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3 Software Stocks to Buy in a Challenging Industry

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The Zacks Computer Software industry is benefiting from the continued digital transformation drive. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage is expanding in managing infrastructure. Moreover, the industry is benefiting significantly from the ongoing cloud transition

The role of software is evolving. Further, as more and more people work remotely due to the coronavirus outbreak, demand for voice and video communication software as well as productivity software is expected to jump exponentially. This bodes well for industry participants like Open Text (OTEX - Free Report) , Verint Systems (VRNT - Free Report) and Cornerstone OnDemand (CSOD - Free Report) .

Industry Description

The Zacks Computer Software industry comprises companies that provide software applications related to cloud computing, electronic product designing, digital media and marketing, customer relationship management, on-premise as well as cloud-based database management, accounting & tax purposes, human capital management, cybersecurity and application performance monitoring, among others.

Major companies in the industry include Adobe (ADBE - Free Report) , Cadence Design System (CDNS - Free Report) , Citrix (CTXS - Free Report) , Intuit (INTU - Free Report) , Microsoft (MSFT - Free Report) , Oracle (ORCL - Free Report) , salesforce.com (CRM - Free Report) and Synopsis (SNPS - Free Report) . Meanwhile, companies like Autodesk (ADSK - Free Report) and ANSYS (ANSS) develop and market simulation software globally.

3 Trends Shaping the Future of the Software Industry

Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given increased spending by enterprises on software procurement. Continued enterprise investment in big data and analytics along with the ongoing adoption of SaaS opens up significant opportunity for industry players. Notably, cloud offers a flexible and cost-effective platform to develop and test applications and the deployment time is also much shorter compared to legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.

Cloud Computing Adoption Gaining Traction: The increasing need to secure cloud platforms, amid growing incidents of cyber-attacks and hacking, drives demand for cyber security software. Further, enterprises are focusing on rapid migration to cloud and DevOps technologies to achieve scalability and agility for software development as well as IT operations, which helps in delivering flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. It is driving demand for performance management monitoring tools that are not only scalable but also suitable for cloud-based environments.

Remote Working and Learning to Aid Growth: Industry participants are facing coronavirus-induced challenging demand environment, which is expected to hurt prospects in the near term. However, the work-from-home and online-learning wave led to a spike in relevant software demand, primarily enterprise communication, workspace management, human capital management among others.

Zacks Industry Rank Indicates Dim Prospects

The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #167, which places it in the bottom 34% 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 continued underperformance in the near term. 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.

The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic in this group’s earnings growth potential. Since Nov 30, 2020, the industry’s earnings estimates for the current year have declined 7.1%.

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 Lags Sector but Outperforms S&P 500

The Zacks Computer Software industry has underperformed the broader Zacks Computer And Technology sector but lagged the S&P 500 Index over the past year.

The industry has rallied 35.5% over this period versus the S&P 500’s rise of 17.7% and the broader sector’s increase of 37.9%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month P/E, which is a commonly used multiple for valuing software companies, we see that the industry is currently trading at 32.76X compared with the S&P 500’s 23.1X. It is also above the sector’s forward-12-month P/E of 28.22X.

Over the last five years, the industry has traded as high as 35.41X, as low as 25.47X and at the median of 30.81X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

 

3 Software Stocks to Buy Right Now

Cornerstone OnDemand: The Santa Monica, CA-based company offers learning and people development solutions, delivered as SaaS. The company is benefiting from the acquisition of Saba Software, which has expanded its reach to more than 6,000 customers of all sizes across 180 countries and nearly 50 languages. Moreover, growing subscription revenues driven by new business wins and customers is a key catalyst.

The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) company’s 2021 earnings has moved up 35.2% to $1.42 per share over the past 60 days. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: CSOD

 

Open Text: This Waterloo, Canada-based information management company offers software and services to maximize the strategic benefits of data and content for increased productivity, growth and competitive advantage. The company is riding on strong cloud services and subscriptions revenue growth driven by an expanding clientele. The consensus mark for this Zacks Rank #2 (Buy) company’s fiscal 2021 earnings has risen 8.7% to $3.26 per share in the past 60 days.

Price and Consensus: OTEX

 

Verint Systems: This Melville, NY-based company is a dominant provider of actionable intelligence solutions. Verint is benefiting from the ongoing digital transformation, cloud migration and automation adoption. The company’s top-line growth is driven by strong demand from security solutions. The consensus mark for this Zacks Rank #2 company’s fiscal 2021 earnings has risen 1.5% to $3.40 per share in the past 60 days.

Price and Consensus: VRNT

 

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.

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