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3 Stocks to Watch in a Challenging Technology Solutions Industry

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Players in the Zacks Computer – Integrated Systems industry are grappling with persistent supply-chain bottlenecks. A challenging macroeconomic landscape with rising inflation is also a concern. Soaring prices and persistent delays in customer acceptance have resulted in high levels of backlog and cast a pall on the industry’s prospects. Nonetheless, International Business Machines (IBM - Free Report) , Hewlett Packard Enterprise (HPE - Free Report) and Agilysys (AGYS - Free Report) are some participants to watch as they are benefiting from the rise in advanced forms of data management, the rapid shift from traditional silos, increased demand for integration of deployment techniques and modern application development.

Industry Description

The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics. These industry players are increasing investments in data modernization and analytics, cyber defense, remote work, automation and contact-less services, customer and employee experience and supply-chain modernization, which accelerate growth in digital transformation services. Some industry participants also provide technological solutions (products and services) to help organizations connect, interact and transact with customers. Others develop and market information recognition, data entry software, systems and technologies.

4 Computer - Integrated Systems Industry Trends in Focus

Integrated Solutions Driving Demand: The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises, as well as increasing investments in IoT, big data, AI and blockchain software technologies. Business analytics, cloud computing, mobile and security and social businesses present significant opportunities to an increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave. Industry players are anticipated to benefit from recovering global IT spending, as predicted by Gartner.

Solid Adoption of Multi-Cloud Model: The growing adoption of the multi-cloud model to achieve better scalability and attain improved resource utilization is expanding the scope of industry participants. Cloud and hardware/software virtual technologies are anticipated to favor 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.

Supply-Chain Bottlenecks and Backlogs: Industry participants are witnessing supply constraints, softness in server demand and cognitive applications and delays in customer acceptance. These are resulting in consistent backlog levels, particularly in Compute, High Performance Computing & Mass Storage Class and Storage. Moreover, volatility in foreign exchange — primarily due to the current macroeconomic scenario and headwinds in emerging markets — does not bode well for the industry.

Semiconductor Chip Shortage Mars Prospects: Industry participants are facing challenges stemming from the ongoing and time-consuming business model transition to the cloud. Further, lower spending across Data-Center Systems — primarily due to component shortages like memory and CPUs and deceleration in hyperscale spending — is likely to dampen the prospects of industry participants.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #197, which places it in the bottom 22% 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 underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 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 Mar 31, 2023, the industry’s earnings estimate for 2024 has moved down 6.1%.

Despite the gloomy industry outlook, a few stocks are worth watching based on a strong earnings outlook. Before we present a few 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 – Integrated Systems industry has underperformed the broader Computer and Technology sector while beating the Zacks S&P 500 composite in the past year.

The industry has returned 46.2% over this period compared with the S&P 500 and the broader Computer and Technology sector’s respective returns of 33% and 53.7%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing computer-integrated systems stocks, we see that the industry is currently trading at 2.05X compared with the S&P 500’s 3.97X. It is also below the sector’s trailing 12-month P/S of 5.26X.

Over the past five years, the industry has traded as high as 2.15X and as low as 1.14X, with the median being at 1.58X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

4 Computer-Integrated Systems Providers to Watch

International Business Machines: This Zacks Rank #3 (Hold) company is witnessing solid net sales growth in the software segment driven by healthy hybrid cloud adoption and solid demand trends across RedHat, automation, data in AI and security. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A strong foundation of research and innovation, a broad portfolio that caters to various industry requirements and a diverse global market presence set it apart from its competitors.

Increased watsonx adoption by clients is a tailwind.  The watsonx Code Assistant enables developers and IT operators to code more quickly and precisely with the assistance of generative AI. The usage of natural language ensures developers from various skill sets have access to automation across business operations.

IBM entered into a definitive agreement to acquire Software AG’s iPaaS (integration platform-as-a-service) businesses, StreamSets and webMethods. StreamSets and webMethods are industry leaders in data integration, API management and application integration. The buyout is anticipated to be concluded by the second quarter of 2024 through a €2.13 billion cash transaction.

webMethods specializes in advanced API management and integration tools and operates seamlessly across on-premises and cloud environments. StreamSets is a DataOps and data ingestion platform with a cloud-based architecture. By integrating these capabilities, IBM aims to create a comprehensive and advanced application and data integration platform within the industry. This integration will enhance watsonx’s data ingestion capabilities and also enrich customers with additional integration and API management features. Through this buyout, IBM is seeking to capitalize on the positive momentum of the integration software market.

The company also made significant advancements in its Quantum Development Roadmap. IBM unveiled its first modular quantum computer ‘IBM Quantum System Two.’ The system will serve as a foundation for IBM's quantum-centric supercomputing architecture.

The Zacks Consensus Estimate for its 2024 earnings has moved north by 0.3% to $10.07 per share in the past 60 days. IBM’s shares have gained 17.2% year to date.

Price & Consensus: IBM

Hewlett Packard Enterprise: The company is benefiting from strong executions in clearing backlogs and increased customer acceptance.

HPE’s multi-billion-dollar investment plan across expanding networking capabilities will help diversify business from server and hardware storage markets and boost margins over the long run. Also, easing supply-chain challenges will help it clear backlogs rapidly.

Hewlett Packard views AI, the Industrial Internet of Things and distributed computing as the next major markets. The company’s latest agreement to acquire Juniper Networks is not just a financial move but a strategic leap to elevate its competitive stance by expanding its networking domain, particularly in the realms of AI, cloud and hybrid solutions.

HPE’s efforts to shift focus to higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding the bottom line.

However, organizations are pushing back their investments in big and expensive technology products due to global economic slowdown concerns, which can undermine this Zacks Rank #3 company’s near-term prospects.

The Zacks Consensus Estimate for fiscal 2024 earnings has moved south by 2.6% to $1.88 per share in the past 60 days. HPE’s shares have gained 6.2% year to date.

Price & Consensus: HPE

Agilysys: The company is benefiting from steady demand for cloud-native products and supporting software modules, an end-to-end array of software solutions and world-class customer service.

Agilysys operates as a developer and marketer of hardware and software products as well as services, with special expertise in select vertical markets, including retail and hospitality in North America, Europe, the Asia-Pacific and India.

Record high services revenues and significantly improved services margins have helped the company to drive increases in gross margin and net income profitability levels.

This Zacks Rank #3 company’s expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management and business continuity is a major growth driver.

The Zacks Consensus Estimate for its fiscal 2024 earnings has remained steady at 97 cents per share in the past 30 days. Shares of AGYS have declined 11.9% year to date.

Price & Consensus: AGYS

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