The Zacks Computer – Services industry has been facing macroeconomic challenges. Elongated sales cycle, lower conversion rates and delays by customers in making purchase decisions are notable headwinds. Despite the adversity, the industry is 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, who include CACI International CACI, Perficient PRFT, and CSG Systems CSGS. They stand well-positioned to benefit from the evolving landscape. The industry’s future is steered by the growing need for consulting, research and cyber-security solutions, stringent regulations, digital healthcare, and the adoption of business automation solutions which are likely to continue driving the industry’s prospects.
Understanding the Industry
The Zacks Computer – Services industry mostly comprises companies that offer cloud and software-based solutions. They provide consulting and research solutions, security solutions, business support solutions, systems engineering, and software application development solutions. Industry players cater to varied end markets and customers across sectors such as 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 offer end-to-end services, including application development, integration and maintenance, technology infrastructure management, and business process services.
Key Trends Driving the Industry
Remote & Hybrid Work Trends Boost Prospects: As more remote and hybrid work structures gain traction, the industry’s growth is expected to accelerate. The industry’s upward trend will be further stimulated by the demand for cloud and cost-efficient business support solutions, which bode well for the industry during this era of digital transformation.
Growing Cyber Attacks are Creating a Tailwind: The industry momentum will continue as the number of cyber-attacks and related security risks keeps rising. The growing need for cyber security solutions and services in critical areas like defense, intelligence and civilian agencies of the U.S. government is a boon for industry players.
Regulatory Compliance Drives Demand: Increasingly complex network systems and sensitive information environments in which governments and businesses operate are expected to drive demand for compliance solutions. This trend benefits the industry as participants help customers incorporate the best practices while complying with governmental and industry norms.
Blurred Prospects & Market Performance
The Zacks ranking places the Zacks Computer – Services industry #183, indicating dim near-term prospects. While the prospective outlook seems grim, there are a few stocks worth keeping an eye on. Let’s delve further into the industry’s recent stock market performance and valuation picture.
The industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index over the past year, with the industry recording an 8.2% increase while the S&P 500 rallied 16.6% and the sector realizing a return of 37.8% over the same period.
One-Year Price Performance
Current Valuation
When evaluating the forward 12-month P/E, the industry shows a ratio of 14.69X, compared with the S&P 500’s 19.43X and the sector’s forward-12-month P/E of 24.66X. Over the last five years, the industry has traded between 12.67X and 19.79X, with a median of 16.12X, as depicted in the charts below.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Top 3 Stocks to Monitor
CSG Systems: This Zacks Rank #2 (Buy) company is riding on strong demand for its SaaS products from an expanding clientele base. The company’s robust portfolio is driving top-line growth, confident of delivering organic revenue growth in the range of 2-6% over the long term. The Zacks Consensus Estimate for CSG Systems’ 2023 earnings has increased and the stock has declined 7.8% in the year-to-date period.
Price and Consensus: CSGS
CACI International: This Zacks Rank #3 (Hold) company is benefiting from business wins and
