3 IT Services Stocks to Buy From a Prospering Industry
The Zacks Computers – IT Services industry is benefiting from the ongoing digitization process globally. Initiatives to diversify IT services have been a boon for industry participants like Infosys INFY, CDW CDW and Endava DAVA. Strong spending on cloud, Internet of Things (IoT), cyber security, data and analytics, artificial intelligence (AI) and automation is driving growth industry-wide. Moreover, solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been driving demand for services provided by these industry participants. However, the pandemic-triggered macroeconomic downturn has induced sluggishness in IT spending, impacting the adoption of consultation and transaction processing solutions.
Industry Description
The Zacks Computers – IT Services industry comprises companies that provide consultancy, communications, IT management & operations, cloud-based web development platform, customer relationship management, professional information solutions and outsourcing services. The industry participants cater to a wide array of end markets, including manufacturing, banking, insurance, healthcare, government agencies and public sector institutions. Industry participants are focusing on cyber-security business, cloud computing market, Big Data business and automation to bolster prospects. Digital transformation is helping companies to gain market share.
What's Shaping the Future of the Computers - IT Services Industry?
Sluggish IT Spending to Mar Prospects: Coronavirus crisis-induced sluggish spending across small and medium businesses (SMBs) due to restricted economic activity globally has impacted the adoption of IT-services, primarily consulting services applications, infrastructure management, and transaction processing platforms. The industry players are anticipated to bear the brunt of the slowdown in IT spending. Gartner projects IT spending to increase 5.1% in 2022, down from 9% growth in 2021. The shift in consumer buying patterns amid coronavirus-induced supply chain constraints is likely to dampen the industry’s prospects. Also, the shift from enterprise to consumer-focused demand, due to the continued work-from-home trend, does not bode well for industry players.
Digitization Wave is a Tailwind: Most of the industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with evolving IT services. The aim is to integrate synergies of emerging technologies including cloud, IoT, AI and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across Asia-Pacific, is a tailwind.
New Normal Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on increasing number of remote workers in the wake of the coronavirus crisis-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premises and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Notably, coronavirus-triggered demand for remote working, digital healthcare and online learning solutions has accelerated the adoption of digital transformation offerings among enterprises, which bodes well for the industry.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #94, which places it in the top 37% 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 positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. Since Nov 30, 2021, the industry’s earnings estimate for the current year has increased 2.8%.
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 Underperforms S&P 500 & Sector
The Zacks Computers - IT Services Industry has underperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology in the past year.
The industry has dropped 17.3% over this period compared with the S&P 500’s return of 12.2% and the broader sector’s decline of 2.5%.
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 27.42X, higher than the S&P 500’s 13.89X and the sector’s 13.32X.
Over the past five years, the industry has traded as high as 39.19X and as low as 25.80X, with the median being at 35.67X, as the chart below shows.
EV/EBITDA Ratio (TTM)
3 Promising IT Services Stocks
Infosys: India-based Infosys is gaining from large deal wins and fast-growing digital services. The company’s sustained focus on Agile Digital and artificial intelligence (AI)-driven core services is a tailwind.
Strong demand for Infosys services in the cloud, Internet of Things (IoT), cyber security, data and analytics is a key driver. Higher investments by clients in digital transformation, AI and automation are an upside.
Infosys currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Infosys’ fiscal 2022 earnings has risen 1.4% to 71 cents per share over the past 30 days. The stock has appreciated 22.8% in the past year.
Price and Consensus: INFY
CDW Corporation: This Vernon Hills, IL-based company is benefiting from the ongoing digital transformation and higher demand for products that enable operations continuity plans amid the pandemic crisis.
Growth in the healthcare end market, a resilient business model, and a solid product and solutions portfolio are key positives for CDW.
CDW’s core strength of providing best-in-class services and easy-to-acquire technologies will bolster growth over the long haul.
The Zacks Consensus Estimate for this Zacks Rank #2 company’s 2022 earnings has been revised upward by 4.4% over the past 30 days to $9.11 per share. The stock has gained 13.3% in the past year.
Price and Consensus: CDW
Endava: This Zacks Rank #2 company is riding on its growing expertise in the fintech domain. Moreover, the ongoing digital transformation by enterprises, accretive acquisitions and an improving economic environment are driving growth. Endava is benefiting from an expanding clientele.
The Zacks Consensus Estimate for this Santa Clara, CA-based company’s fiscal 2022 bottom line has been unchanged at $2.38 per share over the past 30 days. Endava’s shares have risen 48% in the past year.
Price and Consensus: DAVA
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