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2 Stocks to Watch From the Challenging Computer-Services Industry
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The Zacks Computer - Services industry is suffering from macroeconomic challenges, including high interest rates and inflation, which have resulted in an elongated sales cycle, lower conversion rates and delays by customers in making purchase decisions. However, industry participants like CACI International (CACI - Free Report) and PDF Solutions (PDFS - Free Report) are riding on the ongoing digital transformation, which is increasing the demand for cloud-enabled software solutions. The rising adoption of digital transformative techniques in healthcare and financial services has been a silver lining for industry participants. The growing need for consulting, research and cyber-security solutions, stringent regulations, digital healthcare and the growing adoption of business automation solutions is likely to continue driving the industry’s prospects.
Industry Description
The Zacks Computer - Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include consulting and research solutions, security solutions, business support solutions and systems engineering, as well as software application development solutions. The industry participants cater to varied end markets and customers, including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, and media and entertainment. Consultancy companies in the industry are helping clients in their ongoing digital transformation. They provide end-to-end services, including application development, integration and maintenance, technology infrastructure management and business process services.
3 Computer-Services Industry Trends to Watch
Remote & Hybrid Work Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead based on an increasing number of remote and hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, enabling them to provide flexible and easily adaptable hybrid solutions. The growing remote-working trend has led to increased demand for cloud and cost-efficient business support solutions, as well as other digital monetization solutions, which bode well for the industry.
Growing Cyber Attacks are Creating a Tailwind: The increasing number of cyber-attacks and related security risks are expected to keep the industry’s momentum alive. Government agencies are ideal targets for cyber-attacks, as they are entrusted with sensitive information. Therefore, the growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for industry players.
Regulatory Compliance Drives Demand: The companies in this industry are likely to benefit from increasingly complex network systems and sensitive information environments in which governments and businesses operate. The industry participants are keeping pace with the global regulatory and business practice requirements, thereby helping customers incorporate the best practices while complying with governmental and industry norms.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #223, which places it in the bottom 11% 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 dim 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since May 30, 2023, the Zacks Consensus Estimate for the industry’s 2023 earnings has moved south by 13.8%.
Despite the dull industry outlook, there are a few stocks worth watching currently. But before we present those 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.
Industry Lags Sector and S&P 500
The Zacks Computer – Services industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index over the past year.
The industry has risen 6.4% over this period compared with the S&P 500’s growth of 26.1% and the broader sector’s return of 36.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer stocks, we see that the industry is currently trading at 18.51X compared with the S&P 500’s 21.10X and the sector’s forward-12-month P/E of 24.66X.
Over the last five years, the industry has traded as high as 21.27X and as low as 13.25X, with a median of 15.85X, as the charts below show.
CACI’s sustained focus on its strategy to grow in larger markets and leverage mergers and acquisitions to further increase its market share and create long-term value for its shareholders is praiseworthy. A favored relationship with the Department of Defense and exposure to expanding defense budget are key growth catalysts.
The Zacks Consensus Estimate for CACI’s fiscal 2024 earnings has increased 0.4% to $20.35 per share over the past 30 days. The stock has climbed 32.5% in the year-to-date period.
Price and Consensus: CACI
PDF Solutions: This Zacks Rank #3 company is benefiting from strong demand for its solutions, including DFI, CV infrastructure and Exensio. AI is driving strong demand for advanced logic processes that leverage 3D transistors like nanosheets and 3D interconnects such as backside power.
Accelerating usage of AI and machine learning is driving demand for PDF Solutions MLOps system that leverages its Exensio Cloud, DEX and test infrastructure.
The Zacks Consensus Estimate for PDFS’ 2024 earnings has declined a couple of cents to 82 cents per share over the past 30 days. The stock has gained 10.2% year to date.
