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3 Business-Software Services Stocks to Watch in a Thriving Industry

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The Zacks Business-Software Services industry is benefiting from heightened demand for digital transformation and the ongoing shift to cloud. Moreover, elevated demand for SaaS owing to the increasing need for remote working, online learning and diagnosis software has been a major driving factor amid the disruptions caused by the coronavirus pandemic.

Industry participants like Guidewire Software (GWRE - Free Report) , QAD Inc. (QADA - Free Report) and ePlus Inc. (PLUS - Free Report) are gaining from these trends amid the coronavirus crisis. In addition, rising spending on enterprise software by organizations is anticipated to boost sales of industry participants.

Industry Description

The Zacks Business-Software Services industry primarily comprises companies that deliver application-specific software products and services. The offerings include applications related to finance, human resource and supply chain, among others. Manufacturing, retail, banking, insurance, telecommunication, healthcare and public sectors are the primary end-markets for industry participants.

4 Trends Shaping the Future of the Business-Software Services Industry

Rising Spending on Enterprise Software Key Catalyst: Elevated demand for enterprise software, which is ramping up productivity and improving decision-making process, is a key catalyst. According to a report by Gartner, the worldwide spending on enterprise software is anticipated to reach $492.4 billion in 2021, marking a 7.2% increase from the 2020 projected spending of $459.3 billion.

Transition to Cloud Creating Opportunities: The companies in this industry have been gaining from the robust demand for multi cloud-enabled software solutions, given the ongoing transition from legacy platforms to modern cloud-based infrastructure. These industry players are incorporating artificial intelligence (AI) in their applications to make the same more dynamic and result oriented. Most industry players are now offering cloud-based versions of their solutions in addition to the on-premise ones, thereby expanding content accessibility. The enhanced inter-operability feature provides customers with differentiation and efficiency.

Subscription Model Gaining Traction: The industry participants are modifying their business models to cope with clients’ changing requirements. Subscription and term-license based revenue pricing models have become highly popular and are now replacing the legacy upfront payment prototype. Subscription-based business models provide increased revenue visibility and higher recurring revenues, which bode well for investors over the long haul. However, due to this transition, top-line growth of these companies might be affected in the days to come, as term-license revenues include advance payments, whereas subscription-based revenues are a bit delayed.

Continuous M&A to Expand Product Offerings: The companies in this industry are resorting to frequent mergers and acquisitions to supply complementary and end-to-end software products. Nonetheless, increasing investments in digital offerings and acquisitions might erode the industry’s profitability in the near term.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #118, which places it at the top 46% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Beats Sector and the S&P 500

The Zacks Business-Software Services industry has outperformed the broader Zacks Computer And Technology sector as well as the S&P 500 Index over the past year.

The industry has surged 46.8% over this period compared with the S&P 500’s gain of 18.2% and the broader sector’s rally of 41.1%.

Industry’s Current Valuation

Comparing the industry with the S&P 500 composite and broader sector on the basis of the forward 12-month price-to-earnings ratio, which is a commonly-used multiple for valuing business-software services stocks, we see, the industry’s ratio of 33.9X is higher than the S&P 500’s 22.68X and the sector’s 28.15X.

Over the last five years, the industry has traded as high as 33.90X, as low as 7.29X and recorded a median of 21.69X as the charts below show.

Price-to-Earnings (P/E) Ratio (F12M)

Price-to-Earnings (P/E) Ratio (F12M)

3 Business-Software Services Stocks to Watch Out For

Guidewire Software: This Zacks Rank #2 (Buy) company is a leading provider of software solutions for property and casualty (P&C) insurers. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Guidewire is benefiting from the pandemic-triggered demand for cloud-based insurance software solutions. The firm’s cloud-based subscription products are witnessing traction as insurers are increasingly looking to digitally transform their business processes. Furthermore, the growing proliferation of Guidewire across the Canadian P&C industry is a key catalyst.

Shares of this San Mateo, CA-based company have rallied 14.8%, year to date. The Zacks Consensus Estimate for fiscal 2021 earnings has moved 118.2% north to 24 cents per share over the past 30 days.

Price and Consensus: GWRE

QAD: This Santa Barbara, CA-based company operates as a global provider of enterprise software applications, professional services and application support for manufacturing companies.

QAD is benefiting from accelerated digital transformation by organizations. Additionally, the company’s initiatives to enhance offerings via product enhancements, inorganic strategies, and collaborations and partnership programs are enabling it to expand the clientele.

Shares of this Zacks Rank #2 company have appreciated 26.4% in the year so far. The consensus mark for fiscal 2021 earnings has been revised 46.6% upward to 85 cents per share in the past 60 days.

Price and Consensus: QAD

ePlus: This Herndon, Virginia-based company enables organizations to optimize their IT infrastructure and supply-chain processes by delivering world-class IT products from top manufacturers, professional services, flexible lease financing, proprietary software, and patented business methods.

The company is benefiting from the pandemic-driven demand for work-from-home hardware and software including, PCs, tablets, connectivity, collaboration and security products. Apart from this, the company’s strategy of acquiring regional solution providers is helping it grow across the higher margin IT services market.

This Zacks Rank #2 stock has gained approximately 3% in the year-to-date period. The consensus mark for fiscal 2021 earnings has moved 71 cents north to $5.93 per share in 60 days’ time.

Price and Consensus: PLUS

5 Stocks Set to Double

Each was hand-picked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2020. Each comes from a different sector and has unique qualities and catalysts that could fuel exceptional growth.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

Today, See These 5 Potential Home Runs >>


In-Depth Zacks Research for the Tickers Above


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Guidewire Software, Inc. (GWRE) - free report >>

ePlus inc. (PLUS) - free report >>

QAD Inc. (QADA) - free report >>