The Zacks Computer system – IT Companies industry contains an variety of providers that give consultancy, client connection management (CRM), communications, IT administration & operations, cloud-based web development platform, professional information solutions and outsourcing products and services.
The industry participants primarily cater to diversified end-markets and customer base which constitute manufacturing, banking, insurance, healthcare, government agencies and public sectors.
In a bid to modernize legacy-oriented business processes, most of the industry participants are in the process of restructuring their traditional products and services. The goal is to assimilate the synergies of emerging technologies, including the likes ofcloud, Internet of things (“IoT”), artificial intelligence (“AI”) and analytics, to name a few. The sector is witnessing higher debt levels, R&D and sales & marketing spending owing to these factors, which in turn is limiting profitability.
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Here are the three major themes in the field:
The industry’s growth is expected to accelerate in the near future on the back of ongoing workspace trends of Bring Your Own Devices (“BYOD”) and increasing mobile workers. Small and medium enterprises remain key beneficiaries in this domain amid the digital transformation era. Enterprises are increasingly seeking to find a common ground between on-premise and cloud infrastructures that enable them to offer flexible easily adoptable hybrid solutions. Further, increasing IT-spending trends bodes well for the industry players.
Increasing U.S. protectionism is limiting the industry’s growth prospects. Lack of skilled workers particularly from STEM (Science, Technology, Engineering and Mathematics) fields in the United States has been hindering sector participants for quite some time. In this regard, we may note that the U.S. government’s plan to reduce the issuance of H1-B visas to foreign nationals particularly from countries like India remains a key concern.
The ongoing trade war between the United States and China has created an uncertain environment that is not conducive for investments, particularly on infrastructure related companies. The tariffs of 10% on an additional $200 billion worth of Chinese goods announced in September has only aggravated the matter. Additionally, volatility in foreign exchange primarily due to current macro-economic scenario and headwinds in the emerging markets does not bode well for the industry.
Zacks Business Rank Indicates Bleak Near-Term prospects
The ZacksComputers – IT Expert services industry is housed within the broader Zacks Laptop or computer and Technology sector. It carries a Zacks Business Rank #152, which places it at the bottom 41% of more than 250 Zacks industries.
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The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak 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 positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent businesses in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Since Mar 31, 2018, the industry’s earnings estimates for the current year have decreased 1.8%.
We will present a few stocks that are well poised to outperform the market despite this weak backdrop, but it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Field Outperforms Sector and S&p 500
The Zacks Computers – IT Companies Business has outperformed the Zacks S&p 500 composite as well asthe broader Zacks Computer system and Technology sector in the past year.
The industry has gained 12.7% over this period compared to the S&p 500’s rise of 2%. On the other hand, the broader sector has declined 5.5%.
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