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4 IT Services Stocks to Buy From a Prospering Industry
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, CoStar Group, Amdocs and Nutanix. Improving IT spending trends also bode 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 in order 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 Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on 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 5.5% in 2023, significantly higher than 0.5% growth witnessed in 2022. Spending on IT services is expected to witness a 9.1% improvement, much better than 3.5% growth for 2022. For 2024, projections remain bullish, with spending on IT services expected to grow 10.2%.
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 #96, which places it in the top 38% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
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 estimates for the current year have increased 2.2%.
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 S&P 500 & Sector
The Zacks Computers - IT Services Industry has underperformed the S&P 500 composite sector and the broader Zacks Computer and Technology sector in the past year.
The industry has returned 7% over this period compared with the S&P 500’s rise of 14.6% and the broader sector’s surge of 23.1%.
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 29.58X, higher than the S&P 500’s 13.17X and the sector’s 12.30X.
Over the past five years, the industry has traded as high as 52.12X and as low as 20.92X, with the median being 31.56X, as the chart below shows.
4 Must-Buy IT Services Stocks
ServiceNow: This Santa Clara, CA-based company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. NOW’s new solutions — Automated service suggestions, Service Request Playbook and Workplace Scenario Planning — are helping it win new customers, thereby driving subscription revenues. Its strategic alliance with Microsoft is a tailwind.
Its foray into generative AI with the launch of ServiceNow Generative AI Controller, Now Assist for Search and Now Assist for Virtual Agent promises further growth for this Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for ServiceNow’s 2023 earnings of $9.59 per share has increased by a penny over the past 30 days. NOW shares have moved up 42.9% year to date.
CoStar Group: This Zacks Rank #1 company is benefiting from increasing traffic at its marketplaces, including Apartments.com, Homes.com, LoopNet Lands, BizBuySell, Belbex, and Bureaux Locaux.
Apartments.com is benefiting from the growing number of properties on the platform (64,000 at the end of first-quarter 2023). Sales force expansion and excellent customer service are driving growth in clientele.
The Zacks Consensus Estimate for CoStar’s 2023 earnings has been steady at $1.24 per share over the past 30 days. CSGP shares have returned 6.1% year to date.
Amdocs: This leading provider of customer care, billing and order management systems for communications and Internet services is benefiting from a recurring revenue business model. Customer additions and solid demand for managed services are primary growth drivers.
Amdocs’ growth momentum is expected to continue due to its initiatives to aid digital, media, network and cloud transformations of its clients. The acquisition of Openet has rapidly expanded its footprint in 5G (fifth-generation) cellular networks. Its solutions have been selected by the likes of AT&T and T-Mobile to bolster their 5G footprint.
The consensus mark for this Zacks Rank #2 (Buy) company’s fiscal 2023 earnings has increased by a penny to $5.89 per share over the past 30 days. DOX shares are 5.5% year to date.
Nutanix: This San Jose, CA-based enterprise cloud operating system provider is benefiting from the solid adoption of its hybrid cloud solutions and an expanding clientele.
Moreover, the adoption rate of Nutanix’s AHV hypervisor has been strong as customers continue to opt for it as a low-cost alternative to other vendor offerings.
The consensus mark for this Zacks Rank #2 company’s fiscal 2023 earnings has surged by 29 cents to 49 cents per share over the past 30 days. NTNX shares are 14.7% year to date.
Why Haven’t You Looked at Zacks' Top Stocks?
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights ServiceNow, CoStar Group, Amdocs and Nutanix
For Immediate Release
Chicago, IL – June 15, 2023 – Today, Zacks Equity Research discusses ServiceNow (NOW - Free Report) , CoStar Group (CSGP - Free Report) , Amdocs (DOX - Free Report) and Nutanix (NTNX - Free Report) .
4 IT Services Stocks to Buy From a Prospering Industry
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, CoStar Group, Amdocs and Nutanix. Improving IT spending trends also bode 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 in order 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 Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on 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 5.5% in 2023, significantly higher than 0.5% growth witnessed in 2022. Spending on IT services is expected to witness a 9.1% improvement, much better than 3.5% growth for 2022. For 2024, projections remain bullish, with spending on IT services expected to grow 10.2%.
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 #96, which places it in the top 38% 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 outperforms the bottom 50% by a factor of more than 2 to 1.
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 estimates for the current year have increased 2.2%.
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 S&P 500 & Sector
The Zacks Computers - IT Services Industry has underperformed the S&P 500 composite sector and the broader Zacks Computer and Technology sector in the past year.
The industry has returned 7% over this period compared with the S&P 500’s rise of 14.6% and the broader sector’s surge of 23.1%.
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 29.58X, higher than the S&P 500’s 13.17X and the sector’s 12.30X.
Over the past five years, the industry has traded as high as 52.12X and as low as 20.92X, with the median being 31.56X, as the chart below shows.
4 Must-Buy IT Services Stocks
ServiceNow: This Santa Clara, CA-based company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. NOW’s new solutions — Automated service suggestions, Service Request Playbook and Workplace Scenario Planning — are helping it win new customers, thereby driving subscription revenues. Its strategic alliance with Microsoft is a tailwind.
Its foray into generative AI with the launch of ServiceNow Generative AI Controller, Now Assist for Search and Now Assist for Virtual Agent promises further growth for this Zacks Rank #1 (Strong Buy) company. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for ServiceNow’s 2023 earnings of $9.59 per share has increased by a penny over the past 30 days. NOW shares have moved up 42.9% year to date.
CoStar Group: This Zacks Rank #1 company is benefiting from increasing traffic at its marketplaces, including Apartments.com, Homes.com, LoopNet Lands, BizBuySell, Belbex, and Bureaux Locaux.
Apartments.com is benefiting from the growing number of properties on the platform (64,000 at the end of first-quarter 2023). Sales force expansion and excellent customer service are driving growth in clientele.
The Zacks Consensus Estimate for CoStar’s 2023 earnings has been steady at $1.24 per share over the past 30 days. CSGP shares have returned 6.1% year to date.
Amdocs: This leading provider of customer care, billing and order management systems for communications and Internet services is benefiting from a recurring revenue business model. Customer additions and solid demand for managed services are primary growth drivers.
Amdocs’ growth momentum is expected to continue due to its initiatives to aid digital, media, network and cloud transformations of its clients. The acquisition of Openet has rapidly expanded its footprint in 5G (fifth-generation) cellular networks. Its solutions have been selected by the likes of AT&T and T-Mobile to bolster their 5G footprint.
The consensus mark for this Zacks Rank #2 (Buy) company’s fiscal 2023 earnings has increased by a penny to $5.89 per share over the past 30 days. DOX shares are 5.5% year to date.
Nutanix: This San Jose, CA-based enterprise cloud operating system provider is benefiting from the solid adoption of its hybrid cloud solutions and an expanding clientele.
Moreover, the adoption rate of Nutanix’s AHV hypervisor has been strong as customers continue to opt for it as a low-cost alternative to other vendor offerings.
The consensus mark for this Zacks Rank #2 company’s fiscal 2023 earnings has surged by 29 cents to 49 cents per share over the past 30 days. NTNX shares are 14.7% year to date.
Why Haven’t You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.