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IT services and software companies do not follow one universal growth or profit pattern. In Aswath Damodaran’s January 2026 US sector data, Computer Services had a five-year historical revenue CAGR of 27.10%, while the three software categories ranged from 16.72% to 29.18%. For after-tax unadjusted operating margin, two software categories were around 31%–32%, but Software (Internet) was 3.57% and Computer Services was 6.63%. These are averages for broad groups of US public companies—not forecasts or guarantees for an individual business.
What the categories represent
Damodaran’s “Computer Services” category is a broad proxy for IT services; it is not a sample limited to pure-play IT consulting and outsourcing firms. The dataset divides software into Entertainment, Internet, and System & Application categories. That split matters: treating all software companies as one comparable group would hide substantial differences.
The figures below are from Aswath Damodaran’s US sector datasets analyzed as of January 2026. Firm counts are shown to make the scope of each average clear. The growth source reports five-year historical compounded annual revenue growth and analyst estimates for the next two and five years; the margin source reports several different margin measures.
How revenue growth compares
The historical figures do not support a blanket claim that software always grows faster than IT services. Software (Internet) had the highest five-year historical growth in this comparison, while the other two software categories grew more slowly than Computer Services.
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| US sector category | Firms | Five-year historical revenue CAGR | Next two years: analyst estimate | Next five years: analyst estimate |
|---|---|---|---|---|
| Computer Services | 64 | 27.10% | 36.39% | 19.46% |
| Software (Entertainment) | 77 | 16.72% | 13.22% | 7.78% |
| Software (Internet) | 29 | 29.18% | 14.29% | 17.71% |
| Software (System & Application) | 309 | 19.56% | 23.07% | 12.33% |
Historical growth is not a prediction. The forward figures are analyst estimates recorded in the January 2026 dataset, not realized results or guarantees. All values in this table are from Aswath Damodaran’s Historical (Compounded Annual) Growth Rates by Sector.
How operating margins compare
For a like-for-like snapshot, the table uses after-tax unadjusted operating margin. On this measure, the System & Application and Entertainment software categories were near 31%–32%, while Computer Services and Software (Internet) were below 7%.
| US sector category | Firms | After-tax unadjusted operating margin | Gross margin |
|---|---|---|---|
| Computer Services | 64 | 6.63% | 24.26% |
| Software (Entertainment) | 77 | 32.06% | 66.45% |
| Software (Internet) | 29 | 3.57% | 62.58% |
| Software (System & Application) | 309 | 31.17% | 71.72% |
These are January 2026 US sector averages from Aswath Damodaran’s Margins by Sector (US). Gross margin is not operating margin: Software (Internet), for example, had a 62.58% gross margin but a 3.57% after-tax unadjusted operating margin. Costs below gross profit—including operating expenses—can change the comparison considerably.
Do not mix margin definitions
Damodaran’s table also reports net margin, pre-tax margins, and operating margins adjusted for stock compensation, leases, or R&D. Those measures answer different questions and should not be swapped into a comparison without labeling them. For example, net margin was 4.45% for Computer Services, 29.93% for Software (Entertainment), -0.93% for Software (Internet), and 25.49% for Software (System & Application) in the same dataset.
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Why the business models can produce different economics
IT services: revenue tied to delivery capacity
Many IT services companies sell expertise and delivery capacity through consulting, implementation projects, or ongoing managed services. Growth can depend on winning contracts, recruiting or allocating people, and expanding the ability to deliver work. Labor and utilization can therefore be important to the economics of a services business.
Software: reusable products, with continuing costs
A software company can sell a license or subscription to a reusable product. When serving an additional customer has a low incremental delivery cost, that model can support higher gross margins. But product development, sales, customer acquisition, hosting, and support still cost money. Cloud infrastructure can be significant, and some software vendors also have substantial implementation or other services work.
These are business-model mechanisms, not causes proven by the sector tables. A company’s label alone does not determine its growth or margin: firm age and scale, product mix, acquisitions, recurring versus project revenue, and accounting treatment can all affect reported results.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How to compare two specific companies
Sector averages are a starting point, not a substitute for comparing companies on consistent terms. Check:
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- Growth basis: Separate organic growth from acquisition-driven growth, and recurring subscription or license revenue from project revenue.
- Margin definition: Confirm whether you are comparing gross, operating, or net margin, and whether the figures are before or after tax or adjusted for stock compensation, leases, or R&D.
- Delivery costs: For services, consider labor and utilization; for software, consider hosting, support, research and development, and customer acquisition.
- Revenue mix: A single company may combine subscriptions, licenses, implementation, services, and resale.
- Scale and maturity: A fast-growing company investing heavily may have lower current operating margins than a mature business.
Use the same reporting period and accounting basis for both companies; otherwise, apparent differences may reflect measurement rather than business performance.
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