Ongoing digitization, increasing dependency on technology and initiatives to diversify technology services have been boosting the prospects of the Zacks Technology Services industry. Growth opportunities from the robust adoption of the multi-cloud model should offset challenges arising from cyber threats and expenditures related to hiring skillful talent and restructuring initiatives.
Trane Technologies plc (TT), IQVIA Holdings Inc. (IQV) andTuSimple Holdings Inc. (TSP) are some stocks, which are likely to gain from the abovementioned industry trends.
The Zacks Technology Services industry comprises companies that are engaged in manufacturing, developing and designing an array of software support, data processing, computing hardware and communications equipment. These include integrated powertrain technologies, advanced analytics, technology solutions and contract research services, semiconductor packaging and interconnect technologies, collaboration software, specialty printers, and data acquisition and analysis systems. The industry includes consumer as well as business-oriented products and services. It comprises companies with diversified end markets and customer base. Some industry participants also provide advanced analytics, clinical research services, data storage technology and solutions, and technology-enabled financial solutions to consumers, small business owners, tax professionals.
What's Shaping the Future of the Technology Services Industry?
Remote & Hybrid Work Model 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, as well as easily adaptable hybrid solutions. The coronavirus-induced 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.
Digitization Wave is a Tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes to keep themselves updated with evolving IT services. The aim is to integrate synergies of emerging technologies, including cloud, Internet of Things, Artificial Intelligence and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across the Asia-Pacific, is a tailwind.
Adoption of the Multi-Cloud Model:Growing uptake of the multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope of the industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.
Growing Cyber Attacks Are 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 the industry players.
Talent Cost Woes: Rising spending on acquiring skilled talent and restructuring initiatives involving modernization of the IT-service infrastructure are causing higher debt levels, R&D, and sales & marketing expenses.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Technology Services industry, which is housed within the broader Zacks Business Services sector, currently carries a Zacks Industry Rank #122. This rank places it in the top 49% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks that investors can buy or retain given their sturdy potential, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Technology Services industry has lagged the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 24.3% over this period compared with a 12.7% decline of the broader sector and a 2.4% downside of the Zacks S&P 500 composite.
One-Year Price Performance
Industry's Current Valuation
On the basis of EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is commonly used for valuing technology services stocks, the industry is currently trading at 58.74X compared with the S&P 500’s 12.4X and the sector’s 26.08X.
Over the past year, the industry has traded as high as 74.09X, as low as 14.65X and at the median of 32.10X as the charts below show.
3 Technology Services Stocks in Focus
We are presenting three Zacks Rank #3 (Hold) stocks that are well-positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.
Trane Technologies: It remains focused on improving the quality of its products and services and operating efficiencies to achieve sustained improvement in earnings and cash flow. It prioritizes improving its business operating system and innovation through business transformation initiatives and prudent investments. Trane has a track record of repurchasing shares and paying dividends consistently. TT’s 2023 guidance looks encouraging. Trane expects revenues to increase 9-10% on a reported basis compared with the previous expectation of a 7-9% increase. It now expects revenue growth to be 7-8% on an organic basis compared with the prior expectation of 6-8% growth. Adjusted EPS is expected to be between $8.3 and $8.5 compared with the previous anticipation of $8.2 to $8.5.
The Zacks Consensus Estimate for Trane’s 2023 EPS has improved 4.5% in the past 90 days. TT stock has gained 28.8% over the past year.
Price & Consensus: TT
IQVIA Holdings: This North Carolina-based company provides advanced analytics, technology solutions, and contract research services to the life sciences industry in the Americas, Europe, Africa and the Asia-Pacific. IQVIA Holdings has a strong healthcare-specific global IT infrastructure, analytics-driven clinical development capabilities, a robust real-world solutions ecosystem and a growing set of proprietary clinical and commercial applications that allow it to grow and retain relationships with healthcare stakeholders. With an increasing presence in emerging markets, IQVIA Holdings will likely benefit from growth opportunities in the life sciences industry. Consistent share buybacks boost investor confidence and positively impact earnings per share.
The Zacks Consensus Estimate for IQVIA Holdings’ 2023 EPS has improved 0.1% in the past 60 days. IQV stock has declined 14.4% in the past year.
Price & Consensus: IQV
TuSimple: This California-based autonomous technology company develops autonomous technology specifically designed for semi-trucks in the United States and internationally. TuSimple stands to benefit from continued improvements in asset utilization, contributions from new semi-trucks, solid customer relationships and the addition of logistics players.
The Zacks Consensus Estimate for TuSimple’s 2023 EPS has improved 8.2% in the past 90 days. TSP stock has declined 89% over the past year.
Price & Consensus: TSP
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