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3 IT Services Stocks From a Challenging Industry to Buy
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The coronavirus pandemic-triggered macroeconomic downturn has induced sluggishness in IT spending, which has impacted adoption of consultation and transaction processing solutions. Consequently, the outlook for the Zacks Computers – IT Services industry appears drab at the moment.
However, ongoing digitization and initiatives to diversify IT services has somewhat improved the prospects for the industry players. CDW Corporation (CDW - Free Report) , Fair Isaac (FICO - Free Report) , and Cerence (CRNC - Free Report) , are some of the stocks benefiting from this trend. Moreover, solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been a boon for these IT Service providers.
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, which include manufacturing, banking, insurance, healthcare, government agencies and public sector institutions. Industry participants like DXC Technology (DXC - Free Report) is focusing on cyber business, cloud computing market and Big Data business to bolster prospects. Digital transformation is helping companies like CDW and ServiceNow (NOW - Free Report) 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 adoption of IT-services, primarily consulting services applications, infrastructure management, and transaction processing platforms. The industry players are anticipated to bear the brunt of slowdown in IT spending. Additionally, shift in consumer buying patterns amid coronavirus-induced supply chain constraints are likely to dampen the industry’s prospects. Moreover, COVID-19 pandemic led softness in the automotive, travel and hospitality end-markets, remains a concern. Also, shift from enterprise to consumer-focused demand, due to the continued work-from-home trend, does not bode well for industry players.
STEM Skills Crisis to Hinder Growth: Notably, lack of skilled workers, particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States, has been a woe for quite some time. Notably, coronavirus-led economic downturn has triggered layoffs and pay cuts, which are likely to lead to termination of H1-B visas and remain an overhang for some time now.
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. For instance, DXC is focusing on cyber business, cloud computing market and Big Data business to bolster prospects. Moreover, CDW is gaining from growth across all the end markets with strength in small business, government and healthcare verticals.
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. Markedly, ServiceNow is poised to benefit from rising adoption of its workflows by companies undergoing digital transformation over the longer haul.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #129, which places it in the bottom 48% 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 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 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 Nov 30, 2020, the industry’s earnings estimate for the current year have declined 3.3%.
Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Computers - IT Services Industry has outperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology in the past year. The outperformance can be attributed to investors’ optimism regarding ongoing digitization and measures to diversify IT services.
The industry has returned 58.8% over this period compared with the S&P 500 and the broader sector’s rally of 40.4% and 50.3%, respectively.
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 36.56X, higher than the S&P 500’s 17.20X and the sector’s 15.86X.
Over the past five years, the industry has traded as high as 38.27X and as low as 19.23X, with the median being at 26.88X, as the chart below show.
EV/EBITDA Ratio (TTM)
3 Promising IT Services Stocks
Cerence: The Burlington, MA-based company recently made the Cerence Drive conversational AI platform available on Android Automotive OS in a bid to help automakers develop custom, OEM-branded, conversational assistants atop the Android Automotive OS stack for the first time.
Moreover, Cerence voice-powered technologies are gaining popularity. In this regard, the company recently partnered with Lotus Cars and ECARX with an aim to deliver simplified interaction and improved safety, efficiency and entertainment to Lotus Cars drivers worldwide.
Markedly, Lotus Cars will leverage Cerence’s flagship AI products across voice recognition and natural language understanding, text-to-speech, and speech signal enhancement verticals. This augurs well for Cerence, which 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 its fiscal 2021 earnings has risen 13.6% to $2.34 per share over the past 30 days. The stock has appreciated 172.5% in the past year.
Price and Consensus: CRNC
CDW Corporation: This Vernon Hills, IL-based company is benefiting from the ongoing digital transformation and increased demand for products that enable remote working and operations continuity plan amid the COVID-19 pandemic. It is also gaining from growth in education and healthcare end markets.
Moreover, the acquisitions of Scalar Decisions and Aptris have strengthened its capabilities and expanded its product offerings. Progress in network management, storage management and operating system software is a tailwind. CDW’s core strength of providing best-in-class services and easy-to-acquire technologies will bolster growth over the long haul.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 earnings has been revised upward by 2.5% over the past 30 days to $7.37 per share. The stock has gained 51.1% in the past year.
Price and Consensus: CDW
Fair Issac: This Zacks Rank #2 company provides analytical solutions, and data management products, and credit account management services to financial institutions, retailers, healthcare organizations, and public agencies.
Fair Isaac is benefiting from its Scores business and strength in credit analytics domain, which has witnessed strong growth over the past several years. Moreover, growth in its software business is a tailwind.
The growing clout of the company’s solutions that aids businesses to automate and enhance business workloads and make data-driven decisions amid easing COVID-19 restrictions augurs well.
The Zacks Consensus Estimate for this San Jose, CA-based company’s 2021 bottom line has been revised down by a couple of cents to $11.28 over the past 30 days. Shares of the company are up 28.3% in the past year.
Price and Consensus: FICO
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Image: Bigstock
3 IT Services Stocks From a Challenging Industry to Buy
The coronavirus pandemic-triggered macroeconomic downturn has induced sluggishness in IT spending, which has impacted adoption of consultation and transaction processing solutions. Consequently, the outlook for the Zacks Computers – IT Services industry appears drab at the moment.
