AI, digital marketing, automation and web technologies for their business, the information technology services sector stands to benefit in the years to come. Bloomberg Intelligence in a survey of 3,038 executives across different industries found that businesses, small and large, are expected to keep increasing their IT spend as they plan to stay ahead in the technology race. A whopping 61% of respondents in the survey said that they plan to increase their tech spending.
One of the biggest areas where companies plan to increase their spending is cybersecurity as companies resolve to protect their online assets and customer data. Because of this trend, as we will see later in the article, several small and big IT services companies have started offering cybersecurity services.
Another important area where companies are planning to pour their dollars is Cloud computing, where Amazon and Microsoft will continue to take the lead, according to the survey. But in addition to these Cloud giants, several IT services companies thrive because of the Cloud industry as they help businesses migrate from on-premise infrastructure to Cloud systems and maintain their operations. Some notable companies in this domain are ServiceNow, Oracle and DXC.
While companies are poised to increase IT spending, the sector wasn’t immune to the inflation surge and global economic crisis that wreaked havoc on the markets in 2022 and continue to hammer small and large companies in 2023. Gartner earlier this year estimated that worldwide IT spending will reach $4.5 trillion in 2023. This shows a 2.4% growth from the previous year, but was down from Gartner’s previous growth projections of 5.1%.
Spending on business software and IT was expected to account for a whopping $2.16 trillion in projected IT spending in 2023, according to Gartner. This shows that importance of IT services. Despite difficult odds companies need IT services to scale and expand their operations and even to cut costs.
Consulting is another area that is thriving withing the IT services industry. The Gartner report says within IT services, spending on consulting services was expected to reach $264 billion this year, up 6.7% from 2022.
Gartner said that inflation was eroding the spending capabilities of companies and causing layoffs at several B2C companies.
The Gartner report shows that companies are expected to spend more on software and IT and reduce spend dollars when it comes to devices and hardware. The software and IT services segments are expected to grow 9.3% and 5.5% in 2023, respectively, according to Gartner.
Given all the hullaballoo around AI, IT services companies are not silent about this new trend. Accenture’s CEO Julie Sweet in the company’s earnings call with analysts in March talked about Accenture’s AI initiatives:
“We are continuing to use AI in the way we run our business, for example, in how we look at our accounts payable and receivables and finding ways where we can optimize to have better efficiencies there. We are using it today in the way we are delivering our consulting services as well and definitely very much so in how we look at sales and being able to predict based on lots of factors. Should we be running after the sale or not, or can we show the data that these …. is not the right kind of sale, we are not the right fit. So, we have increasingly been using AI, both in how we deliver services as well as in how we run ourselves.
Photo by Science in HD on UnsplashMethodology We scanned Insider Monkey's database of 943 hedge funds and picked 12 IT services stocks with the highest number of hedge fund investors.
Best Information Technology Services Stocks to Buy
IT and consulting services company Wipro Limited (NYSE:WIT) ranks 12th in our list of the best information technology services stocks to buy now. In April Wipro Limited (NYSE:WIT) posted results for the fiscal fourth quarter. GAAP EPS in the period came in at $0.07, in-line with estimates. Gross revenue in the period jumped 11.2% year over year to reach $2.8 billion, missing estimates by $60 million. Wipro Limited (NYSE:WIT)’s IT Services segment’s revenue jumped 3.7% year over year to $2,823.0 million.
Indian IT services company Infosys Limited (NYSE:INFY) stock is under pressure after the company posted weak Q4 results. However, Infosys Limited (NYSE:INFY) is taking several measures to cut costs amid the changing macro backdrop. As of the end of the fourth quarter of 2022, 27 hedge funds were long Infosys Limited (NYSE:INFY), according to Insider Monkey’s database of 943 hedge funds. Ken Griffin’s Citadel Investment Group owns a $93 million stake in Infosys Limited (NYSE:INFY).
DXC Technology Company (NYSE:DXC) ranks 10th in our list of the best information technology services stocks to buy according to hedge funds. DXC Technology Company (NYSE:DXC) provides IT services and consulting in important domains like Cloud, security, applications, insurance software and more.
In March, DXC Technology Company (NYSE:DXC) disclosed that it ended talks with a financial sponsor on a potential takeover.
