For Immediate Release
Chicago, IL – January 20, 2021 – Today, Zacks Equity Research discusses IT - Services, including Dell Technologies Inc. DELL, ASGN Incorporated ASGN, Remark Holdings, Inc. MARK, DXC Technology Company DXC and ServiceNow, Inc. NOW.
The coronavirus pandemic triggered macroeconomic downturn has induced sluggishness in IT spending, which has impacted adoption of consultation and transaction processing solutions. Consequently, the outlook for the Zacks Computers – IT Services industry appears drab at the moment.
However, ongoing digitization and initiatives to diversify IT services has somewhat improved the prospects for the industry players. Dell Technologies, ASGN and Remark Holdings, are some of the stocks benefiting from this trend. Moreover, solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been a boon for these IT Service providers.
Industry at a Glance
The Zacks Computers – IT Services industry comprises companies that provide consultancy, communications, IT management & operations, cloud-based web development platform, customer relationship management, professional information solutions and outsourcing services.
The industry participants cater to a wide array of end-markets, which include manufacturing, banking, insurance, healthcare, government agencies and public sector institutions.
4 Trends Shaping the Future of the Computers – IT Services Industry
Sluggish IT Spending to Mar Prospects: Coronavirus crisis-induced sluggish spending across small and medium businesses (SMBs) due to restricted economic activity globally has impacted adoption of IT-services, primarily consulting services applications, infrastructure management, and transaction processing platforms. The industry players are anticipated to bear the brunt of slowdown in IT spending, as predicted by IDC.
Additionally, shifts in consumer buying patterns amid coronavirus-induced supply chain constraints are likely to dampen the industry's prospects. Moreover, COVID-19 pandemic-led softness in the automotive, travel and hospitality end-markets, remains a concern. Also, the shift from enterprise to consumer-focused demand, due to the continued work-from-home trend, does not bode well for industry players.
STEM Skills Crisis to Hinder Growth: Increasing U.S. protectionism continues to hurt the industry's prospects as traditional IT services providers are significantly exposed to H1-B visa issuance. Notably, lack of skilled workers, particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States, has been a woe for quite some time. Notably, coronavirus-led economic downturn has triggered layoffs and pay cuts, which are likely to lead to termination of H1-B visas and remain an overhang for some time now.
Digitization Wave Is a Tailwind: Most of the industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with evolving IT services. The aim is to integrate synergies of emerging technologies including cloud, IoT, AI and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across Asia-Pacific, is a tailwind. For instance, DXC Technology, one of the notable IT services providers, is focusing on cyber business, cloud computing market and Big Data business to bolster prospects.
New Normal Trends Boost Prospects: The industry's growth is expected to accelerate in the days ahead on increasing number of remote workers in the wake of the coronavirus crisis-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premises and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Notably, coronavirus-triggered demand for remote working, digital healthcare and online learning solutions has accelerated the adoption of digital transformation offerings among enterprises, which bodes well for the industry. Markedly, ServiceNow, a prominent player in the industry, is poised to benefit from rising adoption of its workflows by companies undergoing digital transformation over the longer haul.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #225, which places it in the bottom 11% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish 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.
The industry's position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group's earnings growth potential. While the industry's earnings estimate for 2020 has moved down 3.6% since Mar 31, 2020, the same for 2021 has declined 3%.
Despite gloomy industry outlook, few stocks have the potential to outperform the market based on a strong earnings outlook. But before we present the top industry picks, it is worth taking a look at the industry's shareholder returns and current valuation first.
Industry Outperforms S&P 500 & Sector
The Zacks Computers - IT Services Industry has outperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology in the past year. The outperformance can be attributed to investors' optimism regarding ongoing digitization and measures to diversify IT services.
The industry has returned 39.9% over this period compared with the S&P 500 and the broader sector's rally of 14.9% and 32.4%, respectively.
Industry's Current Valuation
Increasing spend on acquiring skilled talent, and restructuring initiatives involving modernizing the traditional IT-service infrastructure are leading to higher debt levels.
It therefore makes sense to value the industry on the basis of EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio because this valuation metric takes into account the level of debt.
On the basis of the trailing 12-month EV/EBITDA ratio, the industry is currently trading at 36.49X, higher than the S&P 500's 17.07X and the sector's 16.35X.
Over the past five years, the industry has traded as high as 38.03X and as low as 19.85X, with the median being at 27.51X.
3 Promising IT Services Stocks
We will discuss here three stocks that presently carry a Zacks Rank #2 (Buy), which investors can take a look at. These stocks are well positioned to grow in the near term. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Dell: The company is benefiting from continued demand for remote work, learning and gaming solutions. Moreover, strong order momentum in VxRail and PowerMax solutions, and PowerEdge servers hold promise. In fourth-quarter 2020, the company sustained its market share in the PC market at 17.2% with shipments increasing 26.8% on a year-over-year basis, per IDC data.
Further, strong consumer business, with robust uptake of Latitude and Precision notebooks and Commercial Chromebooks, remain noteworthy. The company is also witnessing robust growth in the XPS premium line and gaming systems including Alienware, with solid uptick for both notebooks and desktops.
For this Round Rock, TX-based company, the Zacks Consensus Estimate for its fiscal 2021 earnings has improved by 19.5% to $7.47 per share over the past 60 days. The stock has appreciated 47.6% in the past year.
ASGN: This Glen Allen, VA-based professional staffing and IT solutions provider is gaining from strength in federal government business. Its sustained focus on the Apex segment is helping it expand pipeline and bag contracts.
Also, the recent acquisition of Integrated Solutions Management (or ISM) in a bid to enhance expertise in Internet of Things (IoT) technology, IT service and operations management holds promise. Further, synergies from LeapFrog Systems, Inc. and Skyris LLC buyouts remain tailwinds.
The Zacks Consensus Estimate for its 2021 earnings has been revised upward by 1 cent over the last 60 days to $5.00 per share. It has a trailing four-quarter earnings surprise of 20.05%, on average. The stock has gained 22.7% in the past year.
Remark Holdings: The company develops and deploys artificial intelligence (AI) products and AI-based solutions for businesses in various industries worldwide.
The company's flagship data intelligence platform, KanKan AI, is gaining from broad-based growth across retail, life cycle, and workplace and food safety industry verticals. This has been primarily triggered by ongoing digital transformation, and growing focus on customer engagement and product development.
Increasing uptick in the company's Smart Customer Retail Platform created by Remark's KanKan AI offering, which enables enterprises to enhance customer loyalty and increase online-offline business, bodes well. Further, strong traction in Sharecare, a web-based platform that facilitates search for health and wellness information, holds promise.
For this Las Vegas, NV-based company, the Zacks Consensus Estimate for its 2021 bottom line has been revised from a loss of 21 cents to a loss of 15 cents over the last 60 days. Shares of the company have skyrocketed 235.9% in the past year.
5 Stocks Set to Double
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Dell Technologies Inc. (DELL) : Free Stock Analysis Report
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ASGN Incorporated (ASGN) : Free Stock Analysis Report
Remark Holdings, Inc. (MARK) : Free Stock Analysis Report
DXC Technology Company. (DXC) : Free Stock Analysis Report
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