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3 IT Services Stocks to Buy From a Prospering Industry
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The Zacks Computers – IT Services industry participants like ServiceNow (NOW - Free Report) , Vertiv (VRT - Free Report) and SoundHound AI (SOUN - 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. However, the industry is 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.This has been a major headwind.
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 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 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 #92, 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 outperform the bottom 50% by a factor of more than two to one.
Given the industry’s bullish prospects, there are a number of 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 13.1% over this period compared with the S&P 500’s gain of 19.7% and the broader sector’s surge of 25.9%.
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 49.89X, higher than the S&P 500’s 19.48X and the sector’s 19.22X.
Over the past five years, the industry has traded as high as 55.9X and as low as 40.32X, with the median being 48.11X, as the charts below show.
EV/EBITDA Ratio (TTM)
3 Must-Buy IT Services Stocks
ServiceNow: This Zacks Rank #1 (Strong Buy) company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. You can see the complete list of today’s Zacks #1 Rank stocks here.
NOW had 1,988 total customers with more than $1 million in annual contract value (ACV) at the end of the second quarter, which represents 15% year-over-year growth in customers.
ServiceNow had 14 deals greater than $5 million in net new ACV and four deals of more than $10 million. It closed 88 deals greater than $1 million net new ACV. Generative AI deals continued to gain traction with net new ACV for Now Assist and were part of 11 deals worth more than $1 million in the reported quarter. It is riding on an expanding partner base.
The Zacks Consensus Estimate for ServiceNow’s 2024 earnings has increased by 2.2% to $13.81 per share over the past 30 days. NOW shares have returned 13.1% year to date.
Price and Consensus: NOW
SoundHound AI: This Zacks Rank #1 company’s shares have surged 133.5% year to date. The uptick can be attributed to its commitment to advancing automotive technology through the seamless integration of advanced voice AI.
SOUN’s prospects in the conversational AI space are expected to be bright, as reflected in its expanding clientele. The Zacks Consensus Estimate for SOUN’s fiscal 2024 loss is pegged at 33 cents per share, unchanged over the past 30 days.
Price and Consensus: SOUN
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.
The company now expects third-quarter 2024 order growth to be low double-digit (10-15% range) despite tough comparisons. On a trailing 12-month basis, the order growth rate is expected between 30% and 35%. Solid AI-related demand is expected to provide a tailwind to 2025 order and sales growth.
The consensus mark for VRT’s 2024 earnings has increased by 6.2% to $2.58 per share over the past 30 days. Vertiv shares have jumped 52% year to date.
Price and Consensus: VRT
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3 IT Services Stocks to Buy From a Prospering Industry
The Zacks Computers – IT Services industry participants like ServiceNow (NOW - Free Report) , Vertiv (VRT - Free Report) and SoundHound AI (SOUN - 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. However, the industry is 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.This has been a major headwind.
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 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 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 #92, 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 outperform the bottom 50% by a factor of more than two to one.
Given the industry’s bullish prospects, there are a number of 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 13.1% over this period compared with the S&P 500’s gain of 19.7% and the broader sector’s surge of 25.9%.
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 49.89X, higher than the S&P 500’s 19.48X and the sector’s 19.22X.
Over the past five years, the industry has traded as high as 55.9X and as low as 40.32X, with the median being 48.11X, as the charts below show.
EV/EBITDA Ratio (TTM)
3 Must-Buy IT Services Stocks
ServiceNow: This Zacks Rank #1 (Strong Buy) company is benefiting from the rising adoption of its workflows by enterprises undergoing digital transformation. You can see the complete list of today’s Zacks #1 Rank stocks here.
NOW had 1,988 total customers with more than $1 million in annual contract value (ACV) at the end of the second quarter, which represents 15% year-over-year growth in customers.
ServiceNow had 14 deals greater than $5 million in net new ACV and four deals of more than $10 million. It closed 88 deals greater than $1 million net new ACV. Generative AI deals continued to gain traction with net new ACV for Now Assist and were part of 11 deals worth more than $1 million in the reported quarter. It is riding on an expanding partner base.
The Zacks Consensus Estimate for ServiceNow’s 2024 earnings has increased by 2.2% to $13.81 per share over the past 30 days. NOW shares have returned 13.1% year to date.
Price and Consensus: NOW
SoundHound AI: This Zacks Rank #1 company’s shares have surged 133.5% year to date. The uptick can be attributed to its commitment to advancing automotive technology through the seamless integration of advanced voice AI.
SOUN’s prospects in the conversational AI space are expected to be bright, as reflected in its expanding clientele. The Zacks Consensus Estimate for SOUN’s fiscal 2024 loss is pegged at 33 cents per share, unchanged over the past 30 days.
Price and Consensus: SOUN
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.
The company now expects third-quarter 2024 order growth to be low double-digit (10-15% range) despite tough comparisons. On a trailing 12-month basis, the order growth rate is expected between 30% and 35%. Solid AI-related demand is expected to provide a tailwind to 2025 order and sales growth.
The consensus mark for VRT’s 2024 earnings has increased by 6.2% to $2.58 per share over the past 30 days. Vertiv shares have jumped 52% year to date.
Price and Consensus: VRT
