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Fix the driver behind crashes, sound loss and screen glitchesFind Drivers →Clear out junk files and repair common Windows errorsFree Scan →Neither IT services companies nor software companies have a guaranteed growth or margin advantage. In Aswath Damodaran’s January 2026 US sector data, five-year revenue growth varied widely across software categories: Internet software outpaced Computer Services, while Entertainment and System & Application software grew more slowly. Operating margins also differed sharply within software. The figures are sector averages, not forecasts or predictions for any individual company.
How the business models differ
Many IT services businesses sell expertise and delivery capacity through consulting, implementation projects, or ongoing managed services. Growth can depend on winning contracts, hiring or assigning skilled staff, and expanding the ability to deliver work.
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Software companies sell reusable products through licenses or subscriptions. Once a product is built, serving another customer may cost less than delivering another hour of customized labor, which can support higher gross margins. But software is not cost-free to scale: product development, sales, customer acquisition, hosting, and support all use resources.
These are general business-model mechanisms, not causes established by the sector data. Companies can blur the distinction: a software vendor may have labor-intensive implementation work or significant cloud-hosting costs, while a services firm may sell repeatable offerings.
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What the US sector data shows about growth
Aswath Damodaran’s US sector dataset, analyzed as of January 2026, reports five-year historical compounded annual revenue growth rates (CAGRs). “Computer Services” is a broad proxy for IT services, not a sample limited to pure-play IT consulting and outsourcing firms. Software is split into three categories.
| US 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 |
Each figure is from Aswath Damodaran’s January 2026 US sector dataset; the sample size is shown by category. Internet software had the highest historical growth in this comparison, while Computer Services grew faster than the other two software categories. That is why “software grows faster” is too broad a rule. A historical CAGR describes the past five years in this dataset; it does not promise that the same rate will continue.
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Forward estimates are estimates, not results
The same January 2026 dataset includes analyst estimates of revenue growth over the next two and five years. These are projections recorded in the dataset, not realized outcomes or guarantees.
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| US sector category | Expected growth, next two years | Expected growth, 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 estimates in Aswath Damodaran’s January 2026 US sector dataset, not actual future growth rates. Their variation by category reinforces that the label “software” alone does not indicate a single growth outlook.
How operating margins compare
Margin comparisons depend on the measure. The table below uses after-tax unadjusted operating margin, not gross margin or net margin.
| US 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 |
All values are from Aswath Damodaran’s January 2026 US sector dataset. Entertainment and System & Application software had much higher average after-tax unadjusted operating margins than Computer Services; Internet software was lower than both. These sector averages do not establish that a software business will have higher margins than a services business.
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Why gross margin can tell a different story
Gross margin excludes operating expenses, so it should not be treated as interchangeable with operating margin. In the same 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 relatively high gross margin alongside its 3.57% after-tax unadjusted operating margin illustrates how expenses below gross profit can materially affect operating profitability.
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1Fix the driver behind crashes, sound loss and screen glitches2Clear out junk files and repair common Windows errors3Scan for outdated or missing drivers - takes under a minuteThe dataset also reports net margin and adjusted operating-margin measures, but those answer different questions. For example, net margin was 4.45% for Computer Services and 29.93%, -0.93%, and 25.49% for Software (Entertainment), Software (Internet), and Software (System & Application), respectively. Do not compare those figures as though they were operating margins.
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How to compare two companies fairly
Sector averages are useful context, but they cannot tell you which of two specific companies is the stronger business. For an apples-to-apples comparison, check:
- Growth source: Separate organic growth from acquisitions, and recurring subscription or managed-service revenue from project revenue.
- Margin definition: Compare gross with gross, operating with operating, or net with net. Check whether the figures are before or after tax and whether stock compensation, leases, or research and development are adjusted.
- Delivery economics: For services, consider labor needs and utilization. For software, consider hosting, support, product development, and customer-acquisition costs.
- Revenue mix: A company may combine subscriptions, licenses, implementation, services, and resale; its label may conceal important differences in what it sells.
- Scale and maturity: A fast-growing company investing heavily may have lower current operating margins than a mature company, regardless of sector.
The January 2026 figures describe US sector categories and do not establish that a company’s industry label caused its growth or margin. Firm age, size, product mix, acquisitions, recurring versus project revenue, and accounting treatment may all affect a company’s results.
Sources and scope
- Aswath Damodaran, “Margins by Sector (US)” — US sector margins and firm counts, analyzed using data as of January 2026.
- Aswath Damodaran, “Historical (Compounded Annual) Growth Rates by Sector” — historical growth rates and forward estimates, analyzed using data as of January 2026.
The categories draw on multiple data services and are broad sector classifications. In particular, Computer Services should be read as a proxy rather than a precisely matched group of IT consulting and outsourcing companies. Sector figures and estimates change over time.
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