However, ongoing digitization and initiatives to diversify IT services has somewhat improved the prospects for the industry players. CDW Corporation (CDW - Free Report) , Fair Isaac (FICO - Free Report) , and Cerence (CRNC - Free Report) , are some of the stocks benefiting from this trend. Moreover, solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been a boon for these IT Service providers.
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, which include manufacturing, banking, insurance, healthcare, government agencies and public sector institutions. Industry participants like DXC Technology (DXC - Free Report) is focusing on cyber business, cloud computing market and Big Data business to bolster prospects. Digital transformation is helping companies like CDW and ServiceNow (NOW - Free Report) 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 adoption of IT-services, primarily consulting services applications, infrastructure management, and transaction processing platforms. The industry players are anticipated to bear the brunt of slowdown in IT spending. Additionally, shift in consumer buying patterns amid coronavirus-induced supply chain constraints are likely to dampen the industry’s prospects. Moreover, COVID-19 pandemic led softness in the automotive, travel and hospitality end-markets, remains a concern. Also, shift from enterprise to consumer-focused demand, due to the continued work-from-home trend, does not bode well for industry players.
STEM Skills Crisis to Hinder Growth: Notably, lack of skilled workers, particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States, has been a woe for quite some time. Notably, coronavirus-led economic downturn has triggered layoffs and pay cuts, which are likely to lead to termination of H1-B visas and remain an overhang for some time now.
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. For instance, DXC is focusing on cyber business, cloud computing market and Big Data business to bolster prospects. Moreover, CDW is gaining from growth across all the end markets with strength in small business, government and healthcare verticals.
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. Markedly, ServiceNow is poised to benefit from rising adoption of its workflows by companies undergoing digital transformation over the longer haul.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #129, which places it in the bottom 48% 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 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 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 Nov 30, 2020, the industry’s earnings estimate for the current year have declined 3.3%.
Despite the gloomy industry outlook, a few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Computers - IT Services Industry has outperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology in the past year. The outperformance can be attributed to investors’ optimism regarding ongoing digitization and measures to diversify IT services.
The industry has returned 58.8% over this period compared with the S&P 500 and the broader sector’s rally of 40.4% and 50.3%, respectively.
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 36.56X, higher than the S&P 500’s 17.20X and the sector’s 15.86X.
Over the past five years, the industry has traded as high as 38.27X and as low as 19.23X, with the median being at 26.88X, as the chart below show.
EV/EBITDA Ratio (TTM)
3 Promising IT Services Stocks
Cerence: The Burlington, MA-based company recently made the Cerence Drive conversational AI platform available on Android Automotive OS in a bid to help automakers develop custom, OEM-branded, conversational assistants atop the Android Automotive OS stack for the first time.
Moreover, Cerence voice-powered technologies are gaining popularity. In this regard, the company recently partnered with Lotus Cars and ECARX with an aim to deliver simplified interaction and improved safety, efficiency and entertainment to Lotus Cars drivers worldwide.
Markedly, Lotus Cars will leverage Cerence’s flagship AI products across voice recognition and natural language understanding, text-to-speech, and speech signal enhancement verticals. This augurs well for Cerence, which 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 its fiscal 2021 earnings has risen 13.6% to $2.34 per share over the past 30 days. The stock has appreciated 172.5% in the past year.
Price and Consensus: CRNC
CDW Corporation: This Vernon Hills, IL-based company is benefiting from the ongoing digital transformation and increased demand for products that enable remote working and operations continuity plan amid the COVID-19 pandemic. It is also gaining from growth in education and healthcare end markets.
Moreover, the acquisitions of Scalar Decisions and Aptris have strengthened its capabilities and expanded its product offerings. Progress in network management, storage management and operating system software is a tailwind. CDW’s core strength of providing best-in-class services and easy-to-acquire technologies will bolster growth over the long haul.
The Zacks Consensus Estimate for this Zacks Rank #2 (Buy) company’s 2021 earnings has been revised upward by 2.5% over the past 30 days to $7.37 per share. The stock has gained 51.1% in the past year.
Price and Consensus: CDW
Fair Issac: This Zacks Rank #2 company provides analytical solutions, and data management products, and credit account management services to financial institutions, retailers, healthcare organizations, and public agencies.
Fair Isaac is benefiting from its Scores business and strength in credit analytics domain, which has witnessed strong growth over the past several years. Moreover, growth in its software business is a tailwind.
The growing clout of the company’s solutions that aids businesses to automate and enhance business workloads and make data-driven decisions amid easing COVID-19 restrictions augurs well.
The Zacks Consensus Estimate for this San Jose, CA-based company’s 2021 bottom line has been revised down by a couple of cents to $11.28 over the past 30 days. Shares of the company are up 28.3% in the past year.
Price and Consensus: FICO
+1,500% Growth: One of 2021’s Most Exciting Investment Opportunities
In addition to the stocks you read about above, would you like to see Zacks’ top picks to capitalize on the Internet of Things (IoT)? It is one of the fastest-growing technologies in history, with an estimated 77 billion devices to be connected by 2025. That works out to 127 new devices per second.
Zacks has released a special report to help you capitalize on the Internet of Things’s exponential growth. It reveals 4 under-the-radar stocks that could be some of the most profitable holdings in your portfolio in 2021 and beyond.
Click here to download this report FREE >>