Players operating within the Zacks Computer – Integrated Systems industry, including International Business Machines IBM, Hewlett Packard Enterprise HPE and Agilysys AGYS, are reaping the benefits of several favorable industry trends like advancements in data management capabilities, a rapid shift away from traditional siloed systems toward more integrated deployment techniques and heightened demand for modern application development approaches. 

However, the industry is still recovering from significant headwinds stemming from persistent supply chain bottlenecks, a challenging macroeconomic climate characterized by rising inflation and higher interest rates, soaring prices for key inputs and delays in customer acceptance of new products and services. These factors have resulted in significant order backlogs across the industry, casting a shadow on its prospects.

Industry Description

The Zacks Computer - Integrated Systems industry comprises companies that deliver advanced information technology solutions spanning computer systems, software platforms, data storage infrastructure and microelectronics. These industry players are ramping up investments in data modernization and analytics, cybersecurity and threat defense, remote work enablement, process automation, contactless service delivery models, enhanced customer and employee experience offerings and supply chain modernization initiatives, which are aimed at accelerating digital transformation services for enterprise customers. 

Some players provide technological solutions (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 experiencing a surge in demand for integrated solutions across enterprises of all scales, driven by increasing investments in cutting-edge software technologies, such as the Internet of Things (IoT), big data analytics, artificial intelligence (AI) and blockchain. This demand is further fueled by the significant opportunities presented by business analytics, cloud computing, mobile technologies, security solutions and social business platforms. Additionally, industry players are anticipated to benefit from the recovering global IT spending, as predicted by Gartner, enabling them to capitalize on the rising demand for comprehensive and seamless integrated solutions that can streamline operations and enhance productivity across various sectors.

Solid Adoption of Multi-Cloud Model: The industry is witnessing the robust adoption of the multi-cloud model as enterprises seek to achieve better scalability and optimize resource utilization. This trend is expanding the scope of industry participants, enabling them to leverage the benefits of cloud and hardware/software virtual technologies, which are anticipated to favor the industry's growth.

Moreover, as growth and investment opportunities in developed countries continue to slow down, emerging economies are poised to play a crucial role in driving the industry's future. The multi-cloud model's increasing popularity, coupled with the tailwinds from cloud and virtual technologies and the potential of emerging markets, presents a strong foundation for industry participants to capitalize on new opportunities and foster sustained growth.

Supply-Chain Bottlenecks and Backlogs: Industry participants are grappling with a multitude of challenges, including supply constraints, softening demand for servers and cognitive applications, as well as delays in customer acceptance. These factors have contributed to consistent backlog levels, particularly in the Compute, High-Performance Computing & Mass Storage Class and Storage segments. Furthermore, the industry's outlook is affected by the volatility in foreign exchange rates, primarily due to the prevailing macroeconomic scenario and headwinds in emerging markets. 

Semiconductor Chip Shortage Mars Prospects: The industry is grappling with the ripple effects of the ongoing semiconductor chip shortage, which has posed significant challenges for participants. The time-consuming business model transition to cloud computing has compounded these difficulties, requiring companies to navigate complex operational shifts amid supply chain disruptions. Moreover, the prospects of industry players are further dampened by lower spending across datacenter systems, primarily due to component shortages, particularly in memory and CPUs, as well as a deceleration in hyperscale spending.

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 #52, which places it in the top 21% 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 2 to 1.

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. Since Feb. 29, 2024, the industry’s earnings estimate for 2025 has moved north by 6.9%.

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 & S&P 500

The Zacks Computer – Integrated Systems industry has underperformed the broader Computer and Technology sector and the Zacks S&P 500 composite in the past year.

The industry has declined 3.7% over this period compared with the S&P 500 and the broader Computer and Technology sector’s respective returns of 20.7% and 21%.

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 3.93X compared with the S&P 500’s 6.27X. It is also below the sector’s trailing 12-month P/S of 7.84X.

Over the past five years, the industry has traded as high as 5.09X and as low as 1.67X, with the median being at 3.04X, as the chart below shows.

Trailing 12-Month Price-to-Sales (P/S) Ratio

3 Computer-Integrated Systems Providers to Watch

International Business Machines: It 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. IBM currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

IBM’s growth is expected to be driven primarily by analytics, cloud computing and security in the long haul. With a surge in traditional cloud-native workloads and associated applications, along with a rise in generative AI deployment, there is a radical expansion in the number of cloud workloads that enterprises are currently managing. This has resulted in heterogeneous, dynamic and complex infrastructure strategies, which has led firms to undertake a cloud-agnostic and interoperable approach to highly secure multi-cloud management. This, in turn, has translated into a healthy demand for IBM hybrid cloud solutions.

