The Zacks Technology Services industry seeks to benefit from the ongoing digitization, increasing dependency on technology and initiatives to diversify technology services. Growth opportunities from robust adoption of the multi-cloud model should offset challenges arising from cyber threats and expenditures related to hiring skillful talent and restructuring initiatives.
IQVIA Holdings Inc. IQV, Matterport, Inc. MTTR and TuSimple Holdings Inc. TSP are some stocks, which are likely to gain from the abovementioned industry trends.
The Zacks Technology Services industry comprises companies that are engaged in manufacturing, developing and designing an array of software support, data processing, computing 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 consumer as well as business-oriented products and services. It comprises companies with diversified end-markets and customer base. Some industry participants also provide advanced analytics, clinical research services, data storage technology and solutions, and technology-enabled financial solutions to consumers, small business owners.
What’s Shaping the Future of the Technology Services Industry?
Remote & Hybrid Work Model Trends Boost Prospects:The industry’s growth is expected to accelerate in the days ahead based on an increasing number of remote and hybrid workers. In this era of digital transformation, enterprises are actively seeking a common ground between on-premise and cloud infrastructures, enabling them to provide flexible, as well as easily adaptable hybrid solutions. The coronavirus-induced remote-working trend 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.
Digitization Wave is a Tailwind: Most industry participants are in the process of modernizing their traditional legacy-oriented business processes to keep themselves updated with evolving IT services. The aim is to integrate synergies of emerging technologies, including cloud, Internet of Things, Artificial Intelligence and analytics. Moreover, increasing Internet penetration in the emerging markets, particularly across the Asia-Pacific, is a tailwind.
Adoption of the Multi-Cloud Model:Growing uptake of the multi-cloud model to achieve better scalability and attain improved resource utilization is also expanding the scope of the industry participants. Cloud and hardware/software virtual technologies are anticipated to favorably impact the industry. As growth and investment opportunities in developed countries continue to slow down, we believe that emerging economies will play a crucial role in the days ahead.
Growing Cyber Attacks is a Tailwind: The 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.
Talent Cost Woes: Rising spending on acquiring skilled talent and restructuring initiatives involving modernization of the IT-service infrastructure are causing higher debt levels, R&D, and sales & marketing expenses.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Technology Services industry, which is housed within the broader Zacks Business Services sector, currently carries a 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 the member stocks, indicates bright 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 investors can buy or retain given their sturdy potential, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Underperforms Sector and S&P 500
The Zacks Technology Services industry has lagged the broader Zacks Business Services sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 67.1% over this period compared with a 47% decline of the broader sector and a 21.5% downside of the Zacks S&P 500 composite.
One-Year Price Performance
Industry’s Current Valuation
On the basis of EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization), which is commonly used for valuing technology services stocks, the industry is currently trading at 24.37X compared with the S&P 500’s 11.11X and the sector’s 20.39X.
Over the past year, the industry has traded as high as 46.28X, as low as 19.75X and at the median of 26.58X as the charts below show.
3 Key Technology Services Picks
We are presenting two Zacks Rank #2 (Buy) stocks and one Zacks Rank #3 (Hold) stock that are well-positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Matterport: This California-based spatial data company focuses on digitization and datafication of the built world. Matterport’s top line is likely to benefit from strength across subscription and annual recurring revenues. A strong subscriber base, industry partnerships, product launches and expanded service offerings act as other tailwinds. The Zacks Consensus Estimate for Matterport’s 2022 EPS has improved 0.1% in the past 90 days. MTTR stock has declined 86.3% in the past year. It carries a Zacks Rank #2.
Price & Consensus: MTTR
TuSimple: This California-based autonomous technology company develops autonomous technology specifically designed for semi-trucks in the United States and internationally. TuSimple stands to benefit from continued improvements in asset utilization, contributions from new semi-trucks, solid customer relationships and the addition of logistics players. The Zacks Consensus Estimate for TuSimple’s 2022 EPS has improved 8.5% in the past 90 days. TSP stock has declined 93.2% in the past year. It carries a Zacks Rank #2.
Price & Consensus: TSP
IQVIA Holdings: This Zacks Rank #3 North Carolina-based company provides advanced analytics, technology solutions, and contract research services to the life sciences industry in the Americas, Europe, Africa, and the 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 set of proprietary clinical and commercial applications that allow it to grow and retain relationships with healthcare stakeholders. With an increasing presence in emerging markets, IQVIA Holdings will likely benefit from growth opportunities in the life sciences industry. Consistent share buybacks boost investor confidence and positively impact earnings per share. The Zacks Consensus Estimate for IQVIA Holdings’ 2022 EPS has improved 1.7% in the past 90 days. IQV stock has declined 11.9% in the past year.
Price & Consensus: IQV
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Turmoil at the self-driving trucking company comes as the FBI, SEC probe TuSimple’s ties to a Chinese startup.
San Diego, California-based TuSimple also announced late on Thursday that it removed four independent directors and appointed co-founder and major shareholder Mo Chen as executive chairman of the board. The reshuffle follows an investigation by its board that concluded that some of its employees spent paid hours last year working for Hydron Inc, a startup working on autonomous trucks mostly in China. TuSimple said the investigation also found that confidential information had been shared with Hydron that was not brought to the attention of audit and government security committees.
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