Players in the Zacks Computer – Integrated Systems industry, including International Business Machines IBM, Hewlett Packard Enterprise HPE, Agilysys AGYS and PAR Technology PAR, are benefiting from a rise in advanced forms of data management, the rapid shift from traditional silos, increased demand for the integration of deployment techniques and modern application development. However, industry participants are grappling with lingering supply-chain bottlenecks. A challenging macroeconomic landscape, with rising inflation and higher interest rates, is also a concern. Soaring prices and delays in customer acceptance have resulted in high levels of backlog and cast a pall on the industry’s prospects.
The Zacks Computer – Integrated Systems industry comprises companies that provide advanced information technology solutions, including computer systems, software, storage systems and microelectronics. These industry players are increasing investments in data modernization and analytics, cyber defense, remote work, automation and contact-less services, customer & employee experience and supply-chain modernization, which accelerate growth in digital transformation services. Some industry participants also provide technological solutions (both products and services) to help organizations connect, interact and transact with customers. Others develop and market information recognition, data entry software, systems and technologies.
4 Computer - Integrated Systems Industry Trends in Focus
Integrated Solutions Driving Demand: The industry is benefiting from rising demand for integrated solutions across small, medium and large-scale enterprises, as well as increasing investments in IoT, big data, AI and blockchain software technologies. Moreover, business analytics, cloud computing, mobile and security and social businesses present significant opportunities to an increasing number of remote workers in the wake of the coronavirus-induced work-from-home wave. The industry players are anticipated to benefit from recovering global IT spending, as predicted by Gartner.
Solid Adoption of Multi-Cloud Model: The growing adoption of the multi-cloud model to achieve better scalability and attain improved resource utilization is expanding the scope of industry participants. Cloud and hardware/software virtual technologies are anticipated to impact the industry favorably. 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.
Supply-Chain Bottlenecks and Backlogs: Industry participants are witnessing supply constraints, softness in server demand and cognitive applications, as well as delays in customer acceptance. These are resulting in consistent backlog levels, particularly in Compute, High Performance Computing & Mass Storage Class and Storage. Moreover, volatility in foreign exchange — primarily due to the current macroeconomic scenario and headwinds in emerging markets — does not bode well for the industry.
Semiconductor Chip Shortage Mars Prospects: Industry participants are facing challenges stemming from the ongoing and time-consuming business model transition to the cloud. Further, lower spending across Data-Center Systems — primarily due to component shortages like memory and CPUs, as well as deceleration in hyperscale spending — is likely to dampen the prospects of industry participants.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer – Integrated Systems industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #86, which places it in the top 34% 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 outperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.
The industry’s position in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential.
Before we present a few 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 Lags Sector and S&P 500
The Zacks Computer – Integrated Systems industry has underperformed the broader Computer and Technology sector and Zacks S&P 500 composite over the past year.
The industry has returned 11% over this period compared with the S&P 500 and the broader Computer and Technology sector’s respective returns of 22.8% and 47.4%.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month P/S, which is a commonly used multiple for valuing computer-integrated systems stocks, we see that the industry is currently trading at 1.76X compared with the S&P 500’s 3.97X. It is also below the sector’s trailing 12-month P/S of 4.61X.
Over the past five years, the industry has traded as high as 2.15X and as low as 1.14X, with the median being at 1.56X, as the chart below shows.
Trailing 12-Month Price-to-Sales (P/S) Ratio
4 Computer-Integrated Systems Providers to Watch
PAR Technology: This Zacks Rank #2 (Buy) company designs, develops, manufactures, markets, installs and services microprocessor-based transaction processing systems for the restaurant and industrial marketplaces, including Corneal Topography systems for measuring the true topography of the eye and vision inspection systems for the food-processing industry (Commercial Segment). PAR is also engaged in the design and implementation of advanced-technology computer software systems for the Department of Defense and other government agencies.
PAR has attained a position of market leadership among cloud-based restaurant management Software as a Service providers. The company’s software business, Brink, is growing very quickly, and its restaurant cloud-based Point of Sale software is deployed over multi-brands at more than 1,000 restaurants.
The Zacks Consensus Estimate for the company’s 2023 loss has widened from $1.05 per share to a loss of $1.43 per share over the past 30 days. PAR shares have gained 70.4% year to date.
Price & Consensus: PAR
International Business Machines: This Zacks Rank #3 (Hold) company is witnessing solid net sales growth in the software segment driven by healthy hybrid cloud adoption and solid demand trends across RedHat, automation, data in AI and security.
A strong foundation of research and innovation, a broad portfolio that caters to various industry requirements and a diverseglobal marketpresence set it apart from its competitors.
Synergies from the Red Hat buyout are boosting its competitive position in the hybrid cloud market. The company is likely to benefit from the robust adoption and broad-based availability of IBM Blockchain World Wire, a blockchain-driven global payments network aimed at accelerating and optimizing cross-border payments.
IBM is poised to gain from the spin-off of the legacy infrastructure services business as it focuses on a hybrid cloud strategy. However, declining trends in the infrastructure vertical are hurting its top line. Intense competition from other established players like Amazon, Microsoft and Google in cloud services is exerting pressure on margins.
The Zacks Consensus Estimate for its 2023 earnings has remained steady at $9.45 per share in the past 60 days. IBM shares have gained 14.7% year to date.
Price & Consensus: IBM
Hewlett Packard Enterprise: The company is benefiting from strong executions in clearing backlogs and increased customer acceptance.
HPE’s multi-billion-dollar investment plan across expanding networking capabilities will help diversify business from server and hardware storage markets and boost margins over the long run. Also, easing supply-chain challenges will help it clear backlogs rapidly.
Hewlett Packard views AI, the Industrial Internet of Things and distributed computing as the next major markets.
HPE’s efforts to shift focus to higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding the bottom line.
However, organizations are pushing back their investments in big and expensive technology products due to global economic slowdown concerns, which can undermine this Zacks Rank #3 company’s near-term prospects.
The Zacks Consensus Estimate for 2023 earnings has moved south by 4.5% to $1.93 per share in the past 60 days. HPE shares have gained 5.5% year to date.
Price & Consensus: HPE
Agilysys: The company is benefiting from steady demand for cloud-native products and supporting software modules, an end-to-end array of software solutions and world-class customer service.
Agilysys operates as a developer and marketer of hardware and software products as well as services, with special expertise in select vertical markets, including retail and hospitality in North America, Europe, the Asia-Pacific and India.
This Zacks Rank #3 company’s expertise in enterprise architecture and high availability, infrastructure optimization, storage and resource management and business continuity is a major growth driver.
The Zacks Consensus Estimate for its fiscal 2024 earnings has remained steady at 88 cents per share in the past 60 days. Shares of AGYS have declined 9.9% year to date.
Price & Consensus: AGYS
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.