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Zacks Industry Outlook Highlights CDW, EPAM Systems and Nutanix

For Immediate Release

Chicago, IL – October 3, 2022 – Today, Zacks Equity Research discusses CDW CDW, EPAM Systems EPAM and Nutanix NTNX.

Industry: IT Services

Link: https://www.zacks.com/commentary/1987242/3-it-services-stocks-to-buy-from-a-challenging-industry

The Zacks Computers – IT Services industry has been suffering from the pandemic-triggered macroeconomic downturn, which has induced sluggishness in IT spending, impacting the adoption of consultation and transaction processing solutions. Declining PC sales are headwinds. However, industry participants are benefiting from the ongoing digitization process globally. Initiatives to diversify IT services have been boons for CDW, EPAM Systems and Nutanix. Robust spending on cloud, Internet of Things (IoT), cyber security, data and analytics, artificial intelligence (AI) and automation is driving industry-wide growth. Solid demand for advanced IT-service infrastructure solutions for remote working and digital healthcare has been benefiting the prospects of the industry participants.

Industry Description

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, including manufacturing, banking, insurance, healthcare, government agencies and public sector institutions. Industry participants are focusing on the cyber-security business, the cloud computing market, the Big Data business and automation to bolster prospects. Digital transformation is helping companies to gain market share.

What's Shaping the Future of the Computers - IT Services Industry?

Sluggish IT Spending to Mar Prospects: The coronavirus crisis-induced sluggish spending across small and medium businesses due to restricted economic activity globally has impacted the adoption of IT-services, primarily consulting service applications, infrastructure management and transaction processing platforms. The industry players are anticipated to bear the brunt of the slowdown in IT spending.

Gartner projects IT spending to increase 4.4% in 2022, down from 9.5% growth in 2021. The shift in consumer buying patterns amid the coronavirus-induced supply-chain constraints is likely to dampen the industry’s prospects. Also, the shift from enterprise to consumer-focused demand due to the continued work-from-home trend does not bode well for industry players.

Digitization Wave is a Tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes in order to keep pace with the evolving IT services. The aim is to integrate synergies of emerging technologies, including cloud, IoT, AI and analytics. Increasing Internet penetration in emerging markets, particularly across the Asia Pacific, is another tailwind.

New Normal Trends Boost Prospects: The industry’s growth is expected to accelerate in the days ahead on an 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, which will enable them to provide flexible and easily adoptable hybrid solutions. The 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.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computers - IT Services is housed within the broader Zacks Computer And Technology Sector. It currently carries a Zacks Industry Rank #137, which places it in the bottom 45% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is 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 a negative earnings outlook for the constituent companies in aggregate. The aggregate earnings estimate revisions show that analysts are pessimistic about this group’s earnings growth potential. Since Sep 30, 2021, the industry’s earnings estimates for the current year have declined 35%.

Despite the challenging industry conditions, there are a few stocks that are worth buying. Before we present the 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 Underperforms S&P 500 & Sector

The Zacks Computers - IT Services Industry has underperformed the Zacks S&P 500 composite sector and the broader Zacks Computer and Technology in the past year.

The industry has dropped 41.4% over this period against the S&P 500’s return of 15.7%. In the same period, the broader sector has witnessed a decline of 30.4%.

Industry's Current Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, which is a commonly used multiple for valuing IT Services companies, the industry is currently trading at 24.78X, higher than the S&P 500’s 11.74X and the sector’s 10.33X.

Over the past five years, the industry has traded as high as 48.99X and as low as 24.23X, with the median being 39.52X.

3 Promising IT Services Stocks

CDW: The Vernon Hills, IL-based company has been benefiting from the global digital transformation, as well as higher revenue growth in the Corporate, Small Business and CDW Canada segments, owing to the ongoing focus on hybrid work and return-to-office solutions. Growth in the healthcare end market, a resilient business model, and a solid product and solutions portfolio are key positives. Strategic acquisitions bode well.

CDW currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for CDW’s fiscal 2022 earnings has been unchanged at $9.66 per share over the past 30 days. The stock has depreciated 22.4% year to date.

EPAM: The Newtown, PA-based company has been benefiting from the ongoing digital transformation and continued focus on customer engagement and product development. This Zacks Rank #2 company is benefiting from growth across all geographies and multiple industry verticals. Digital transformation, focus on customer engagement and product developments have been the key catalysts. Acquisitions and partnerships are also aiding top-line growth.

The Zacks Consensus Estimate for EPAM’s fiscal 2023 earnings has been revised upward by 1.7% over the past 30 days to $9.96 per share. The stock has declined 45.8% year to date.

Nutanix: The San Jose, CA-based company is benefiting from the solid adoption of its Hybrid cloud solutions and an expanding clientele. The adoption rate of this Zacks Rank #2 company’s AHV hypervisor has been strong, as customers continue to opt for it as a low-cost alternative to other vendor offerings. A healthy pipeline of big deals is another tailwind. It is expected to benefit from the growth prospects of the hyper-converged infrastructure market in the long term.

The Zacks Consensus Estimate for Nutanix’s fiscal 2023 earnings has been revised upward from a loss of 39 cents per share to earnings of 14 cents over the past 30 days. The stock has declined 33.7% year to date.

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.


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