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3 Stocks to Buy in a Challenging Technology Services Industry

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Ongoing digitization, increasing dependency on technology and initiatives to diversify technology services have been boosting the prospects of the Zacks Technology Services industry. Growth opportunities from the robust adoption of the multi-cloud model should offset challenges arising from cyber threats and expenditures related to hiring skillful talent and restructuring initiatives.

Opendoor Technologies Inc. (OPEN - Free Report) , TuSimple Holdings Inc. (TSP - Free Report) and Matterport, Inc. (MTTR - Free Report) are some stocks, which are likely to gain from the abovementioned industry trends.

Industry Description

The Zacks Technology Services industry comprises companies that are engaged in manufacturing, developing and designing an array of software support, data processing, computing hardware and communications equipment. These include integrated powertrain technologies, advanced analytics, technology solutions and contract research services, semiconductor packaging and interconnect technologies, collaboration software, specialty printers, and data acquisition and analysis systems. The industry includes consumer as well as business-oriented products and services. It comprises companies with diversified end-markets and customer base. Some industry participants also provide advanced analytics, clinical research services, data storage technology and solutions, and technology-enabled financial solutions to consumers, small business owners.

What's Shaping the Future of the Technology Services Industry?

Digitization Wave is a Tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes to keep themselves updated with evolving IT services. The aim is to integrate synergies of emerging technologies including cloud, Internet of Things, Artificial Intelligence and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across the Asia-Pacific, is a tailwind.

Adoption of the Multi-Cloud Model: Growing uptake 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.

New Normal Trends Boost Industry Prospects: The industry’s growth is expected to accelerate in the days ahead on the increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adaptable hybrid solutions. Notably, coronavirus-triggered demand for remote working, digital healthcare and online learning solutions has expedited the adoption of digital transformation offerings among enterprises, which bodes well for the industry.

Growing Cyber Attacks is a Tailwind: The increasing number of cyber-attacks and related security risks are expected to keep the industry’s momentum alive. Government agencies are ideal targets for cyber-attacks, as they are entrusted with sensitive information. Therefore, the growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for the industry players.

Talent Cost Woes: Rising spending on acquiring skilled talent and restructuring initiatives involving modernization of the IT-service infrastructure are causing higher debt levels, R&D, and sales & marketing expenses.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Technology Services industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #142. This rank places it in the bottom 44% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates dull 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 sell-side analysts covering the companies in this industry have been decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has decreased 92.7%.

Despite the cloudy prospects, we present a few stocks that investors can buy given their sturdy potential. But before that let’s take a look at the industry’s recent stock market performance and its current valuation.

Industry Underperforms Sector and S&P 500

The Zacks Technology Services industry has lagged the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 49.5% over this period compared with a 37.4% decline of the broader sector and 7.2% loss downside of the Zacks S&P 500 composite.

One-Year Price Performance

Industry's Current Valuation

On the basis of EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is commonly used for valuing technology services stocks, the industry is currently trading at 30.11X compared with the S&P 500’s 12.85X and the sector’s 23.01X.

Over the past year, the industry has traded as high as 35.55X, as low as 17.97X and at the median of 22.32X as the charts below show.


3 Key Technology Services Picks

We are presenting three Zacks Rank #2 (Buy) stocks that are well-positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Opendoor Technologies: This Arizona-based company operates a digital platform for residential real estate in the United States. Opendoor’s top line is likely to have benefited from the company's continued market expansion efforts and increase in home purchases. Demand for the company’s digital product is likely to have acted as another tailwind. Healthy margins (due to structural price and cost improvements) are likely to have driven the company’s bottom- line performance.

The Zacks Consensus Estimate for Opendoor’s 2022 EPS has improved more than 100% in the past 90 days. OPEN stock has declined 61.8% over the past year.

Price & Consensus: OPEN

TuSimple: This California-based autonomous technology company, develops autonomous technology specifically designed for semi-trucks in the United States and internationally. TuSimple stands to benefit from continued improvements in asset utilization, contributions from new semi-trucks, solid customer relationships and the addition of logistics players.

The Zacks Consensus Estimate for TuSimple’s 2022 EPS has improved 6.7% in the past 90 days. TSP stock has declined 72.6% over the past year.

Price & Consensus: TSP

Matterport: This California-based spatial data company focuses on digitization and datafication of the built world. Matterport’s top line is likely to benefit from strength across subscription and annual recurring revenues. A strong subscriber base, industry partnerships, product launches and expanded service offerings act as other tailwinds.

The Zacks Consensus Estimate for Matterport’s 2022 EPS has improved 4.1% in the past 90 days. MTTR stock has declined 67.5% over the past year.

Price & Consensus: MTTR

In-Depth Zacks Research for the Tickers Above

Normally $25 each - click below to receive one report FREE:

TuSimple Holdings Inc. (TSP) - free report >>

Opendoor Technologies Inc. (OPEN) - free report >>

Matterport, Inc. (MTTR) - free report >>