Price and Consensus: PDFS
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2 Stocks to Watch From the Challenging Computer-Services Industry
The Zacks Computer - Services industry is suffering from macroeconomic challenges, including high interest rates and inflation, which have resulted in an elongated sales cycle, lower conversion rates and delays by customers in making purchase decisions. However, industry participants like CACI International (CACI - Free Report) and PDF Solutions (PDFS - Free Report) are riding on the ongoing digital transformation, which is increasing the demand for cloud-enabled software solutions. The rising adoption of digital transformative techniques in healthcare and financial services has been a silver lining for industry participants. The growing need for consulting, research and cyber-security solutions, stringent regulations, digital healthcare and the growing adoption of business automation solutions is likely to continue driving the industry’s prospects.
Industry Description
The Zacks Computer - Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include consulting and research solutions, security solutions, business support solutions and systems engineering, as well as software application development solutions. The industry participants cater to varied end markets and customers, including intelligence, defense, U.S. government agencies, communications, banking, financial services, insurance, healthcare, and media and entertainment. Consultancy companies in the industry are helping clients in their ongoing digital transformation. They provide end-to-end services, including application development, integration and maintenance, technology infrastructure management and business process services.
3 Computer-Services Industry Trends to Watch
Remote & Hybrid Work Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead based on an increasing number of remote and hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, enabling them to provide flexible and easily adaptable hybrid solutions. The growing remote-working trend has led to increased demand for cloud and cost-efficient business support solutions, as well as other digital monetization solutions, which bode well for the industry.
Growing Cyber Attacks are Creating a Tailwind: The increasing number of cyber-attacks and related security risks are expected to keep the industry’s momentum alive. Government agencies are ideal targets for cyber-attacks, as they are entrusted with sensitive information. Therefore, the growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government bodes well for industry players.
Regulatory Compliance Drives Demand: The companies in this industry are likely to benefit from increasingly complex network systems and sensitive information environments in which governments and businesses operate. The industry participants are keeping pace with the global regulatory and business practice requirements, thereby helping customers incorporate the best practices while complying with governmental and industry norms.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #223, which places it in the bottom 11% 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 dim 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since May 30, 2023, the Zacks Consensus Estimate for the industry’s 2023 earnings has moved south by 13.8%.
Despite the dull industry outlook, there are a few stocks worth watching currently. But before we present those 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.
Industry Lags Sector and S&P 500
The Zacks Computer – Services industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index over the past year.
The industry has risen 6.4% over this period compared with the S&P 500’s growth of 26.1% and the broader sector’s return of 36.2%.
One-Year Price Performance
Industry's Current Valuation
On the basis of forward 12-month P/E, which is a commonly used multiple for valuing computer stocks, we see that the industry is currently trading at 18.51X compared with the S&P 500’s 21.10X and the sector’s forward-12-month P/E of 24.66X.
Over the last five years, the industry has traded as high as 21.27X and as low as 13.25X, with a median of 15.85X, as the charts below show.
Forward 12-Month Price-to-Earnings (P/E) Ratio
2 Computer-Services Stocks to Watch
CACI International: This Zacks Rank #3 (Hold) company is benefiting from new business wins and organic expansions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CACI’s sustained focus on its strategy to grow in larger markets and leverage mergers and acquisitions to further increase its market share and create long-term value for its shareholders is praiseworthy. A favored relationship with the Department of Defense and exposure to expanding defense budget are key growth catalysts.
The Zacks Consensus Estimate for CACI’s fiscal 2024 earnings has increased 0.4% to $20.35 per share over the past 30 days. The stock has climbed 32.5% in the year-to-date period.
Price and Consensus: CACI
PDF Solutions: This Zacks Rank #3 company is benefiting from strong demand for its solutions, including DFI, CV infrastructure and Exensio. AI is driving strong demand for advanced logic processes that leverage 3D transistors like nanosheets and 3D interconnects such as backside power.
Accelerating usage of AI and machine learning is driving demand for PDF Solutions MLOps system that leverages its Exensio Cloud, DEX and test infrastructure.
The Zacks Consensus Estimate for PDFS’ 2024 earnings has declined a couple of cents to 82 cents per share over the past 30 days. The stock has gained 10.2% year to date.
Price and Consensus: PDFS
