9 IT Services Stocks With Upside

NEW YORK ( TheStreet) -- Worldwide IT spending is forecast at $3.8 trillion in 2012, increasing 3.7% from the previous calendar year, according to the latest outlook by technology researcher Gartner. Total tech spending has grown at a CAGR of 4.6% since 2006 and is estimated to cross increase to 6.8% from 2010 through 2015, according to International Data Corporation (IDC). The hardware sector is likely to lead the growth due to the proliferation of smart phones and tablets.

Developed markets in North America and Western Europe account for about 70% of IT spending. At $593 billion, North America accounts for the largest portion of about 37% of Tech spending.

Based on average estimates of analysts surveyed by Bloomberg, these IT stocks have upsides ranging from 9% to 53%. The buy recommendation and hold guidance for these stocks is 75% and 22%, respectively.

The nine stocks are listed in ascending order of upside potential.

9. Verisign ( VRSN) delivers Internet infrastructure services for the network world. With a market cap exceeding $5.70 billion, the company's services include domain name registry and infrastructure assurance. It operates through two business segments: Naming Services, comprising of Registry Services and Network Intelligence, and Availability (NIA) Services.

Of the 16 analysts covering the stock, 63% recommend a buy and 37% rate a hold. Analysts polled by Bloomberg foresee the stock gaining an average 9.4% to $39.20 in the upcoming 12 months.

For the latest third-quarter, the company reported revenue of $197 million, up 4% from the previous quarter and up 14% from the 2010 quarter. Net income for the quarter was $59 million and diluted earnings per share stood at 36 cents. Operating margin was 50.1%, compared to 43.1% for the same period last year.

Verisign Registry Services ended the quarter with 112 million active domain names in the adjusted zones, for .com and .net representing an 8% increase year-over-year. The company processed 7.9 million new domain name registrations, up 6% over the same quarter previous year. Verisign ended the quarter repurchasing about 7.9 million shares of the company's common stock for $235 million.

The company will report fourth-quarter earnings on Jan. 26, 2012. Revenue outlook for the quarter is $203.71 million, an increase by 14% from the same quarter last year. Net income is pegged at $67.36 million, or 41 cents per share, from $53.51 million, or 31 cents per share, from the prior year quarter, according to Bloomberg.

Fiscal 2011 revenue is expected to rise 13% to $771.92 million, while net income is seen at $251.73 million, or $1.51 per share, from 185.20 million, or $1.03 per share, in the prior-year quarter, as stated by Bloomberg.

In its Domain Name Industry Brief released Dec. 22, the company registered almost 220 million domain names across all top-level domains at the end of the third quarter. Registrations grew 2.3% or 4.9 million since the prior quarter, and rose 8.9% or 18 million since the third quarter of 2010.

8. Sapient Corporation ( SAPE) is a global services company that helps clients transform their businesses in the areas of marketing and technology. The company has three business units: SapientNitro, Sapient Global Markets and Sapient Government Services.

Of the 13 analysts covering the stock, 54% recommend a buy and 38% rated a hold. Analysts polled by Bloomberg foresee the stock gaining an average 16.8% to $14.59 in the upcoming 12 months.

For the 2011 third quarter, SAPE reported service revenue of $262.7 million compared to $217.1 million in the same quarter last year, an increase of $45.7 million or 21%. Net income for the quarter was $19.1 million, up from $14.2 million recorded in the same quarter last year. Diluted net income per share was 13 cents, vs. 10 cents in the previous year's quarter.

For the fourth quarter, the company's fourth quarter service revenue guidance is between $258 million and $266 million. Non-GAAP operating margin is seen ranging from 14.5% to 15.5%.

Recently, Sapient Nitro announced a partnership with Vail Resorts to launch the second-generation EpicMix program for its second ski and snowboard season. Sapient Global Markets has announced the launch of a Global Distributed Delivery (GDD) capability for Geneva, a tool for customers to achieve compliance, shorten project timelines, and improve efficiency.

7. Equinix ( EQIX) offers businesses the expertise to connect with partners and customers around the world through a global platform of high performance data centers, containing dynamic ecosystems and the broadest choice of networks. Equinix operates in 38 strategic markets across the Americas, EMEA and Asia-Pacific and continually invests in expanding its platform to power customer growth.

Of the 25 analysts covering the stock, 72% recommend a buy and 24% rate a hold. Analysts have average 12-month price target of $119.06 for the stock, about 18% higher than the current price, according to a Bloomberg consensus.

Quarterly net revenue was up 26% year-over-year in the third quarter. Revenue grew to $417.6 million from $330.3 million in the same quarter prior year. Net income increased to $20.3 million, or 20 cents, up 83% from the prior year.

