November 27, 2020

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Inspired by Technology

Dull Near-Term Outlook for Computer Services Industry

4 min read

The Zacks Computer – Services industry primarily comprises companies that offer cloud and software-based solutions. Their offerings include national security solutions, business support solutions, and systems engineering and 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, as well as media and entertainment.

Here are the four major industry themes:
 

  • The industry’s growth is expected to accelerate in the days ahead on increasing number of remote workers in the wake of coronavirus-induced work-from-home wave. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures that will enable them to provide flexible and easily adoptable hybrid solutions. Notably, coronavirus-triggered demand for remote working 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.
     
  • 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.
     
  • The ongoing trade war between the United States and China has created an uncertain environment that is not conducive for investments. Additionally, volatility in foreign exchange – primarily due to the current macro-economic scenario and headwinds in the emerging markets – does not bode well for the industry.
     
  • The industry’s near-term prospects look gloomy due to global business disruptions caused by coronavirus-led lockdown. Due to uncertainty over global economic and business activities, computer services providers are likely to witness decline in new bookings and IT spending cutbacks across multiple industries.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Computer – Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #128, which places it in the bottom 49% 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 weak 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 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 Computer – Services industry has underperformed both the Zacks S&P 500 composite, and the broader Zacks Computer and Technology sector in the past year.

The industry has declined 1.4% over this period against the S&P 500 and broader sector’s rally of 11.1% and 27.4%, respectively.

One-Year Price Performance

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing computer services stocks, the industry is currently trading at 22.09X versus the S&P 500’s 22.09X and the sector’s 24.36X.

Over the past five years, the industry has traded as high as 25.29X, as low as 14.38X and at a median of 22.08X, as the charts below show.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Bottom Line

The growing adoption of cyber security solutions, stringent regulatory requirements and the need for business automation solutions should help drive the industry’s growth.

None of the stocks in the Zacks Computer – Services industry sport a Zacks Rank #1 (Strong Buy). However, we present two stocks that carry a Zacks Rank #2 (Buy) and are well positioned to outperform the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

CSG Systems International, Inc. (CSGS) is a leading provider of outsourced billing, customer care, and print and mail solutions, and services. This Zacks Rank #2 stock has gained 7.2% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has decreased 6.6% to 71 cents per share over the past 30 days.

Price and Consensus: CSGS

‎Perficient, Inc. (VRTU) is a global provider of information technology (IT) consulting and outsourcing services. It holds a Zacks Rank #2 at present. The stock has lost 27.1% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings per share has decreased 56.6% to 20 cents over the past 30 days.

Price and Consensus: VRTU

Below is a stock with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.

Based in Arlington, CACI International Inc (CACI) is a provider of IT applications and infrastructure to improve communications and secure the integrity of information systems. The stock has gained 24.6% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased 0.3% to $3.34 per share over the past 30 days.

Price and Consensus: CACI

 

5 Stocks to Soar Past the Pandemic: In addition to the companies you learned about above, we invite you to learn about 5 cutting-edge stocks that could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of the decade.

See the 5 high-tech stocks now>>

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Virtusa Corporation (VRTU) : Free Stock Analysis Report
 
CSG Systems International, Inc. (CSGS) : Free Stock Analysis Report
 
CACI International, Inc. (CACI) : Free Stock Analysis Report
 
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