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3 IT Services Stocks to Buy From a Challenging Industry
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The Zacks Computers – IT Services 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. However, industry participants like Dell Technologies (DELL - Free Report) , Fair Isaac (FICO - Free Report) and CyberArk Software (CYBR - Free Report) have 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. Improving IT spending trends also bodes well for these players.
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. Industry participants cater to a wide array of end markets, including manufacturing, telecommunications, banking, insurance, healthcare, government agencies and public sector institutions. They 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 6.8% over 2023 to $5 trillion in 2024. Spending on IT services is expected to witness an 8.7% improvement, much better than the 5.8% growth for 2023.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #149, which places it in the bottom 40% 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 bearish 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. The aggregate earnings estimate revisions show that analysts are pessimistic about this group’s earnings growth potential. Since Oct 31, 2023, the industry’s earnings estimate for the current year has decreased 23.18%.
Given the industry’s bearish prospects, there are a few 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 38.2% over this period compared with the S&P 500’s growth of 23% and the broader sector’s surge of 45.9%.
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 41.03X, higher than the S&P 500’s 13.63X and the sector’s 14.22X.
Over the past five years, the industry has traded as high as 41.82X and as low as 26.82X, with the median being 31.83X, as the charts below show.
EV/EBITDA Ratio (TTM)
3 Must-Buy IT Services Stocks
Dell Technologies: This Zacks Rank #2 (Buy) company is benefiting from strong demand for AI servers driven by ongoing digital transformation and heightened interest in generative AI applications. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
An expanding partner base that includes the likes of NVIDIA, Microsoft, Meta Platforms and Imbue has been a major growth driver for Dell.
The Zacks Consensus Estimate for Dell’s fiscal 2024 earnings of $6.66 per share has increased by a penny over the past 30 days. DELL shares have gained 10.1% year to date.
Price and Consensus: DELL
Fair Isaac: The company, also carrying a Zacks Rank #2, is benefiting from a robust portfolio and an expanding clientele.
FICO is riding the strong adoption of its FICO Scores, which remains a dominant player in the consumer credit scoring market, as evident from an expanding clientele. FICO Scores are extensively used in asset-backed securitizations across major collateral classes, including student loans, consumer finance and credit cards.
The consensus mark for fiscal 2024 earnings has increased by 0.8% to $24.04 per share over the past 30 days. FICO shares have gained 10.1% year to date.
Price and Consensus: FICO
CyberArk Software: This Zacks Rank #2 company is benefiting from the rising demand for cyber security and privileged access security solutions due to the long list of data breaches and increasing digital transformation strategies.
CyberArk’s strategic mix shift toward software-as-a-service and subscription-based solutions is driving top-line growth.
The Zacks Consensus Estimate for CyberArk’s 2024 earnings has increased by 4.8% to $1.72 per share over the past 30 days. CYBR shares have returned 18.9% year to date.
Price and Consensus: CYBR
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3 IT Services Stocks to Buy From a Challenging Industry
The Zacks Computers – IT Services 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. However, industry participants like Dell Technologies (DELL - Free Report) , Fair Isaac (FICO - Free Report) and CyberArk Software (CYBR - Free Report) have 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. Improving IT spending trends also bodes well for these players.
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. Industry participants cater to a wide array of end markets, including manufacturing, telecommunications, banking, insurance, healthcare, government agencies and public sector institutions. They 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 6.8% over 2023 to $5 trillion in 2024. Spending on IT services is expected to witness an 8.7% improvement, much better than the 5.8% growth for 2023.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #149, which places it in the bottom 40% 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 bearish 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. The aggregate earnings estimate revisions show that analysts are pessimistic about this group’s earnings growth potential. Since Oct 31, 2023, the industry’s earnings estimate for the current year has decreased 23.18%.
Given the industry’s bearish prospects, there are a few 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 38.2% over this period compared with the S&P 500’s growth of 23% and the broader sector’s surge of 45.9%.
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 41.03X, higher than the S&P 500’s 13.63X and the sector’s 14.22X.
Over the past five years, the industry has traded as high as 41.82X and as low as 26.82X, with the median being 31.83X, as the charts below show.
EV/EBITDA Ratio (TTM)
3 Must-Buy IT Services Stocks
Dell Technologies: This Zacks Rank #2 (Buy) company is benefiting from strong demand for AI servers driven by ongoing digital transformation and heightened interest in generative AI applications. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
An expanding partner base that includes the likes of NVIDIA, Microsoft, Meta Platforms and Imbue has been a major growth driver for Dell.
The Zacks Consensus Estimate for Dell’s fiscal 2024 earnings of $6.66 per share has increased by a penny over the past 30 days. DELL shares have gained 10.1% year to date.
Price and Consensus: DELL
Fair Isaac: The company, also carrying a Zacks Rank #2, is benefiting from a robust portfolio and an expanding clientele.
FICO is riding the strong adoption of its FICO Scores, which remains a dominant player in the consumer credit scoring market, as evident from an expanding clientele. FICO Scores are extensively used in asset-backed securitizations across major collateral classes, including student loans, consumer finance and credit cards.
The consensus mark for fiscal 2024 earnings has increased by 0.8% to $24.04 per share over the past 30 days. FICO shares have gained 10.1% year to date.
Price and Consensus: FICO
CyberArk Software: This Zacks Rank #2 company is benefiting from the rising demand for cyber security and privileged access security solutions due to the long list of data breaches and increasing digital transformation strategies.
CyberArk’s strategic mix shift toward software-as-a-service and subscription-based solutions is driving top-line growth.
The Zacks Consensus Estimate for CyberArk’s 2024 earnings has increased by 4.8% to $1.72 per share over the past 30 days. CYBR shares have returned 18.9% year to date.
Price and Consensus: CYBR