Total revenue outlook for fiscal 2011 is expected greater than $1.6 billion. Adjusted EBITDA for the year is seen to be over $730 million. Capital expenditure for 2011 is projected between $645 million and $665 million, comprising of approximately $115 million of ongoing capital expenditure and $530 to $550 million for expansion capital expenditure.

Total revenue guidance for full year 2012 is projected to top $1.9 billion. Adjusted EBITDA is expected to be greater than $850 million. Capital expenditure for 2012 is seen ranging from $700 million to $800 million, comprising of approximately $120 million of ongoing capital expenditure and $580 to $680 million for expansion capital expenditures.

In Nov. 2011, EQIX opened the first phase of its second International Business Exchange data center called HK2, primarily to meet the growing demand for premium collocation and interconnection data center services, principally from financial services organizations and cloud service providers operating in the city of Hong Kong.

6. Syntel ( SYNT) is a leading global provider of integrated information technology and Knowledge Process Outsourcing (KPO) solutions spanning the entire lifecycle of business and information systems and processes to Global 2000 companies. The company organizes its business into four segments: Application Outsourcing, Knowledge Process Outsourcing (KPO), e-Business, and Team Sourcing.

Of the 13 analysts covering the stock, 62% recommend a buy and 31% rate a hold. Analysts polled by Bloomberg foresee the stock gaining an average 20.6% to $56.00 in the upcoming 12 months.

Syntel's revenue for the third quarter of 2011 increased 19% to $167.6 million compared with $140.5 million in the 2010 period and up 7% from $157 million in the prior quarter. Net income for the third quarter was $26.2 million, or 63 cents per diluted share. At the end of the quarter, global headcount stood at 18,293, up 12% from the earlier year.

The company's revenue guidance for full year 2011 is $635 million to $640 million and EPS in the range of $2.65 to $2.73. Recently, Syntel declared regular quarterly dividend of 6 cents per share payable Jan. 13 to shareholders of record Dec. 30, 2011.

Syntel recently announced a systems integration partnership with Aras, the leading enterprise open source Product Lifecycle Management (PLM) software solution provider offering clients an open source option to meet their PLM challenges. The company has also signed an implementation partnership with Pyxis Mobile, a provider of the only cross-device mobile application development platform.

5. iGATE ( IGTE) is an integrated Technology and Operations (iTOPS) company providing businesses end-to-end solutions that leverage technology, thus enabling clients to enhance their business performance. It targets large- and medium-sized organizations across industry verticals such as financial services, insurance, manufacturing, media and healthcare.

Of the 10 analysts covering the stock, 70% recommend a buy and 20% rate a hold. Analysts polled by Bloomberg foresee the stock gaining an average 22% to $19.71 over the next 12 months.

For the 2011 third quarter, the company reported revenue of $265.7 million compared with $170.4 million in the prior quarter and $74.8 million in the same quarter last year. Net income was $14.3 million during the quarter, unchanged from the same quarter previous year and up 257% from the earlier quarter.

Diluted EPS was 10 cents, vs. 20 cents in the previous quarter. About 24 new customers were added during the quarter, including 6 Fortune 1000 companies. The quarter ended with a headcount of 26,216 employees.

The company recently announced its intent to initiate through its subsidiaries Pan-Asia iGATE Solutions and iGATE Global Solutions Limited, a process that could lead to the delisting of its Indian subsidiary Patni Computer Systems Limited, as part of merger a process that will likely close in Dec. 2012.

In Oct. 2011, iGate Patni announced the extension of a multi-million-dollar, multi-year contract with The Mosaic Company to provide Global Service Desk support in English, Latin American, and APAC languages.

4. LogMeIn ( LOGM) offers on-demand, remote-connectivity and support solutions for small- and medium-sized businesses (SMBs), information technology (IT) service providers, mobile carriers and consumers. The company's solutions enable users to remotely access support and manage computers and other Internet-enabled devices on demand, as well as to collaborate with other users.

All the 10 analysts covering the stock recommend a buy. The stock's average 12-month price target is $47.14, which is 25% higher than the current price, according to a Bloomberg consensus.

For the 2011 third quarter, total revenue was up 22% year-over-year to $31.0 million from $25.3 million during the third quarter of 2010. Core product revenue, excluding $1.7 million revenue from the company's Intel agreement in the third quarter of 2010, grew 31% year-over-year. Net income for the 2011 third quarter stood at $1.1 million, or 4 cents per diluted share. Cash flow from operations reached $10.2 million, vs. $7.0 million in the 2010 third quarter.

For the fourth quarter of 2011, the company expects revenue to be in the range of $31.6 million to $32.0 million, while GAAP net income are seen in the range of $1.5 million to $1.8 million, or 6 cents to 7 cents per diluted share.

