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Software is Still "Eating the World": 3 Top-Ranked Stocks to Keep on Your Radar
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Over ten years ago, Silicon Valley legend Marc Andreessen correctly proclaimed that “software is eating the world.” Today, every Fortune 500 Company uses software in one way or another. Advancements in computer hardware have led to more powerful and efficient software. Industries such as healthcare, education, and finance have adopted software to collect and maintain data, fight cyber security threats, make business more efficient, and much more. As more companies of all sizes have adopted software, software stocks have been significant beneficiaries over the past decade. For example, before the 2022 market correction, the Ishares Expanded Tech-Software ETF (IGV - Free Report) was at one point up 600% over a ten-year period.
Image Source: Zacks Investment Research
Since topping in the fourth quarter of 2021, the picture has changed completely. Software-related stocks took the brunt of the sell off as investors exited high-valuation growth stocks and transitioned into steady value stocks. The latest correction is on pace to be one of the longest and nastiest in the history of the IGV ETF outside of the 2008 Global Financial Crisis and aftermath of the tech bubble in the early 2000s. In fact, the current correction is even worse than that of the Covid correction it suffered in 2020.
Image Source: Zacks Investment Research
Despite the recent bearishness in the industry, investors should be sure to keep their perspective. Software valuations are the lowest they have been in years. For example, software giant Salesforce (CRM - Free Report) has seen its P/E ratio drop from over 90 in 2018 to 33.90 today.
Image Source: Zacks Investment Research
Pictured: CRM's P/E has been falling in recent quarters.
Below, we will cover three #1 Ranked Zacks stocks that are worth watching:
Okta Inc (OKTA - Free Report) is a cyber-security-focused software company that provides clients with multi-factor Authentication, mobility management, and enterprise solutions. Though Okta’s stock has fallen hard (along with the industry), it has surprised to the upside on earnings in every quarter dating back to 2019.
Image Source: Zacks Investment Research
Fortunately for Okta, companies can only hold off on cyber security expenses for so long. Over the past 60 days, Zack’s Consensus estimate data for the coming quarters have seen a very powerful positive trend. For example, 60 days ago, consensus analyst estimates suggested that the company would lose 0.12 a share for the first quarter. Currently, analysts’ expectations have become rosier, and consensus analyst estimates suggest that the company may deliver a profit of 0.09 cents per share in Q1. A profitable quarter would be significant. Though Okta has had years of impressive revenue growth since coming public, the company has only had one year of profitability as a public company.
Image Source: Zacks Investment Research
As software valuations get more attractive, Okta and other cybersecurity stocks such as Palo Alto Networks (PANW - Free Report) , become potential acquisition targets in 2023. Private equity firm Thoma Bravo has purchased six cybersecurity firms in just the past few years alone. The stock is currently consolidating near $74. If shares can clear the $74 level, it may act as an interesting “dumpster dive” play for investors looking for a turnaround play.
Image Source: Zacks Investment Research
Hello Group Inc (MOMO - Free Report) provides a mobile social and entertainment platform in China. Over the past three months, the stock symbol “MOMO” has been appropriate. Shares have launched higher by 118.2% since late October.
Image Source: Zacks Investment Research
Why are shares so strong?
· Momentum in China: Chinese markets have stormed back with a vengeance after the government lifted stringent Covid lockdowns and provided stimulus to the ailing real estate sector. The Kraneshares CSI China Internet ETF (KWEB - Free Report) has doubled from its lows in late 2022.
Image Source: Zacks Investment Research
· Improving Technical Picture: Late last year, MOMO’s technical improved drastically after reporting solid earnings results. The stock retook its 200-day moving average and the 50-day moving average crossed above the 200-day to indicate a “Golden Cross”
Image Source: Zacks Investment Research
· Consensus Estimates on the Rise: Zack’s Consensus Analyst Estimate data suggests the next few quarters will be strong.
Image Source: Zacks Investment Research
While the stock has a lot of reasons to be bullish, its price has risen rapidly in the past few months. Investors should avoid chasing the stock but keep it on the radar for a potential pullback purchase.
I3 Verticals Inc (IIIV - Free Report) is a company engaged in payment processing solutions. As the world moves further away from a physical cash society, companies like I3 Verticals have benefitted. I3 sports seven straight quarters of both double-digit revenue and EPS growth. The stock has also shown relative strength versus the S&P 500 Index. Over the past year, IIIV is up 20.5% while the S&P 500 is down 14.2%.
Image Source: Zacks Investment Research
Pictured: IIIV performance in relation to the S&P 500 Index
IIIV is also getting more attractive from a valuation lens. Last year, the P/E ratio was as high as 55x, now the P/E is down to 34.31. The stock is reasonably valued considering its recent growth and growth expectations moving forward.
Image Source: Zacks Investment Research
Conclusion
Though the software space has had a tough couple of years, the industry is worth keeping on the radar. Valuations are becoming more reasonable, and consensus analyst estimates suggest that many top software companies are turning the corner from an earnings perspective. Investors should focus their energy on top-ranked software stocks with stellar earnings growth at reasonable valuations.
