Image: ShutterstockThe Zacks Computers – IT Services industry participants have been 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.However, industry participants like ServiceNow (NOW – Free Report), Roper Technologies (ROP – Free Report), and Nutanix (NTNX – Free Report) have 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. Improving IT spending trends also bodes well for these players.
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.Industry participants cater to a wide array of end markets, including manufacturing, telecommunications, banking, insurance, healthcare, government agencies, and public sector institutions. They 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 8% over 2023 to $5.06 trillion in 2024. Spending on IT services is expected to witness a 9.7% improvement, much better than the 6.1% growth for 2023.
The Zacks Industry Rank Indicates Dim Prospects
The Zacks Computers – IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #143, which places it in the bottom 43% 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 bearish 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 bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are pessimistic about this group’s earnings growth potential. Since Oct. 31, 2023, the industry’s earnings estimate for the year has decreased 23.18%.Given the industry’s bearish prospects, there are a few 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.
The Industry Beats the Sector and the S&P 500
The Zacks Computers – IT Services Industry has outperformed the S&P 500 sector and the broader Zacks Computer and Technology sector in the past year. The industry has returned 47.7% over this period compared with the S&P 500’s growth of 25.8% and the broader sector’s surge of 40.2%.
One-Year Price Performance
Image Source: Zacks Investment Research
The 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 has recently been seen trading at 42.01X, which is higher than the S&P 500’s 13.93X and the sector’s 14.42X.Over the past five years, the industry has traded as high as 53.02X, as low as 21.16X, and with the median being 33.12X, as the charts below show.
EV/EBITDA Ratio (TTM)
Image Source: Zacks Investment Research
Image Source: Zacks Investment Research
3 Must-Buy IT Services Stocks – Nutanix
This Zacks Rank #1 (Strong Buy) company is benefiting from the steady adoption of its Hybrid cloud solutions and an expanding clientele. The adoption rate of the company’s AHV hypervisor has been strong as customers continue to opt for it as a low-cost alternative to other vendor offerings.Nutanix is expected to benefit from the growth prospects of the hyper-converged infrastructure market over the long-term. Its transition to software-only sales will boost its margins over the long run.The Zacks Consensus Estimate for the company’s fiscal 2024 earnings of $1.08 per share has been unchanged over the past 30 days. Shares of Nutanix have gained 41.7% year-to-date.
Price and Consensus: NTNX
Image Source: Zacks Investment Research
Roper Technologies
This company, carrying a Zacks Rank #2 (Buy) at present, is benefiting from momentum across the Deltek, Vertafore, Frontline, and Aderant businesses, which are aiding the Application Software unit.Strong momentum in the DAT & Loadlink businesses and excellent bookings in the iPipeline business are boosting the Network Software unit’s performance. Strength across the Neptune and Verathon businesses bodes well for the Technology Enabled Products unit. Additionally, Roper’s bullish forecast for 2024 sparks optimism.The consensus mark for Roper’s 2024 earnings has increased by 0.6% to $18.17 per share over the past 30 days. Roper shares have declined 4% year-to-date.
Price and Consensus: ROP
Image Source: Zacks Investment Research
ServiceNow
This Zacks Rank #2 (Buy) company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. ServiceNow had 1933 total customers with more than $1 million in annual contract value (ACV) at the end of the first quarter.ServiceNow had eight deals greater than $5 million in net new ACV, and four deals of more than $10 million. It closed 59 deals greater than $1 million net new ACV. Generative AI deals continued to gain traction with record-breaking net new ACV for Pro Plus, making it the fastest-selling product in ServiceNow’s history.The Zacks Consensus Estimate for ServiceNow’s 2024 earnings has increased by 1.9% to $13.52 per share over the past 30 days. The company’s shares have returned 2.3% year-to-date.
Price and Consensus: NOW
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