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3 IT Services Stocks to Buy From a Prospering Industry
The Zacks Computers – IT Services 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. However, industry participants like Vertiv VRT, Check Point Software CHKP and CyberArk Software CYBR 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 improve engagement with customers, launch products and support 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 modernizing their traditional legacy-oriented business processes to keep pace with evolving IT services. The aim is to integrate the coordination 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 7.5% over 2023 to $5.26 trillion in 2024. Spending on IT services is expected to witness a 7.1% improvement, much better than the 4.9% growth for 2023.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #50, which places it in the top 20% 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 July 30, 2024, the industry’s earnings estimate for the current year has increased by a penny.
Given the industry’s bullish prospects, there are several 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 and S&P 500
The Zacks Computers - IT Services Industry has underperformed the S&P 500 sector and the broader Zacks Computer and Technology sector in the past year.
The industry has returned 33.8% over this period compared with the S&P 500’s appreciation of 39.4% and the broader sector’s surge of 48.6%.
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 54.34X, higher than the S&P 500’s 19.38X and the sector’s 19.08X.
Over the past five years, the industry has traded as high as 56.82X and as low as 41.52X, with the median being 50.43X, as the charts below show.
EV/EBITDA Ratio (TTM)
3 Must-Buy IT Services Stocks
CyberArk: This Zacks Rank #1 (Strong Buy) company is benefiting from the rising demand for cyber security and privileged access security solutions due to the long list of data breaches and increasing digital transformation strategies. You can see the complete list of today’s Zacks #1 Rank stocks here.
A strong presence across verticals, such as banking, healthcare, government and utilities, is safeguarding CyberArk from the adverse effects of softening IT spending.
The Zacks Consensus Estimate for CyberArk’s 2024 earnings has been unchanged at $2.29 per share over the past 30 days. CYBR shares have returned 32.4% year to date.
Price and Consensus: CYBR
Vertiv: The company, sporting a Zacks Rank #1, offers cooling and power management infrastructure technologies, primarily addressing data center providers. It is riding on strong AI-driven order growth. The growing focus on thermal management by data center providers bodes well for Vertiv.
Solid AI-related demand is expected to provide a tailwind to Vertiv’s order and sales growth.
The consensus mark for VRT’s 2024 earnings has increased by 4.3% to $2.69 per share over the past 30 days. Vertiv shares have jumped 133.6% year to date.
Price and Consensus: VRT
Check Point Software: This Zacks Rank #2 (Buy) company’s shares have surged 35.6% year to date. Check Point is benefiting from the adoption of cloud solutions, 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 CHKP’s remote access VPN solutions. Acquisitions have helped Check Point broaden its portfolio and enter into newer markets.
The Zacks Consensus Estimate for CHKP’s 2024 earnings is pegged at $9.08 per share, up a penny over the past 30 days.
Price and Consensus: CHKP
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