IT service providers are experiencing weak demand amid macroeconomic uncertainty, with few stocks in the sector offering near-term upside compared to consensus estimates. Against this backdrop, Guggenheim analysts shared a list of the best IT services stocks to own in 2024 in a note this week.
They noted that weak near-term demand is the result of a “de-prioritization of discretionary spending,” adding that spending cuts are evident “particularly in transformation-focused discretionary programs as businesses have shifted budget priorities toward outsourcing-based cost optimization.”
Despite this, Guggenheim remains constructive about mid-term opportunities, expecting cyclical headwinds to fade and AI-driven technologies to begin opening up new areas of growth.
“We believe that we are in the early stages of the technology cycle based on artificial intelligence. “IT service providers are often at the ‘tip of the spear’ of innovation as those with consulting capabilities help plan, schedule, develop and implement new technologies for enterprise clients,” they said.
Analysts also expect acquisitions to be key at this stage and are most bullish on stocks that offer growth potential and discretionary spending potential.
According to Guggenheim, the best IT services stocks are Accenture (NYSE:), Andava Ltd. (DAVA), EPAM Systems (EPAM) and Globant (GLOB). Each of them has a Buy rating on the company, and DAVA also has a Best Idea rating.
“[W]We expect these companies to better reflect the demand recovery driven by secular trends. Each also has a history of systematic acquisitions, constantly changing its capabilities to meet demand,” the analysts said.
That’s why these Guggenheim stocks are being bought.
Accenture ($425 price target): “We view ACN as one of the best companies to address secular demand themes, given its comprehensive service offerings, investments ahead of demand trends, and a sustainable capital allocation structure that balances acquisitions and shareholder returns.”
Andava ($60 price target): The stock “represents a buying opportunity in a high-quality digital play that is well positioned to benefit from the return of discretionary spending.”
EPAM ($350 price target): “Despite near-term uncertainty, we believe EPAM is one of the best positioned to benefit from the demand recovery given its focus on digital.”
Globant ($250 price target): “The Latin America-based global digital company, demonstrating resilience in the face of macroeconomic uncertainty, has demonstrated the strength and differentiation of its customer relationships and Studio model, which we believe will continue to drive double-digit growth in medium-term perspective”.