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Computer Software Stock Outlook: Growth Prospects Plenty

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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 (CRM), on-premise as well as cloud-based database management, accounting & tax purposes, human capital management, cybersecurity, application performance monitoring, among others.

A few companies also provide operating systems including open-source software. There are others who offer virtualization and networking solutions. A couple of companies also develop and market simulation software globally.

Software is ubiquitous and has become the focal point of technological innovation. The industry is highly dynamic. The primary mode of software deployment has shifted from legacy on-premise to cloud architecture with software-as-a-service (SaaS) becoming the preferred delivery mode.

Here are the three major themes in the industry:

  • The industry is benefiting from continued strong digital transformation environment. The last few years have witnessed a series of breakthroughs in cloud computing, predictive analysis, artificial intelligence (AI), self-driving vehicles, digital personal assistants, and Internet-of-Things (IoT), which set the stage for strong growth in the software industry. The near-term growth prospects are bright given increased spending by enterprises on software procurement.
  • Moreover, continued enterprise investment in big data and analytics along with the ongoing adoption of Software-as-a-Service (SaaS) presents significant growth opportunity for industry players. Notably, the cloud offers a flexible and cost-effective platform to develop and test new applications and the deployment time is also much shorter compared with legacy systems. SaaS companies are expected to register strong top-line growth due to a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.
  • Additionally, 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 ultimately helps in delivering flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. This is creating more demand for performance management monitoring tools that are not only scalable but also suitable for cloud-based environments.


Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer Software is housed within the broader Zacks Computer And Technology Sector. It carries a Zacks Industry Rank #101, which places it at the top 39% 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 continued outperformance 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 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 almost 10%.

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 and S&P 500

The Zacks Computer Software 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 rallied 17.5% over this period compared with the S&P 500 Index’s rise of 5.3% and the broader sector’s increase of 0.6%.

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 24.68X compared with the S&P 500’s 16.22X. It is also above the sector’s forward-12-month P/E of 18.51X.

Over the last five years, the industry has traded as high as 27.78X, as low as 16.29X and at the median of 21.02X, as the chart below shows.

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



 

Bottom Line

The role of software is evolving. Apart from running devices and applications, its usage is expanding in managing infrastructure. Moreover, the industry is significantly benefiting from the ongoing cloud transition.

Here, we present four stocks that either have a Zacks Rank #1 (Strong Buy) or Rank 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

These stocks are well positioned to grow in the near term.

Cadence Design Systems, Inc. (CDNS - Free Report) : The stock of this San Jose-based electronic product designing solutions provider has climbed 1.4% over the past year. The current fiscal Zacks Consensus Estimate EPS estimate for this Zacks Rank #1 stock has increased 7.7% over the past 30 days.

Price and Consensus: CDNS



 

Manhattan Associates, Inc. (MAN - Free Report) : The stock of this Atlanta, GA-based supply chain commerce provider has increased 15.9% over the past year. The current year Zacks Consensus Estimate EPS estimate for this Zacks Rank #1 stock has increased 6.3% over the past 30 days.

Price and Consensus: MANH



 

Citrix Systems, Inc. (CTXS - Free Report) : The consensus EPS estimate for this Fort Lauderdale-based virtualization, networking and cloud computing solutions provider has moved 3.3% higher for the current year over the past 30 days. This Zacks Rank #2 stock has rallied 22.4% in a year’s time.

Price and Consensus: CTXS



 

Adobe Systems, Inc. (ADBE - Free Report) : The stock of this San Jose, CA-based software solutions provider has gained 32.6% over the past year. The current fiscal Zacks Consensus Estimate EPS estimate for this Zacks Rank #2 stock has remained stable over the past 30 days.

Price and Consensus: ADBE


 

 

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