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4 Stocks to Watch in a Challenging Technology Solutions Industry

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Players in the Zacks Computer – Integrated Systems industry are grappling with lingering 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, Hewlett Packard Enterprise HPE, NCR Corporation NCR and Agilysys AGYS are a few industry 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 as well as 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 & employee experience and supply-chain modernization, which accelerate growth in digital transformation services. Some industry participants also provide technological solutions (both 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. Moreover, 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. The 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 favorably impact 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, as well as 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, as well as 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 #167, which places it in the bottom 33% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates continued underperformance in the near term. 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 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 on this group’s earnings growth potential. Since Sep 30, 2022, the industry’s earnings estimate for 2023 has moved down 14.1%.

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 and S&P 500

The Zacks Computer – Integrated Systems industry has underperformed the broader Computer and Technology sector and Zacks S&P 500 composite over the past year.

The industry has returned 13.7% over this period compared with the S&P 500 and broader Computer and Technology sector’s respective returns of 16.5% and 28.5%.

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 1.64X compared with the S&P 500’s 3.71X. It is also below the sector’s trailing 12-month P/S of 4.13X.

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 1.55X.

4 Computer-Integrated Systems Providers to Watch

International Business Machines: This Zacks Rank #2 (Buy) 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.

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.

Synergies from the Red Hat buyout are boosting its competitive position in the hybrid cloud market. The company is likely to benefit from the robust adoption and broad-based availability of IBM Blockchain World Wire — a blockchain-driven global payments network aimed at accelerating and optimizing cross-border payments.

IBM is poised to gain from the spin-off of the legacy infrastructure services business as it focuses on a hybrid cloud strategy. However, declining trends in the infrastructure vertical are hurting IBM’s top line. Intense competition from other established players like Amazon, Microsoft and Google in cloud services is exerting pressure on margins.

The Zacks Consensus Estimate for its 2023 earnings has moved north by 0.2% to $9.43 per share in the past 60 days. IBM’s shares are up 1.7% year to date.

NCR: This Zacks Rank #3 (Hold) company is benefiting from strong demand for its software and service solutions across digital payments, banking and hospitality industries.

The acquisition of Cardtronics strengthened its NCR-as-a-Service strategy, expanded its global footprint and enhanced its automated teller machine (“ATM”) network. Cardtronics’ robust debit network will further expand NCR’s payments platform and help it connect to retail and bank customers, thereby facilitating customer acquisition.

Besides, the company continued to witness the traction of its point-of-sale and self-checkout solutions across food-drug merchandise and convenience-fuel-retail customers.

The Zacks Consensus Estimate for the company’s 2023 earnings has been revised upward by 9.9% in the past 60 days to $3.45 per share. NCR’s shares have gained 13.5% year to date.

Hewlett Packard Enterprise: It 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, Industrial Internet of Things and distributed computing as the next major markets.

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 2023 earnings has moved north by 0.9% to $2.13 per share in the past 60 days. HPE’s shares have increased 5.1% year to date.

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.

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 2023 earnings has remained steady at 73 cents per share in the past 60 days. Shares of AGYS have declined 18.1% year to date.
International Business Machines Corporation (IBM): Free Stock Analysis Report

NCR Corporation (NCR): Free Stock Analysis Report

Agilysys, Inc. (AGYS): Free Stock Analysis Report

Hewlett Packard Enterprise Company (HPE): Free Stock Analysis Report

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