The Zacks Technology Services industry is seeking to capitalize on ongoing digitalization, increasing reliance on technology and initiatives to diversify technology services. Opportunities for growth from the robust adoption of the multi-cloud model should offset challenges arising from cyber threats and spending related to hiring skilled talent and restructuring initiatives.
IQVIA Holdings Inc. (IQV – free report) Matterport, Inc. (MTTR – Free report) and TuSimple Holdings Inc. (TSP – Free Report) are some stocks that should benefit from the above industry trends.
The Zacks Technology Services industry includes companies engaged in the manufacture, development and design of a range of software support, computing, computer hardware and communications equipment. These include integrated powertrain technologies, advanced analytics, technology solutions and contract research services, semiconductor packaging and interconnect technologies, collaboration software, specialty printers, and data acquisition and analysis systems. The industry includes both consumer and business-oriented products and services. It includes companies with diversified end markets and customer bases. Some industry participants also provide advanced analytics, clinical research services, data storage technologies and solutions, and technology-enabled financial solutions to consumers and small business owners.
What is shaping the future of the technology services industry?
Trends in remote and hybrid working models increase the prospects:Industry growth is expected to accelerate in the coming days due to an increasing number of remote and hybrid workers. In this era of digital transformation, companies are actively looking for a common ground between on-premises and cloud infrastructures that allows them to offer flexible and easily adaptable hybrid solutions. The trend towards remote working caused by coronavirus has led to increased demand for cloud and cost-effective solutions to support businesses, as well as other digital monetization solutions, which bodes well for the industry.
Digitization wave is tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes to keep up with evolving IT services. The aim is to integrate synergies from new technologies, including cloud, Internet of Things, artificial intelligence and analytics. In addition, increasing internet penetration in emerging markets, particularly in Asia Pacific, is a tailwind.
Adoption of the multi-cloud model:The growing acceptance of the multi-cloud model to achieve better scalability and improved resource utilization is also expanding the scope of industry participants. Cloud and virtual hardware/software technologies are expected to be beneficial to the industry. As growth and investment opportunities continue to slow in developed markets, we believe emerging markets will play a crucial role in the coming days.
Increasing cyber attacks are tailwind: The increasing number of cyber attacks and the associated security risks are expected to keep the industry on the move. Government agencies are ideal targets for cyberattacks because they are entrusted with sensitive information. Therefore, the growing need for cybersecurity solutions and services in critical sectors such as defense, intelligence and civil agencies of the US government bodes well for industry players.
talent cost issues: Increasing spending on attracting skilled talent and restructuring initiatives to modernize IT service infrastructure are driving higher debt, R&D, and sales and marketing expenses.
Zacks’ industry ranking points to an encouraging outlook
The Zacks Technology Services industry, part of the broader Zacks Business Services sector, currently holds the Zacks Industry Rank #126. This rank places it in the top 50% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates good near-term prospects. Our research shows that the top 50% of industries evaluated by Zacks outperform the bottom 50% by a factor of more than 2 to 1.
Before we review some stocks that investors may want to buy or hold because of their solid potential, let’s take a look at recent stock market performance and current industry valuation.
The industry is underperforming the sector and the S&P 500
The Zacks technology services industry lagged the broader Zacks business services sector as well as the Zacks S&P 500 composite over the past year.
The industry is down 67.1% over the period, compared to a 47% decline in the broader sector and a 21.5% decline in the Zacks S&P 500 Composite.
One-year price development
Current rating of the industry
Based on EV-to-EBITDA (Enterprise Value to Earnings Before Interest, Tax, Depreciation and Amortization), which is commonly used to value technology services stocks, the industry is currently trading at 24.37X compared to the S&P 500’s 11.11X the sector is 20.39X.
Over the past year, the industry has traded at 46.28x, 19.75x and the median at 26.58x, as shown in the charts below.
EV to EBITDA
3 tips for essential technology services
We feature two #2 Zacks stocks (Buy) and one #3 Zacks stock (Hold) that are well positioned for growth in the near term.
Matterhafen: This California-based geospatial company focuses on the digitization and datafication of the built world. Matterport’s revenue is likely to benefit from strength in subscription and annual recurring revenue. A strong subscriber base, industry partnerships, product launches and expanded service offerings act as additional tailwinds. The Zacks Consensus Estimate for Matterport’s 2022 EPS is up 0.1% over the last 90 days. MTTR stock is down 86.3% over the past year. It carries a Zacks Rank #2.
Price & Consensus: MTTR
Just do: This California-based autonomous technology company develops autonomous technology specifically designed for semi-trucks in the United States and internationally. TuSimple will benefit from continued improvements in facility utilization, contributions of new tractor units, solid customer relationships and the addition of logistics players. The Zacks Consensus estimate for TuSimple’s 2022 earnings per share is up 8.5% over the past 90 days. TSP stock is down 93.2% over the past year. It carries a Zacks Rank #2.
Price & Consensus: TSP
IQVIA Holdings: Based in North Carolina at Zacks Rank #3, this company provides advanced analytics, technology solutions and contract research services to the life sciences industries in the Americas, Europe, Africa and Asia Pacific. IQVIA Holdings has a strong healthcare-specific global IT infrastructure, analytics-driven clinical development capabilities, a robust real-world solutions ecosystem, and a growing suite of proprietary clinical and commercial applications that enable it to grow and maintain relationships with healthcare stakeholders. With an increasing presence in emerging markets, IQVIA Holdings is likely to capitalize on growth opportunities in the life sciences industry. Regular share buybacks boost investor confidence and have a positive impact on earnings per share. The Zacks Consensus estimate for 2022 earnings per share for IQVIA Holdings has improved by 1.7% over the last 90 days. IQV stock is down 11.9% over the past year.
Price & Consensus: IQV