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Bright Near-Term Outlook for Business-Software Services Stocks

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The Zacks Business Software Services industry primarily comprises companies that offer application-specific software products and services. Their 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 the industry participants.

Here are the three major themes in the industry:

  • The companies in this industry are benefiting from a robust demand for multi cloud-enabled software solutions, given the ongoing transition from legacy platforms to modern cloud-based infrastructure. The companies are incorporating artificial intelligence (AI) and tools like machine learning (ML) in their applications to make them more dynamic and result oriented. Robust demand for enterprise software, which is driving increased productivity and improved decision-making, is a key catalyst. Additionally, business software providers are keeping pace with global regulatory and business practice regulations such as General Data Protection Regulation (“GDPR”) or Privacy Shield, thereby helping customers incorporate industry-best practices while complying with governmental and industry norms.
     
  • The industry participants are adjusting their business model to keep up with changing requirements of clients. Subscription and term-license based revenue pricing models have become extremely popular and these are replacing the legacy upfront payment model. Although top-line growth of these companies is expected to suffer in the near term owing to this transition, increased revenue visibility and higher recurring revenues bode well for investors in the long haul.
     
  • Most of the industry players are now offering a cloud-based version of their solutions in addition to the on-premise version, thereby expanding content accessibility. The enhanced interoperability feature provides differentiation as well as efficiency for customers. Moreover, the companies in this industry are resorting to frequent mergers and acquisitions to provide complementary as well as end-to-end software products. Moreover, partnerships with major cloud providers like Microsoft Azure and Amazon Web Services (AWS) are strengthening their product portfolio.

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 #109, which places it at the top 43% of 256 Zacks industries.

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

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has increased by 7.3%.

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 Outperforms Sector, Lags S&P 500

The Zacks Business - Software Services Industry has lagged the Zacks S&P 500 composite over the past year but surpassed the broader Zacks Computer and Technology Sector.

The industry has gained 3.2% over this period compared to the S&P 500’s rise of 3.6%. The broader sector has however declined 0.4%.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry with the Zacks S&P 500 composite on the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing business software stocks, we see that the industry’s ratio of 21.5 is higher than the S&P 500’s 17.13 and the sector’s 19.61.

Over the last five years, the industry has traded as high as 27.17X, as low as 19.34X and recorded a median of 23.21X, as the charts below show.

Price-to-Earnings (P/E) Ratio (F1)

Price-to-Earnings (P/E) Ratio (F1)

Bottom Line

Business – Software Servicescompanies are trying to fast adapt to changing user needs. Focus on providing offerings that address the need for transparency and efficiency in organizations bodes well for the industry participants.

Here, we present three stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). These stocks are well positioned to grow in the near term. You can see the complete list of today’s Zacks #1 Rank stocks here.

Foster City, CA-based Guidewire Software, Inc. (GWRE - Free Report) is a provider of software solutions for property and casualty (P&C) insurers. This Zacks Rank #2 stock has gained 7.1% in the past year. The Zacks Consensus Estimate for its current fiscal year earnings has increased by a penny to $1.23 over the past 30 days.

Price and Consensus: GWRE

Based in Dallas, TX, Tyler Technologies, Inc. (TYL - Free Report) is engaged in providing integrated information management solutions and services to the public sector. This Zacks Rank #2 stock has gained 17.5% in the past year. The Zacks Consensus Estimate for current-fiscal earnings has remained stable at $4.81 over the past 30 days.

Price and Consensus: TYL

Headquartered in Fremont, CA, SYNNEX Corporation (SNX - Free Report) , a business process services company providing business-to-business services, has seen a 43% decline in its share price over the past year. For this Zacks Rank #2 stock, the Zacks Consensus Estimate for current fiscal year earnings has increased 2 cents to $10.12 over the past 30 days.

Price and Consensus: SNX

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