IT services companies do not automatically grow more slowly than software companies, and software does not always mean higher operating margins. In Aswath Damodaran’s January 2026 US sector dataset, five-year revenue growth ranges from 16.72% to 29.18% across software categories, compared with 27.10% for Computer Services. After-tax unadjusted operating margins range from 3.57% to 32.06% across those software categories, versus 6.63% for Computer Services. The results depend on which kind of software business and which financial measure you compare.
How do IT services and software companies differ?
Many IT services firms sell expertise and delivery capacity: consulting, implementation, project work, or ongoing managed services. Their growth can depend on winning contracts, hiring or retaining skilled workers, and expanding the capacity to deliver the work.
Software companies typically sell a reusable product through licenses or subscriptions. Once built, a product may be sold to additional customers without adding delivery costs in the same proportion, which can support high gross margins. But software is not cost-free to scale: development, sales, customer acquisition, cloud hosting, and support all require investment. Some software vendors also provide substantial implementation or other services.
These are business-model mechanisms, not causes proved by the sector averages below. Company age, size, acquisitions, revenue mix, and accounting choices can also affect reported growth and margins.
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How did revenue growth compare in the January 2026 US data?
Damodaran’s US sector dataset reports five-year historical compounded annual revenue growth, or CAGR. “Computer Services” is a broad proxy for IT services rather than a sample limited to pure-play IT consulting and outsourcing companies. The dataset divides software into three categories:
| Sector category | Five-year historical revenue CAGR | Firms |
|---|---|---|
| Computer Services | 27.10% | 64 |
| Software (Entertainment) | 16.72% | 77 |
| Software (Internet) | 29.18% | 29 |
| Software (System & Application) | 19.56% | 309 |
All figures in the table are five-year historical revenue CAGRs from Aswath Damodaran’s US sector growth dataset, analyzed using data as of January 2026. They show why a blanket claim that software grows faster is misleading: Internet software exceeded Computer Services in this period, while the other two software categories grew more slowly.
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What the forward estimates said
The same January 2026 dataset included analyst estimates for revenue growth over the next two and five years. These were estimates recorded in the dataset, not realized results or guarantees:
| Sector category | Next two years | Next five years |
|---|---|---|
| Computer Services | 36.39% | 19.46% |
| Software (Entertainment) | 13.22% | 7.78% |
| Software (Internet) | 14.29% | 17.71% |
| Software (System & Application) | 23.07% | 12.33% |
These are analyst expected revenue growth rates in Damodaran’s January 2026 US sector dataset. They should not be read as a promise of what any category—or an individual company—will achieve.
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Which tends to have higher margins?
The clearest comparison depends on the margin measure. The table below uses after-tax unadjusted operating margin throughout, from Damodaran’s January 2026 US sector data:
| Sector category | After-tax unadjusted operating margin | Firms |
|---|---|---|
| Computer Services | 6.63% | 64 |
| Software (Entertainment) | 32.06% | 77 |
| Software (Internet) | 3.57% | 29 |
| Software (System & Application) | 31.17% | 309 |
These figures are from Aswath Damodaran’s US sector margins dataset, analyzed using data as of January 2026. The two established software categories shown here had much higher averages than Computer Services, but Software (Internet) was lower. Sector averages are not predictions for a particular company.
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Gross margin is not operating margin
Gross margin subtracts direct costs associated with providing a product or service; operating margin also reflects operating expenses such as research and development, sales, and administration. In the same January 2026 dataset, gross margins were 24.26% for Computer Services, 66.45% for Software (Entertainment), 62.58% for Software (Internet), and 71.72% for Software (System & Application). The Internet software category’s 62.58% gross margin alongside its 3.57% after-tax unadjusted operating margin illustrates how operating costs and business maturity can change the comparison.
Other reported measures include net margin, pre-tax margin, and margins adjusted for stock compensation, leases, or R&D. They are not interchangeable with after-tax unadjusted operating margin. For example, net margins in the same dataset were 4.45% for Computer Services, 29.93% for Software (Entertainment), -0.93% for Software (Internet), and 25.49% for Software (System & Application). Check the definition before comparing a figure from one company with a figure from another.
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How should you compare two specific companies?
Sector averages provide context, but a company-to-company comparison is more useful when it matches periods, definitions, and business mix. Check:
- Growth basis: Separate organic growth from revenue added through acquisitions. Distinguish recurring subscriptions from project-based revenue.
- Margin definition: Confirm whether the figure is gross, operating, or net margin; whether it is before or after tax; and whether adjustments for stock compensation, leases, or R&D are included.
- Delivery costs: For services firms, consider labor costs and the ability to keep staff utilized. For software firms, consider hosting, support, product development, and customer acquisition.
- Revenue mix: A company may combine services, subscriptions, licenses, implementation, and resale. Its label alone may not describe its economics.
- Scale and maturity: A fast-growing company investing heavily in expansion can have lower current operating margins than a more mature business.
What the sector comparison can—and cannot—tell you
The January 2026 US sector snapshot supports three conclusions: software categories often have higher gross margins; operating margins vary sharply among software categories; and Computer Services growth can match or exceed that of some software categories over a particular historical period. It does not establish that a software label causes a higher margin or faster growth. The samples cover broad listed-company categories, and the figures will change as company results and analyst estimates change.
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