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 Roper Technologies ROP, Check Point Software CHKP, Vertiv VRT and Wix.com WIX. 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 4.3% in 2023, significantly higher than the 2.8% growth witnessed in 2022. Spending on IT services is expected to witness a 8.8% improvement, much better than the 7.5% growth for 2022. For 2024, projections remain bullish, with spending on IT services expected to grow 11.6%.

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 #105, which places it in the top 42% 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 estimates for the current year have increased 1.42%.

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 20.4% over this period compared with the S&P 500’s growth of 15.1% and the broader sector’s surge of 27.7%.

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.

4 Must-Buy IT Services Stocks

Vertiv: This Zacks Rank #1 (Strong Buy) company is benefiting from supply-chain improvements and healthy market demand.

Growing demand for AI-based solutions is benefiting Vertiv’s prospects. The company raised its top-line expectation based on robust performance in the Americas.

The Zacks Consensus Estimate for Vertiv’s 2023 earnings of $1.59 per share has increased 16.05% over the past 30 days. VRT shares have gained 191.9% year to date.

Wix.com: The company, also carrying a Zacks Rank #1, is benefiting from solid momentum in Creative Subscriptions’ and Business Solutions’ segments. It plans to tap the growing demand for AI by launching new products like AI Site Generator and AI Assistant for businesses. Increasing partner revenues and B2B partnerships are tailwinds.

The conversion of new users to paid subscriptions, strong customer retention and increasing average revenue per subscription augur well.

The consensus mark for 2023 earnings has surged 45.7% to $3.35 per share over the past 30 days. WIX shares have gained 26.9% year to date.

Check Point Software: This Zacks Rank #2 (Buy) company is benefiting from growth in security subscriptions, aided by strong demand for its advanced solutions, primarily CloudGuard, Harmony, Sandblast Zero-day threat prevention and Infinity solutions. Increased demands for network security gateways to support higher capacities are aiding the adoption of its remote access VPN solutions.

Acquisitions have helped it to broaden its portfolio and enter newer markets, which have eventually driven its revenues. The company continues to win new customer accounts, which is boosting revenues.

The Zacks Consensus Estimate for Check Point Software’s 2023 earnings has increased by a couple of cents to $8.19 per share over the past 30 days. CHKP shares have returned 5.5% year to date.

Roper: This Zacks Rank #2 company is benefiting from strength across all its segments. Momentum across the Deltek, Vertafore and Aderant businesses is aiding the Application Software unit.

The acquisition of Syntellis bolsters the unit’s growth. Strong retention and customer expansion activity are boosting the Network Software unit’s performance. Strength across the Neptune business augurs well for the Tech Enabled Products unit.

The consensus mark for fiscal 2023 earnings has increased by a penny to $16.46 per share over the past 30 days. ROP shares are up 15.6% year to date.
Roper Technologies, Inc. (ROP): Free Stock Analysis Report

Check Point Software Technologies Ltd. (CHKP): Free Stock Analysis Report

Wix.com Ltd. (WIX): Free Stock Analysis Report

Vertiv Holdings Co. (VRT): Free Stock Analysis Report

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