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Software is Still "Eating the World": 3 Top-Ranked Stocks to Keep on Your Radar
Over ten years ago, Silicon Valley legend Marc Andreessen correctly proclaimed that “software is eating the world.” Today, every Fortune 500 Company uses software in one way or another. Advancements in computer hardware have led to more powerful and efficient software. Industries such as healthcare, education, and finance have adopted software to collect and maintain data, fight cyber security threats, make business more efficient, and much more. As more companies of all sizes have adopted software, software stocks have been significant beneficiaries over the past decade. For example, before the 2022 market correction, the Ishares Expanded Tech-Software ETF (IGV - Free Report) was at one point up 600% over a ten-year period.
Image Source: Zacks Investment Research
Since topping in the fourth quarter of 2021, the picture has changed completely. Software-related stocks took the brunt of the sell off as investors exited high-valuation growth stocks and transitioned into steady value stocks. The latest correction is on pace to be one of the longest and nastiest in the history of the IGV ETF outside of the 2008 Global Financial Crisis and aftermath of the tech bubble in the early 2000s. In fact, the current correction is even worse than that of the Covid correction it suffered in 2020.
Image Source: Zacks Investment Research
Despite the recent bearishness in the industry, investors should be sure to keep their perspective. Software valuations are the lowest they have been in years. For example, software giant Salesforce (CRM - Free Report) has seen its P/E ratio drop from over 90 in 2018 to 33.90 today.
Image Source: Zacks Investment Research
Pictured: CRM's P/E has been falling in recent quarters.
Below, we will cover three #1 Ranked Zacks stocks that are worth watching:
Okta Inc (OKTA - Free Report) is a cyber-security-focused software company that provides clients with multi-factor Authentication, mobility management, and enterprise solutions. Though Okta’s stock has fallen hard (along with the industry), it has surprised to the upside on earnings in every quarter dating back to 2019.
Image Source: Zacks Investment Research
Fortunately for Okta, companies can only hold off on cyber security expenses for so long. Over the past 60 days, Zack’s Consensus estimate data for the coming quarters have seen a very powerful positive trend. For example, 60 days ago, consensus analyst estimates suggested that the company would lose 0.12 a share for the first quarter. Currently, analysts’ expectations have become rosier, and consensus analyst estimates suggest that the company may deliver a profit of 0.09 cents per share in Q1. A profitable quarter would be significant. Though Okta has had years of impressive revenue growth since coming public, the company has only had one year of profitability as a public company.
Image Source: Zacks Investment Research
As software valuations get more attractive, Okta and other cybersecurity stocks such as Palo Alto Networks (PANW - Free Report) , become potential acquisition targets in 2023. Private equity firm Thoma Bravo has purchased six cybersecurity firms in just the past few years alone. The stock is currently consolidating near $74. If shares can clear the $74 level, it may act as an interesting “dumpster dive” play for investors looking for a turnaround play.
Image Source: Zacks Investment Research
Hello Group Inc (MOMO - Free Report) provides a mobile social and entertainment platform in China. Over the past three months, the stock symbol “MOMO” has been appropriate. Shares have launched higher by 118.2% since late October.
Image Source: Zacks Investment Research
Why are shares so strong?
· Momentum in China: Chinese markets have stormed back with a vengeance after the government lifted stringent Covid lockdowns and provided stimulus to the ailing real estate sector. The Kraneshares CSI China Internet ETF (KWEB - Free Report) has doubled from its lows in late 2022.
Image Source: Zacks Investment Research
· Improving Technical Picture: Late last year, MOMO’s technical improved drastically after reporting solid earnings results. The stock retook its 200-day moving average and the 50-day moving average crossed above the 200-day to indicate a “Golden Cross”
Image Source: Zacks Investment Research
· Consensus Estimates on the Rise: Zack’s Consensus Analyst Estimate data suggests the next few quarters will be strong.
Image Source: Zacks Investment Research
While the stock has a lot of reasons to be bullish, its price has risen rapidly in the past few months. Investors should avoid chasing the stock but keep it on the radar for a potential pullback purchase.
I3 Verticals Inc (IIIV - Free Report) is a company engaged in payment processing solutions. As the world moves further away from a physical cash society, companies like I3 Verticals have benefitted. I3 sports seven straight quarters of both double-digit revenue and EPS growth. The stock has also shown relative strength versus the S&P 500 Index. Over the past year, IIIV is up 20.5% while the S&P 500 is down 14.2%.
Image Source: Zacks Investment Research
Pictured: IIIV performance in relation to the S&P 500 Index
IIIV is also getting more attractive from a valuation lens. Last year, the P/E ratio was as high as 55x, now the P/E is down to 34.31. The stock is reasonably valued considering its recent growth and growth expectations moving forward.
Image Source: Zacks Investment Research
Conclusion
Though the software space has had a tough couple of years, the industry is worth keeping on the radar. Valuations are becoming more reasonable, and consensus analyst estimates suggest that many top software companies are turning the corner from an earnings perspective. Investors should focus their energy on top-ranked software stocks with stellar earnings growth at reasonable valuations.