According to a report from Bloomberg in September last year, DXC Technology Company (NYSE:DXC) was approached by Baring Private Equity Asia.
Out of the 943 hedge funds tracked by Insider Monkey, 31 hedge funds had stakes in DXC Technology Company (NYSE:DXC) as of the end of the fourth quarter of 2022. The most notable hedge fund stakeholder of DXC Technology Company (NYSE:DXC) during this period was Larry Robbins’s Glenview Capital which owns a $257 million stake in the company.
Cognizant Technology Solutions Corp. (NASDAQ:CTSH) provides IT services across the entire spectrum of the industry, including Cloud, Business Process Automation (BPO), Internet of Things (IoT), AI, applications and more.
A total of 35 hedge funds tracked by Insider Monkey were bullish on Cognizant Technology Solutions Corp. (NASDAQ:CTSH) at the end of the fourth quarter of 2022. The total value of these hedge funds’ stakes was $2.2 billion. The most significant shareholder of Cognizant Technology Solutions Corp. (NASDAQ:CTSH) was Richard S. Pzena’s Pzena Investment Management which owns a $993 million stake in the company.
Hewlett Packard Enterprise Company (NYSE:HPE) offers IT services in Cloud computing, automation, security and data domains. During the company’s latest quarter’s earnings call, Hewlett Packard Enterprise Company (NYSE:HPE) management talked about its services business:
"Most importantly, we continue to make our as-a-Service business more valuable with a growing mix of higher-margin software and services recurring revenue. In Q1 2023, our mix of software and services increased another 150 basis points year-over-year to 65%, thanks to our cloud and SaaS offerings, particularly in edge and storage."
Answering a question, the company’s CEO Antonio Neri said:
"And by the way, let’s remind ourselves that one-third of our recurring revenues come from services, which is unique in our space. So we have a unique portfolio, which is incredibly relevant in the mega trends we see in the market."
7. International Business Machines Corp. (NYSE:IBM)
Number of Hedge Fund Holders: 43
International Business Machines Corp. (NYSE:IBM) is a giant in the IT services industry with its ITSM solutions and consulting. International Business Machines Corp. (NYSE:IBM) is currently in the spotlight after the company’s management revealed plans to pause hiring for roles that could be performed by AI. In April, International Business Machines Corp. (NYSE:IBM) declared a 0.6% increase to its quarterly dividend. The increased dividend is payable on June 10 to shareholders of record as of May 10.
Insider Monkey’s proprietary database of 943 hedge funds shows that 43 hedge funds had stakes in International Business Machines Corp. (NYSE:IBM). The biggest hedge fund stakeholder of International Business Machines Corp. (NYSE:IBM) was Phill Gross and Robert Atchinson’s Adage Capital Management which owns a $130 million stake in the company.
Diamond Hill Long-Short Fund made the following comment about International Business Machines Corporation (NYSE:IBM) in its Q4 2022 investor letter:
“New positions initiated in Q4 included shorts International Business Machines Corporation (NYSE:IBM), Acushnet Holdings (GOLF) and elf Beauty (ELF). Since diversified information technology company IBM’s 2019 acquisition of Red Hat, the company has aggressively pursued a hybrid cloud strategy. Though IBM and its new management team have made solid progress on this pivot, we believe the company still meaningfully lags the cloud hyperscalers and other cloud-native companies. Management has also laid out aggressive long-term targets for revenue growth and free cash flow, both of which we believe the company will struggle to achieve as it faces intense competition in its hybrid cloud business and structural headwinds in the company’s legacy businesses.”
Dell Technologies Inc. (NYSE:DELL) is a notable player operating in the IT services industry. Dell Technologies Inc. (NYSE:DELL) offers product-level technical support and services, managed IT services, multicloud solutions and more.
Last month Dell Technologies Inc. (NYSE:DELL) jumped after Evercore ISI said a recent rule change by S&P could pave the way for Dell’s inclusion in the index. Evercore’s analyst Amit Daryanani said the inclusion of Dell Technologies Inc. (NYSE:DELL) in the S&P index will “broaden the scope for potential investors” of the company. The analyst has an Outperform rating on the stock and he upped his price target to $50 from $46.
A total of 46 hedge funds were bullish on Dell Technologies Inc. (NYSE:DELL) at the end of 2022, according to Insider Monkey’s proprietary database of hedge funds.
