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3 IT Services Stocks to Buy From a Prospering Industry

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The Zacks Computers – IT Services industry has been benefiting from ongoing digitization efforts globally. Robust spending on cloud, Internet of Things (IoT), cyber security, data and analytics, artificial intelligence (AI) and automation is driving industry-wide growth. Solid demand for advanced IT-service infrastructure solutions for hybrid working and digital healthcare has been benefiting the prospects of industry participants like ServiceNow (NOW - Free Report) , Vertiv (VRT - Free Report) and (TBLA - Free Report) . Improving IT spending trends also bodes well for these players. Nevertheless, the industry participants are suffering from challenging macroeconomic conditions that are elongating the sales cycle. The adoption of consultation and transaction processing solutions has been affected by an uncertain macro environment.

Industry Description

The Zacks Computers – IT Services industry comprises companies that provide consultancy, communications software and services, IT management and operations, cloud-based web development platform, customer relationship management, professional information solutions, real estate information and analysis, and outsourcing services. The industry participants cater to a wide array of end markets, including manufacturing, telecommunications, banking, insurance, healthcare, government agencies and public sector institutions. Industry participants focus on the cyber-security business, the cloud computing market, generative AI, IoT and automation to bolster prospects. Offerings from industry participants help in improving engagement with customers, launching products and supporting new business models with enterprises going for digital transformation.

What's Shaping the Future of the Computers - IT Services Industry?

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

Hybrid Work Environment to Boost Prospects: The industry’s growth is expected to accelerate in the days ahead due to an increasing number of hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, which will enable them to provide flexible and easily adaptable hybrid solutions.

Improving IT Spending to Aid Prospects: Improving IT spending trends bode well for industry participants. Gartner projects IT spending to increase 3.5% in 2023 and 8% in 2024, higher than the 2.9% growth witnessed in 2022. Spending on IT services is expected to witness a 10.4% improvement, much better than the 7.5% growth for 2022.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #63, which places it in the top 25% 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 bullish 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are optimistic about this group’s earnings growth potential. Since Mar 31, 2023, the industry’s earnings estimate for the current year has increased 6.4%.

Given the industry’s bullish prospects, there are a number of stocks worth buying. But before we present the 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 Computers - IT Services Industry has outperformed the S&P 500 composite sector but lagged the broader Zacks Computer and Technology sector in the past year.

The industry has returned 24.8% over this period compared with the S&P 500’s growth of 15.5% and the broader sector’s surge of 38.5%.

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 35X, higher than the S&P 500’s 13.2X and the sector’s 12.54X.

Over the past five years, the industry has traded as high as 52.87X and as low as 21.06X, with the median being 31.71X, as the charts below show.




3 Must-Buy IT Services Stocks

Vertiv: This Zacks Rank #1 (Strong Buy) company is benefiting from supply-chain improvements and healthy market demand. You can see the complete list of today’s Zacks #1 Rank stocks here.

Growing demand for AI-based solutions is benefiting Vertiv’s prospects. The company raised its top-line expectation based on a solid data center end-market.

The Zacks Consensus Estimate for Vertiv’s 2023 earnings of $1.72 per share has increased 7.5% over the past 30 days. VRT shares have gained 212.4% year to date.

Price and Consensus: VRT The company, also sporting a Zacks Rank #1, offers recommendations across the Open Web with an AI-based, algorithmic engine.

Taboola is benefiting from a strong user engagement level and its ability to monetize its interactions with customers.

The consensus mark for 2023 earnings has surged by three cents to five cents per share over the past 30 days. TBLA shares have gained 25.3% year to date.

Price and Consensus: TBLA


ServiceNow: This Zacks Rank #2 (Buy) company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. It had 1789 total customers with more than $1 million in annual contract value at the end of the third quarter of 2023.

The Zacks Consensus Estimate for ServiceNow’s 2023 earnings has increased by 3% to $10.44 per share over the past 30 days. NOW shares have returned 73.6% year to date.

Price and Consensus: NOW

See More Zacks Research for These Tickers

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

ServiceNow, Inc. (NOW) - free report >>

Vertiv Holdings Co. (VRT) - free report >> Ltd. (TBLA) - free report >>

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