2 IT Services Stocks to Buy From a Challenging Industry
The Zacks Computers – IT Services industry is suffering from the pandemic-triggered macroeconomic downturn that has induced sluggishness in IT spending, impacting the adoption of consultation and transaction processing solutions. Declining PC sales is a headwind. However, industry participants are benefiting from the ongoing digitization process globally. Initiatives to diversify IT services have been a boon for Dell Technologies DELL and Amdocs DOX. Robust spending on cloud, Internet of Things (IoT), cyber security, data and analytics, artificial intelligence (AI) and automation is driving growth industry-wide. Solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been driving demand for services provided by these industry participants.
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 endmarkets, including manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.Industry participants are focusing on cyber-security business, cloud computing market, 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: Coronavirus crisis-induced sluggish spending across small and medium businesses (SMBs) due to restricted economic activity globally has impacted the adoption of IT-services, primarily consulting services 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 4% in 2022, down from 9.5% growth in 2021. The shift in consumer buying patterns amid coronavirus-induced supply chain constraints is likely to dampen the industry’s prospects. Also, the shift from enterprise to consumer-focused demand, due to the continued work-from-home trend, does not bode well for industry players.
Digitization Wave is a Tailwind: Most of the industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with evolving IT services. The aim is to integrate synergies of emerging technologies including cloud, IoT, AI and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across Asia-Pacific, is a tailwind.
New Normal Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on increasing number of remote workers in the wake of the coronavirus crisis-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premises and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Notably, 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 carries a Zacks Industry Rank #156, which places it in the top 38% 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 two to one.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since Jun 30, 2021, the industry’s earnings estimate for the current year hasdecreased30.3%.
Despite the challenging industry conditions, there are a few stocks that are worth buying. Before we present those 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 Underperforms S&P 500 & Sector
The Zacks Computers - IT Services Industry has underperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology sector in the past year.
The industry has dropped 38.4% over this period compared with the S&P 500’s return of 13.7% and the broader sector’s decline of 28.1%.
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 24.78X, higher than the S&P 500’s 11.74X and the sector’s 10.33X.
Over the past five years, the industry has traded as high as 48.99X and as low as 24.23X, with the median being at 39.52X, as the chart below shows.
EV/EBITDA Ratio (TTM)
2 Promising IT Services Stocks
Amdocs: St. Peter Port, Guernsey-based Amdocs is benefiting from a recurring revenue business model. Moreover, customer additions and solid demand for managed services were primary growth drivers.
Amdocs’ growth momentum is expected to continue due to the company’s initiatives to aid digital, media, network and cloud transformations of its clients. Markedly, the acquisition of Openet has rapidly expanded Amdocs’ footprint in 5G (fifth-generation) cellular networks. The company’s solutions have been selected by the likes of AT&T and T-Mobile to bolster their 5G footprints.
Amdocs currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Amdocs’ fiscal 2022 earnings has risen 0.8% to $5.25 per share over the past 30 days. The stock has appreciated 4.6% year to date.
Price and Consensus: DOX
Dell Technologies: This Round Rock, TX-based company is benefiting from strong demand for its servers and networking solutions.
Although PC shipments have been declining, Dell is benefiting from strong demand for its notebooks. Dell currently has a Zacks Rank #2.
The Zacks Consensus Estimate for Dell’s fiscal 2023 earnings has been revised upward by 6.5% over the past 30 days to $7.04 per share. The stock has declined 15.3% year to date.
Price and Consensus: DELL
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