Computer Software industry benefits from the accelerated digital transformation drive across the globe. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. The role of software is constantly evolving. With the continuation of remote work setup and mainstream adoption of the hybrid/flexible work model, the demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Synopsys ( SNPS Quick Quote SNPS - Free Report) , Descartes Systems Group ( DSGX Quick Quote DSGX - Free Report) and Blackbaud ( BLKB Quick Quote BLKB - Free Report) . Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (mostly for semiconductor and electronics industries), digital media and marketing, customer relationship management, on-premises and cloud-based database management, accounting and tax purposes, human capital management, cybersecurity and application performance monitoring and cloud-based enterprise communications platform. Some companies develop and market simulation software (like computer-aided design or CAD, 3D modeling, product lifecycle management or PLM, data orchestration and experience creation), which engineers, designers and researchers use across various industries like architecture, engineering and construction, product design, manufacturing and digital media.
3 Trends Shaping the Future of the Software Industry
Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given higher spending by enterprises on software procurement. Continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS open up opportunities for industry players. Cloud offers a flexible and cost-effective platform for developing and testing applications. The deployment time is also shorter compared with 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 cyber-attacks and hacking incidents drives demand for cyber security software. Enterprises are focused on rapid migration to the cloud and DevOps technologies to achieve scalability and agility for software development and IT operations. This helps deliver a flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. It is driving the demand for performance management monitoring tools that are scalable and suitable for cloud-based environments. Macroeconomic Headwinds a Concern: The mainstream adoption of the distributed workforce model is fueling demand for enterprise communication, workspace management and human capital management software solutions, among others. However, global macroeconomic weakness, geopolitical instability in Europe due to the Russia-Ukraine war and lingering supply chain troubles are a concern. Increasing inflation could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term. Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Software industry is housed within the broader Zacks
Computer And Technology sector. It carries a Zacks Industry Rank #110, which places it in the top 44% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is 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 outperform 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, considering bright prospects, let us 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 and the S&P 500 Index in the past year.
The industry gained 21.5% over this period compared with the S&P 500 and the broader sector’ gain of 2.2% and 11.1%, respectively. One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month P/E, a commonly-used multiple for valuing software companies, we see that the industry is currently trading at 30.87X compared with the S&P 500’s 18.76X. It is also above the sector’s forward-12-month P/E of 24.60X.
In the last five years, the industry has traded as high as 37.28X, as low as 22.63X and at the median of 28.08X, as the chart below shows Forward 12-Month Price-to-Earnings (P/E) Ratio Forward 12-Month P/E Ratio
3 Software Stocks to Power Your Portfolio
Blackbaud: Headquartered in Charleston, SC, Blackbaud is a leading cloud software company working for social causes. The company combines technology and expertise to help organizations achieve their missions. Blackbaud benefited from higher transactional revenues owing to robust demand for the company’s JustGiving and Tuition Management platforms and rising volumes across its payment solutions. Frequent product launches coupled with rising customer renewal rates and booking bodes well. The company is likely to benefit from its new contractual pricing approach. Owing to the above-mentioned factors, it raised its non-GAAP revenues for 2023. The company expects revenues to be between $1.095 billion and $1.125 billion compared with the previous guidance of $1.08-$1.11 billion. Blackbaud sports a Zacks Rank #2 (Buy). The consensus mark for the company’s 2023 earnings is pegged at $3.75 per share, suggesting a rise of 39.4% year over year. The long-term growth rate is pegged at 10.4%. Shares have gained 14.5% in the past year. Price and Consensus: BLKB Synopsys: Headquartered in Mountain View, Synopsys is one of the vendors of electronic design automation (EDA) software to the semiconductor and electronics industries. Synopsys is benefiting from strong design wins owing to a robust product portfolio. Growth in hybrid working trend is driving demand for bandwidth. Growing demand for advanced technology, design, IP and security solutions is also creating solid prospects. Rising impact of artificial intelligence, 5G, internet of things and big data is driving investments in new compute and machine learning architectures. The company recently reported second-quarter fiscal 2023 non-GAAP earnings of $2.54 per share, beating the Zacks Consensus Estimate of $2.47. The bottom line improved 1.6% year over year. Revenues jumped 9.1% year over year to $1.4 billion, driven by growth across its business segments. The top line surpassed the Zacks Consensus Estimate of $1.38 billion by 1.1%. The stock carries a Zacks Rank #2. The consensus mark for the company’s fiscal 2023 earnings is pegged at $10.60 per share, up 19.1% in the past 60 days. The long-term growth rate is pegged at 15.6%. Shares have gained 39.3% in the past year. Price and Consensus: SNPS Descartes Systems Group: Based in Canada, Descartes Systems Group provides logistics and supply chain management software-as-a-service solutions to businesses, including transportation and logistics, manufacturing, retail and healthcare. The company's software offerings include messaging services between logistics trading partners, book-to-bill services for contract carriers and private fleet management services. The company is likely to benefit from the growing demand for the company’s transportation management businesses owing to rising shipments for the company’s MacroPoint's real-time visibility solution. The company has also been active on the acquisition front. Buyouts have aided growth by expanding product portfolio and adding competence. Recently, the company acquired assets of Australia-based tech company, Localz. The firm is engaged in providing real-time vehicle location tracking and communications to deliver secure SaaS solutions to boost customer delivery experience. In February, the company completed the acquisition of GroundCloud. It expects its GroundCloud safety and driver training solutions to increase its customer base. In January, the company acquired Supply Vision to combine its real-time shipment visibility solutions, like MacroPoint, with Supply Vision’s comprehensive digital system, which helps logistics service providers to effectively manage the life cycle of shipments for customers. In the last fiscal year, the company acquired four companies to boost its e-commerce business. Descartes carries a Zacks Rank #2. The company’s fiscal 2024 earnings is pegged at $1.44 per share, indicating year-over-year growth of 22%. Shares have gained 29.9% in the past year. Price and Consensus: DSGX