The buyout of HashiCorp has further augmented IBM’s capabilities to assist enterprises in managing complex cloud environments. HashiCorp’s tool sets complement IBM RedHat’s portfolio, bringing additional functionalities for cloud infrastructure management. The integration of HashiCorp’s cloud software capabilities has bolstered IBM’s hybrid multi-cloud approach. The acquisitions of StreamSets and webMethods have improved IBM’s AI platform and automation capabilities, bringing together key competencies in integration, API management and data ingestion. Complementing IBM DataStage and Databand platform with a hybrid and multi-cloud approach, the buyouts have enabled IBM to develop comprehensive application and data integration platforms in the industry.

IBM’s Watsonx platform is likely to be the core technology platform for its AI capabilities. Watsonx delivers the value of foundational models to the enterprise, enabling them to be more productive. This enterprise-ready AI and data platform comprises three products to help organizations accelerate and scale AI — the watsonx.ai studio for new foundation models, generative AI and machine learning, and the watsonx.data fit-for-purpose data store built on an open lake house architecture and the watsonx.governance toolkit to help enable AI workflows to be built with responsibility and transparency.

The Zacks Consensus Estimate for its 2025 earnings has moved north by 1.3% to $10.75 per share in the past 30 days. IBM shares have gained 33.9% in the past year.

Price & Consensus: IBM

Hewlett Packard Enterprise: The company is benefiting from the strong execution in clearing backlogs and increased customer acceptance. Its latest agreement to acquire Juniper Networks is not just a financial move but a strategic leap to elevate its competitive stance by expanding its networking domain in the realms of AI, cloud and hybrid solutions.

HPE has been witnessing strong performance in its key segments, particularly GreenLake and artificial intelligence (AI) systems. There is significant momentum in the adoption of HPE GreenLake as organizations are capitalizing on the flexibility and scalability of this IT transformation solution. GreenLake’s customer base expanded approximately 34.5% year over year, reaching 39,000 in the fourth quarter of fiscal 2024. 

Hewlett Packard Enterprise continues to see robust demand for its AI system offerings. In the fourth quarter of fiscal 2024, HPE reported that it had $6.7 billion in cumulative orders for AI products and services since the first quarter of fiscal 2023. HPE’s new AI orders in the fiscal fourth quarter of 2024 have brought its backlogs to a value of $3.5 billion. HPE has been expanding its AIOps network management capabilities by integrating multiple generative AI Large Language Models within HPE Aruba Networking Central, HPE’s cloud-native network management solution, hosted on the HPE GreenLake Cloud Platform.

The company has been benefiting from continued growth in the sales of its accelerator processing unit, primarily driven by rising demand for HPE Cray EX, Cray XT and HPE ProLiant Gen11 AI-optimized servers. This Zacks Rank #2 company’s efforts to shift focus to higher-margin offerings like Intelligent Edge and Aruba Central Hyperconverged Infrastructure are aiding the bottom line. 

The Zacks Consensus Estimate for fiscal 2025 earnings has moved north by a penny to $2.11 per share in the past 30 days. HPE shares have gained 37.3% in the past year.

Price & Consensus: HPE

Agilysys: AGYS has been benefiting from a strong growth trajectory, driven by record sales in property management systems and related add-ons that improve customer operations. Increasing subscription revenues reflect higher adoption of AGYS’ solutions, supported by its successful sales strategies and expanding market footprint.

AGYS' robust portfolio of cloud-native products and comprehensive end-to-end software solutions, coupled with its exceptional customer service, has established it as a trusted partner in North America, Europe, Asia-Pacific, and India. Agilysys' demonstrated ability to achieve record-high service revenues while simultaneously improving service margins reflects its operational efficiency and strong market position. This Zacks Rank #3 (Hold) company's specialized expertise in enterprise architecture, infrastructure optimization, storage management, and business continuity solutions provides multiple growth vectors while addressing critical client needs.

Agilysys’ recent acquisition of Book4Time, a leading spa management software provider for top hospitality brands like Marriott International, Hilton Worldwide, Four Seasons, Accor and Intercontinental Hotels Group, has been a key catalyst for its growth. With a revenue model that is nearly 100% subscription-based, Book4Time aligns well with Agilysys’ business strategy. The acquisition has expanded AGYS’ customer base by 30% with minimal overlap and has contributed significantly to revenue growth.

The Zacks Consensus Estimate for its fiscal 2025 earnings has decreased 3.1% to $1.27 per share in the past 30 days. Shares of AGYS have declined 6.4% in the past year.

Price & Consensus: AGYS

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