The Zacks Computers – IT Services industry has been benefiting from the ongoing digitization process globally. Initiatives to diversify IT services have been boons for CoStar Group, Fair Isaac and Nutanix. Robust spending on cloud, Internet of Things (IoT), cyber security, data and analytics, artificial intelligence (AI), and automation is driving industry-wide growth. Solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been benefiting the prospects of the industry participants.
Nevertheless, the industry participants are suffering from the lingering effects of the pandemic, challenging macroeconomic conditions, including raging inflation that has induced sluggishness in IT spending, impacting the adoption of consultation and transaction processing solutions. Declining PC sales are major headwinds.
Industry Description
The Zacks Computers – IT Services industry comprises companies that provide consultancy, communications, IT management & operations, cloud-based web development platform, customer relationship management, professional information solutions, and outsourcing services. The industry participants cater to a wide array of end markets, including manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.
Industry participants are focusing on the cyber-security business, the cloud computing market, the Big Data business and automation to bolster prospects. Digital transformation is helping companies to gain market share.
What's Shaping the Future of the Computers - IT Services Industry?
Sluggish IT Spending to Mar Prospects: The lingering effects of COVID-19 is hurting industry prospects. Sluggish spending across small and medium businesses due to higher inflation and component costs has impacted the adoption of IT services, primarily consulting service applications, infrastructure management and transaction processing platforms.
The industry players are anticipated to bear the brunt of the slowdown in IT spending. Gartner projects IT spending to increase 5.1% in 2023, which is half of 10.2% growth witnessed in 2021. However, the figure is better than 0.8% estimated growth for 2022. Spending on IT services is expected to witness a 7.9% improvement, much better than 4.2% estimated growth for 2022 but lower than the 12.8% rise witnessed in 2021.
Digitization Wave is a Tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with the evolving IT services. The aim is to integrate synergies of emerging technologies, including cloud, IoT, AI and analytics. Increasing Internet penetration in emerging markets, particularly across the Asia Pacific, is another tailwind.
New Normal Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on an increasing number of remote workers in the wake of the coronavirus crisis-induced hybrid work environment. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, which will enable them to provide flexible and easily adaptable hybrid solutions. The coronavirus-triggered demand for remote working, digital healthcare and online-learning solutions has accelerated the adoption of digital transformation offerings among enterprises, which bodes well for the industry.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #85, which places it in the top 34% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are optimistic about this group’s earnings growth potential. Since Oct 30, 2022, the industry’s earnings estimates for the current year have increased 1.6%.
Before we present the stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500, Outperforms Sector
The Zacks Computers - IT Services Industry has underperformed the Zacks S&P 500 composite sector but has beaten the broader Zacks Computer and Technology in the past year.
The industry has dropped 35.6% over this period against the S&P 500’s decline of 21.3% and the broader sector’s plunge of 38.1%.
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing IT Services companies, the industry is currently trading at 27.30X, higher than the S&P 500’s 11.56X and the sector’s 8.39X.
Over the past five years, the industry has traded as high as 50.68X and as low as 19.96X, with the median being 30.63X.
3 Must Buy IT Services Stocks
CoStar Group: The Washington, DC-based provider of information, analytics and online marketplaces to the commercial real estate industry in the United States and the U.K. is benefiting from the robust performance of the Apartments.com business. In third-quarter 2022, Apartments.com’s net new sales bookings surged a whopping 192% year over year, as apartment vacancy rates increased, leading to raised apartment advertisements. Rising vacancies are expected to increase the demand for advertising.
CoStar Group currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for CoStar Group’s fiscal 2022 earnings has been unchanged at $9.66 per share over the past 30 days. CSGP shares have depreciated 5.2% in the past year.
Fair Isaac: The Bozeman, MT-based company has been focusing on diversifying its product portfolio, specifically in the software business segment. The Zacks Rank #2 (Buy) company has been expanding its operations internationally to cater to a wider customer base, which is aiding top-line growth. Expanding product portfolio, leveraging advanced analytics, is helping customers make informed decisions.
The Zacks Consensus Estimate for Fair Isaac’s fiscal 2023 earnings has been revised upward by 1.7% over the past 30 days to $9.96 per share. FICO shares have moved up 38.8% in the past year.
Nutanix: The San Jose, CA-based company is benefiting from the solid adoption of its hybrid cloud solutions and an expanding clientele. The adoption rate of this Zacks Rank #2 company’s AHV hypervisor has been strong, as customers continue to opt for it as a low-cost alternative to other vendor offerings. A healthy pipeline of big deals is another tailwind. NTNX is expected to benefit from the growth prospects of the hyper-converged infrastructure market in the long term.
The Zacks Consensus Estimate for Nutanix’s fiscal 2023 earnings has been revised upward by 30.8% to 17 cents per share over the past 30 days. NTNX shares have declined 20.5% in the past year.
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