For full year 2011 outlook, the company expects revenue in the range of $118.7 million to $119.1 million, while GAAP net income including the stock compensation expense, acquisition related expenses, and patent litigation related expenses are forecast between $5.2 million and $5.5 million, or 21cents to 22 cents per diluted share.

Last month, LogMeIn launched a free mobile app to bring its signature remote desktop capabilities to more iPads and iPhones. Pachube, a LogMeIn company, has just released the beta of OnBoard, a turnkey service for commercial manufacturers to get their devices onto the Internet of Things and create Internet-connected services.

3. Interxion Holding ( INXN) provides carrier-neutral collocation data center services in Europe, and supports over 1,100 customers through 28 data centers located in 11 countries facilitating the protection, connection, and process and distribution of information. Within its data centers, the company enables customers to connect to a range of telecommunications carriers, Internet service providers and other customers.

Eighty-two percent of the 11 analysts covering the stock recommend a buy. The stock's average 12-month price target is $17.19, up 26.7% from the current price, according to a Bloomberg consensus.

For the 2011 third quarter, revenue rose 13% year-over-year to $79.4 million. Recurring revenue rose 17% year-over-year to $74.5 million, representing 94% of total revenue. Adjusted EBITDA reached $32 million, up 20% year-over-year, while adjusted EBITDA margin expanded to 40.3% from 38.1% in the prior year period. Net profit rose 16% year-over-year to $8.84 million.

The company has reaffirmed its 2011 guidance and expects revenue to be in the range of $306.4 million to $314.1 million. Adjusted EBITDA is seen between $116.7 million and $121.8 million, while capital expenditure is expected to range from $179.5 million to $205.2 million range.

In Nov. 2011, the company announced an agreement with Hibernia Atlantic to host a Point-of-Presence (POP) for its high-capacity fiber optic cable system at Interxion's Dublin 2 (DUB2) data center.

2. Cognizant Technology Solutions> ( CTSH) offers information technology, consulting and business process outsourcing services.

Of the 29 analysts covering the stock, 83% recommend a buy and 17% suggest a hold. The stock's average 12-month price target is $84.10, which is 27.5% higher than the current price, according to a Bloomberg consensus.

Revenue for the third quarter of 2011 grew 31.6% year-over-year to $1.6 billion from $1.2 billion during the 2010 third quarter. GAAP net income improved to $227.1 million, or 73 cents per diluted share, vs. $203.7 million, or 66 cents per diluted share, during the prior year's third quarter. The quarter ended with net headcount addition exceeding 12,000, including 4,000 employees from the CoreLogic India acquisition.

For the 2011 fourth quarter, the company expects revenue of at least $1.66 billion and diluted EPS of 76 cents per share, excluding $0.06 of estimated stock-based compensation expense. Full year 2011 revenue is expected to be least $6.11 billion, up 33% compared to 2010. Fiscal 2011 diluted EPS is seen above $2.83 on a GAAP basis, excluding $0.22 of estimated stock-based compensation expense.

Last month, Telefónica UK, a leading communications company for consumers and businesses in the UK, has selected CTSH as a strategic partner for managing and developing its online applications, critical to improving sales and enhancing customer service.

1. Active Network> ( ACTV) offers organization-based cloud computing applications catering to a range of customer groups, including business events, outdoors, community activities and sports. The company operates in two segments: Technology and Marketing services.

Of the eight analysts covering the stock, seven recommend a buy and one rates a hold. The stock's average 12-month price target is $20.17, which is 52.9% higher than the current price, according to a Bloomberg consensus.

For the 2011 third quarter, net revenue rose 23% year-over-year to $89.6 million from $73.1 million. Technology revenue grew 22% year-over-year to $76.3 million from $62.4 million in the same period previous quarter. Revenue from marketing services rose 24% year-over-year to $13.3 million from $10.7 million. Net loss narrowed to $1.4 million, vs. net loss of $3.8 million in the same period previous quarter. Cash flow from operations surged 52% year-over-year to $61.6 million against $40.5 million.

The company expects 2011 fourth quarter of $72 million to $76 million, with registration growth forecast above 12% to 14%, and revenue per registration growth of approximately 1% to 3%, vs. the same period prior year. Total net revenue guidance for full year 2011 is about $333 million to $337 million. Adjusted EBITDA is forecast in the range of $36.7 to $38.7 million.

Last month, USA Triathlon announced that Active Network is expected to serve as the exclusive Official Technology Partner of USA Triathlon through Nov. 2016. Moreover, National Archives and Records Administration (NARA) has launched an integrated software-as-a-service (SaaS) solution from Active Network.

>>To see these stocks in action, visit the 9 IT Services Stocks With Upside portfolio on Stockpickr.

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