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3 Stocks to Watch in a Challenging Technology Solutions Industry
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The coronavirus pandemic-led macroeconomic downturn has negatively impacted the Zacks Computer – Integrated Systems industry. Supply chain disruptions, destabilization of international trade and significant delays in customer acceptance have resulted in high levels of backlog and cast a pall on the industry’s prospects. Nonetheless, International Business Machines (IBM - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) and NCR are a few industry participants to watch as they are benefiting from the rise in advanced forms of data management, the rapid shift from traditional silos, increased demand for integration of deployment techniques as well as modern application development.
Industry Description
The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics. These industry players are increasing investments in data modernization and analytics, cyber defense, remote work, automation and contact-less services, customer & employee experience, and supply-chain modernization, which accelerate growth in digital transformation services. Some industry participants also provide technological solutions (both products and services) to aid organizations in connecting, interacting and transacting with customers. Others develop and market information recognition, data entry software, systems as well as technologies.
4 Computer -Integrated Systems Industry Trends to Watch Out For
Integrated Solutions Driving Demand: The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises, along with increasing investments in IoT, big data, AI and blockchain software technologies. Moreover, business analytics, cloud computing, mobile, and security and social businesses present significant opportunities to an increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave. The industry players are anticipated to benefit from recovering global IT spending, as predicted by Gartner.
Solid Adoption of Multi-Cloud Model: Growing adoption of the multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope of the industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.
Coronavirus Hurts Supply and Demand: Due to coronavirus-led uncertainty over global economic and business activities, industry participants are witnessing supply constraints, softness in server demand and cognitive applications, as well as delays in customer acceptance, in turn resulting in high levels of backlog, particularly in Compute, High Performance Computing & Mass Storage Class and Storage. Moreover, volatility in foreign exchange — primarily due to the current macroeconomic scenario and headwinds in the emerging markets — does not bode well for the industry.
Semiconductor Chip Shortage Mars Prospects: Industry participants are facing challenges owing to the ongoing and heavily time-consuming business model transition to cloud. Further, lower spending across Data-Center Systems — primarily due to component shortages like memory and CPUs, as well as deceleration in hyperscale spending — is likely to dampen the prospects of the industry participants.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #207, which places it in the bottom 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. 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 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 on this group’s earnings growth potential. Since Mar 31, 2021, the industry’s earnings estimate for 2022 has moved down 9%.
Despite the gloomy industry outlook, a few stocks are worth watching based on a strong earnings outlook. Before we present a few 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 Sector and S&P 500
The Zacks Computer – Integrated Systems industry has underperformed the broader Computer and Technology sector and Zacks S&P 500 composite over the past year.
The industry has declined 3.9% over this period compared with the S&P 500 and broader Computer and Technology sector’s respective rallies of 13.4% and 3.6%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing computer integrated systems stocks, we see that the industry is currently trading at 1.53X compared with the S&P 500’s 4.38X. It is also below the sector’s trailing 12-month P/S of 4.26X.
Over the past five years, the industry has traded as high as 1.87X and as low as 1.12X, with the median being at 1.48X, as the charts below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Computer-Integrated Systems Providers to Watch
Hewlett Packard Enterprise: HPE is benefiting from improved supply-chain execution and higher demand for its cloud services owing to the ongoing digital transformation.
HPE’s efforts to shift focus to higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding bottom-line growth.
HPE’s target of saving at least $800 million annually by fiscal 2022-end through the cost optimization plan is a positive. Moreover, Hewlett Packard’s multi-billion-dollar investment plan across expanding networking capabilities will help diversify the business from server and hardware storage markets as well as boost margins in the long run.
The Zacks Consensus Estimate for its fiscal 2022 earnings has increased by 3.4% to $2.10 per share over the past 60 days.
Price & Consensus: HPE
International Business Machines: This Zacks Rank #3 (Hold) company is riding on strong demand for analytics, cloud computing and security.
Synergies from the Red Hat buyout are boosting its competitive position in the hybrid cloud market. The company is likely to benefit from robust adoption and broad-based availability of IBM Blockchain World Wire — a blockchain driven global payments network aimed at accelerating and optimizing cross-border payments.
IBM is also poised to gain from the spin-off of the legacy infrastructure services business as it focuses on hybrid cloud strategy.
The Zacks Consensus Estimate for its 2022 earnings has been steady at $10.09 per share over the past 30 days. IBM’s shares are down 3.6% year to date.
Price & Consensus: IBM
NCR: This Zacks Rank #3 (Hold) company is benefiting from strong demand for its software and service solutions across banking, retail and hospitality industries. NCR’s shares have risen 0.4% year to date.
The coronavirus-induced rapid adoption of digital banking solutions bodes well for NCR. Notably, the company has received a positive feedback from customers on the new features and functionality of its solutions. It has also begun witnessing higher growth.
NCR’s acquisition of Cardtronics is anticipated to drive the acceleration of the NCR-as-a-service strategy. Cardtronics’ robust debit network will further expand NCR’s payments platform and help it connect to retail and bank customers, thereby facilitating customer acquisition.
NCR continues to see traction of its point-of-sale and self-checkout solutions across food-drug-merchandise and convenience-fuel-retail customers.
The Zacks Consensus Estimate for the company’s 2022 earnings has been revised downward by 4.5% over the past 60 days to $3.39 per share.
