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3 Stocks to Watch From the Challenging Computer-Services Industry

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The Zacks Computer - Services industry has been facing macroeconomic challenges. Elongated sales cycle, lower conversion rates and delays by customers in making purchase decisions are notable headwinds. However, the industry is riding on the ongoing digital transformation, which is increasing the demand for cloud-enabled software solutions. The rising adoption of digital transformative techniques in healthcare and financial services has been a silver lining for industry participants. CGI Inc. (GIB - Free Report) , CACI International (CACI - Free Report) , and CSG Systems (CSGS - Free Report) are well-positioned to benefit from the above-mentioned factors. The growing need for consulting, research and cyber-security solutions, stringent regulations, digital healthcare, and the growing adoption of business automation solutions should continue to drive the industry’s prospects.

Industry Description

The Zacks Computer - Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include consulting and research solutions, security solutions, business support solutions and systems engineering, as well as software application development solutions. The industry participants cater to varied end markets and customers, including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, and media and entertainment. Consultancy companies in the industry are helping clients in their ongoing digital transformation. They provide end-to-end services, including application development, integration and maintenance, technology infrastructure management, and business process services.


3 Computer-Services Industry Trends to Watch

Remote & Hybrid Work Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead, based on an increasing number of remote and hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, enabling them to provide flexible and easily adaptable hybrid solutions. The coronavirus-induced remote-working trend has led to increased demand for cloud and cost-efficient business support solutions, as well as other digital monetization solutions, which bode well for the industry.

Growing Cyber Attacks are Creating 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 industry players.

Regulatory Compliance Drives Demand: The companies in this industry are likely to benefit from increasingly complex network systems and sensitive information environments, in which governments and businesses operate. The industry participants are keeping pace with the global regulatory and business practice requirements, thereby helping customers incorporate the best practices while complying with governmental and industry norms.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #213, which places it in the bottom 13% 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 dim near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 a 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 Feb 28, 2023, the Zacks Consensus Estimate for the industry’s 2023 earnings has moved down 2.3%.

Despite the gloomy industry outlook, there are a few stocks worth watching. But 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 Lags Sector, Beats S&P 500

The Zacks Computer – Services industry has underperformed the broader Zacks Computer and Technology sector but beat the S&P 500 Index over the past year.

The industry has risen 21.6% over this period compared with the S&P 500’s rally of 18.7% and the broader sector’s return of 31.9%.

One-Year Price Performance

Industry's Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer stocks, we see that the industry is currently trading at 14.5X compared with the S&P 500’s 19.08X and the sector’s forward-12-month P/E of 23.61X.

Over the last five years, the industry has traded as high as 19.79X, and as low as 12.67X, with a median of 16.12X, as the charts below show.

Forward 12-Month Price-to-Earnings (P/E) Ratio

3 Computer-Services Stocks to Watch Right Now

CGI: This Zacks Rank #3 (Hold) company is riding on an expanding clientele and a strong partner base. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

CGI is expected to benefit from the ongoing digitalization amid challenging macroeconomic conditions. Strong demand for the company’s managed services and IP offerings is expected to drive top-line growth in the near term.

The company’s managed services pipeline for industries like manufacturing, retail, and energy and utilities is up more than 33% for the next year, while the IP pipeline is up 30%. Moreover, in government health care and insurance, CGI’s pipeline remains well balanced across consulting system integration and managed services and is up 20% year over year.

CGI is also investing in the development of AI-based solutions and services and plans to invest $1 billion over the next three years.

The Zacks Consensus Estimate for CGI’s fiscal 2023 earnings has been unchanged at $5.35 per share over the past 30 days. The stock has gained 19.1% year to date.

Price and Consensus: GIB


CACI International: This Zacks Rank #3 company has been benefiting from business wins and organic expansions. CACI has a large pipeline of new projects and continues to win more deals at regular intervals. Having the government as a big client lends stability to the company’s business and moderates revenue fluctuations.

CACI’s sustained focus remains on its strategy to grow in larger markets and leverage mergers and acquisitions to further increase its market share.

The Zacks Consensus Estimate for CACI’s fiscal 2024 earnings has increased by a couple of cents to $19.97 per share over the past 30 days. The stock has gained 6.9% year to date.

Price and Consensus: CACI


CSG Systems: This Zacks Rank #3 company is benefiting from strong demand for its SaaS products. Expanding clientele driven by a robust portfolio is driving top-line growth.

CSG Systems continues to focus on delivering sustained mid-single-digit organic revenue growth or higher over the long term.

The Zacks Consensus Estimate for CSG Systems’ 2023 earnings has been unchanged at $3.51 per share over the past 30 days. The stock has declined 8.3% in the year-to-date period.

Price and Consensus: CSGS


See More Zacks Research for These Tickers

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

CACI International, Inc. (CACI) - free report >>

CGI Group, Inc. (GIB) - free report >>

CSG Systems International, Inc. (CSGS) - free report >>

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