The Zacks Computers – IT Services industry has been benefiting from the ongoing digitization process globally. Initiatives to diversify IT services have been boons for Fair Isaac (FICO – Free Report) and CyberArk Software (CYBR – Free Report) . 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.
The Zacks Computers – IT Services industry comprises companies that provide consultancy, communications, IT management and 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 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. Industry players are anticipated to bear the brunt of the slowdown in IT spending. Gartner projects IT spending to increase 2.4% in 2023, significantly lower than 10.2% growth witnessed in 2021. However, the expected figure is better than the decline of 0.2% reported in 2022. Spending on IT services is expected to witness a 5.5% improvement, much better than 3% 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 pandemic-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 Dim Prospects
The Zacks Computers – IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #146, which places it in the bottom 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 bearish 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 negative earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are pessimistic about this group’s earnings growth potential. Since Mar 31, 2022, the industry’s earnings estimates for the current year have decreased 23%.
Despite the dim industry prospects, there are a few stocks worth buying. But 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 & Sector
The Zacks Computers – IT Services Industry has underperformed the S&P 500 composite sector and the broader Zacks Computer and Technology sector in the past year.
The industry has dropped 22.8% over this period against the S&P 500’s decline of 12.8% and the broader sector’s plunge of 15.1%.
One-Year Price Performance
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 24.91X, higher than the S&P 500’s 11.98X and the sector’s 10.08X.
Over the past five years, the industry has traded as high as 51.12X and as low as 19.96X, with the median being 30.67X, as the chart below shows.
EV/EBITDA Ratio (TTM)
2 Must Buy IT Services Stocks
CyberArk: The Petach Tikva, Israel-based, company is benefiting from rising demand for cyber security solutions due to the long list of data breaches. Increasing demand for privileged access security on the back of digital transformation strategies remains a key growth driver. Strong presence across verticals, such as banking, healthcare, government and utilities, are driving revenues.
CyberArk currently has a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for CyberArk’s 2023 earnings has increased 21.4% to 17 cents per share over the past 30 days. CYBR shares have depreciated 16.8% in the past year.
Price and Consensus: CYBR
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 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 of $19.86 per share has been unchanged over the past 30 days. FICO shares have moved up 46.1% in the past year.
Price and Consensus: FICO