Price & Consensus: NCR
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3 Stocks to Watch in a Challenging Technology Solutions Industry
The coronavirus pandemic-led macroeconomic downturn has negatively impacted the Zacks Computer – Integrated Systems industry. Supply chain disruptions, destabilization of international trade and significant delays in customer acceptance have resulted in high levels of backlog and cast a pall on the industry’s prospects. Nonetheless, International Business Machines (IBM - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) and NCR are a few industry participants to watch as they are benefiting from the rise in advanced forms of data management, the rapid shift from traditional silos, increased demand for integration of deployment techniques as well as modern application development.
Industry Description
The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics. These industry players are increasing investments in data modernization and analytics, cyber defense, remote work, automation and contact-less services, customer & employee experience, and supply-chain modernization, which accelerate growth in digital transformation services. Some industry participants also provide technological solutions (both products and services) to aid organizations in connecting, interacting and transacting with customers. Others develop and market information recognition, data entry software, systems as well as technologies.
4 Computer -Integrated Systems Industry Trends to Watch Out For
Integrated Solutions Driving Demand: The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises, along with increasing investments in IoT, big data, AI and blockchain software technologies. Moreover, business analytics, cloud computing, mobile, and security and social businesses present significant opportunities to an increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave. The industry players are anticipated to benefit from recovering global IT spending, as predicted by Gartner.
Solid Adoption of Multi-Cloud Model: Growing adoption of the multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope of the industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.
Coronavirus Hurts Supply and Demand: Due to coronavirus-led uncertainty over global economic and business activities, industry participants are witnessing supply constraints, softness in server demand and cognitive applications, as well as delays in customer acceptance, in turn resulting in high levels of backlog, particularly in Compute, High Performance Computing & Mass Storage Class and Storage. Moreover, volatility in foreign exchange — primarily due to the current macroeconomic scenario and headwinds in the emerging markets — does not bode well for the industry.
Semiconductor Chip Shortage Mars Prospects: Industry participants are facing challenges owing to the ongoing and heavily time-consuming business model transition to cloud. Further, lower spending across Data-Center Systems — primarily due to component shortages like memory and CPUs, as well as deceleration in hyperscale spending — is likely to dampen the prospects of the industry participants.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #207, which places it in the bottom 18% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. 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 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 on this group’s earnings growth potential. Since Mar 31, 2021, the industry’s earnings estimate for 2022 has moved down 9%.
Despite the gloomy industry outlook, a few stocks are worth watching based on a strong earnings outlook. Before we present a few 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 Sector and S&P 500
The Zacks Computer – Integrated Systems industry has underperformed the broader Computer and Technology sector and Zacks S&P 500 composite over the past year.
The industry has declined 3.9% over this period compared with the S&P 500 and broader Computer and Technology sector’s respective rallies of 13.4% and 3.6%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing computer integrated systems stocks, we see that the industry is currently trading at 1.53X compared with the S&P 500’s 4.38X. It is also below the sector’s trailing 12-month P/S of 4.26X.
Over the past five years, the industry has traded as high as 1.87X and as low as 1.12X, with the median being at 1.48X, as the charts below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
3 Computer-Integrated Systems Providers to Watch
Hewlett Packard Enterprise: HPE is benefiting from improved supply-chain execution and higher demand for its cloud services owing to the ongoing digital transformation.
HPE’s efforts to shift focus to higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding bottom-line growth.
HPE’s target of saving at least $800 million annually by fiscal 2022-end through the cost optimization plan is a positive. Moreover, Hewlett Packard’s multi-billion-dollar investment plan across expanding networking capabilities will help diversify the business from server and hardware storage markets as well as boost margins in the long run.
Shares of this Zacks Rank #2 (Buy) company have risen 8.1% year to date. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The Zacks Consensus Estimate for its fiscal 2022 earnings has increased by 3.4% to $2.10 per share over the past 60 days.
Price & Consensus: HPE
International Business Machines: This Zacks Rank #3 (Hold) company is riding on strong demand for analytics, cloud computing and security.
Synergies from the Red Hat buyout are boosting its competitive position in the hybrid cloud market. The company is likely to benefit from robust adoption and broad-based availability of IBM Blockchain World Wire — a blockchain driven global payments network aimed at accelerating and optimizing cross-border payments.
IBM is also poised to gain from the spin-off of the legacy infrastructure services business as it focuses on hybrid cloud strategy.
The Zacks Consensus Estimate for its 2022 earnings has been steady at $10.09 per share over the past 30 days. IBM’s shares are down 3.6% year to date.
Price & Consensus: IBM
NCR: This Zacks Rank #3 (Hold) company is benefiting from strong demand for its software and service solutions across banking, retail and hospitality industries. NCR’s shares have risen 0.4% year to date.
The coronavirus-induced rapid adoption of digital banking solutions bodes well for NCR. Notably, the company has received a positive feedback from customers on the new features and functionality of its solutions. It has also begun witnessing higher growth.
NCR’s acquisition of Cardtronics is anticipated to drive the acceleration of the NCR-as-a-service strategy. Cardtronics’ robust debit network will further expand NCR’s payments platform and help it connect to retail and bank customers, thereby facilitating customer acquisition.
NCR continues to see traction of its point-of-sale and self-checkout solutions across food-drug-merchandise and convenience-fuel-retail customers.
The Zacks Consensus Estimate for the company’s 2022 earnings has been revised downward by 4.5% over the past 60 days to $3.39 per share.
Price & Consensus: NCR
