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3 Stocks to Buy From the Prospering Computer-Services Industry
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The Zacks Computer - Services industry participants like CSG Systems International (CSGS - Free Report) , PDF Solutions (PDFS - Free Report) and Innodata (INOD - 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. However, industry participants are 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.
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 Bright Prospects
The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #99, which places it in the top 40% 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 bright 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 bright industry outlook, there are a number of stocks worth buying 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 14% over this period compared with the S&P 500’s gain of 27.8% and the broader sector’s return of 38.6%.
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 19.01X compared with the S&P 500’s 21.66X and the sector’s forward-12-month P/E of 27.11X.
Over the last five years, the industry has traded as high as 20.35X and as low as 13.3X, with a median of 16.81X, as the charts below show.
CSGS now expects to deliver organic revenue growth for 2024 in line with its long term guidance of 2% to 6% range. It is benefiting from strong performance from the top two customers, Charter and Comcast.
The Zacks Consensus Estimate for CSGS’ 2024 earnings has increased 5% to $4.26 per share over the past 30 days. The stock has declined 11% in the year-to-date period.
Price and Consensus: CSGS
PDF Solutions: This Zacks Rank #2 company is benefiting from strong demand for its solutions, including Sapience Manufacturing Hub, MLOps, DFI system, eProbe machine and Exensio.
PDF’s prospects benefit from growing usage of its solutions among fabs developing advanced logic processes such as 2-nanometer, fabless customers deploying advanced test control software, often with AI/ML to augment conventional test methodologies, and companies engaged in digital transformations. This factor is expected to drive top-line growth (roughly 20% year over year) in the second half of 2024.
The Zacks Consensus Estimate for PDFS’ 2024 earnings has increased a couple of cents to 84 cents per share over the past 30 days. The stock has declined 2.8% year to date.
Price and Consensus: PDFS
Innodata: Another Zacks Rank #2 company, Innodata is benefiting from strong demand for generative AI training data. Increasing demand for Agility is notable, with revenues crossing the $5 million mark for the first time in the second quarter.
Innodata raised its 2024 revenues to 60% growth compared with its previous guidance of 40% growth. It expects third-quarter adjusted EBITDA to triple.
The Zacks Consensus Estimate for INOD’s 2024 earnings has increased 16.7% to 21 cents per share over the past 30 days. The stock has surged 125.6% year to date.
Price and Consensus: INOD
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3 Stocks to Buy From the Prospering Computer-Services Industry
The Zacks Computer - Services industry participants like CSG Systems International (CSGS - Free Report) , PDF Solutions (PDFS - Free Report) and Innodata (INOD - 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. However, industry participants are 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.
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 Bright Prospects
The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It currently carries a Zacks Industry Rank #99, which places it in the top 40% 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 bright 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 bright industry outlook, there are a number of stocks worth buying 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 14% over this period compared with the S&P 500’s gain of 27.8% and the broader sector’s return of 38.6%.
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 19.01X compared with the S&P 500’s 21.66X and the sector’s forward-12-month P/E of 27.11X.
Over the last five years, the industry has traded as high as 20.35X and as low as 13.3X, with a median of 16.81X, as the charts below show.
Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Computer-Services Stocks to Buy Right Now
CSG Systems International: This Zacks Rank #2 (Buy) company is benefiting from new logo sales wins and deal expansions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
CSGS now expects to deliver organic revenue growth for 2024 in line with its long term guidance of 2% to 6% range. It is benefiting from strong performance from the top two customers, Charter and Comcast.
The Zacks Consensus Estimate for CSGS’ 2024 earnings has increased 5% to $4.26 per share over the past 30 days. The stock has declined 11% in the year-to-date period.
Price and Consensus: CSGS
PDF Solutions: This Zacks Rank #2 company is benefiting from strong demand for its solutions, including Sapience Manufacturing Hub, MLOps, DFI system, eProbe machine and Exensio.
PDF’s prospects benefit from growing usage of its solutions among fabs developing advanced logic processes such as 2-nanometer, fabless customers deploying advanced test control software, often with AI/ML to augment conventional test methodologies, and companies engaged in digital transformations. This factor is expected to drive top-line growth (roughly 20% year over year) in the second half of 2024.
The Zacks Consensus Estimate for PDFS’ 2024 earnings has increased a couple of cents to 84 cents per share over the past 30 days. The stock has declined 2.8% year to date.
Price and Consensus: PDFS
Innodata: Another Zacks Rank #2 company, Innodata is benefiting from strong demand for generative AI training data. Increasing demand for Agility is notable, with revenues crossing the $5 million mark for the first time in the second quarter.
Innodata raised its 2024 revenues to 60% growth compared with its previous guidance of 40% growth. It expects third-quarter adjusted EBITDA to triple.
The Zacks Consensus Estimate for INOD’s 2024 earnings has increased 16.7% to 21 cents per share over the past 30 days. The stock has surged 125.6% year to date.
Price and Consensus: INOD
