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3 Software Stocks to Keep an Eye on in a Troubled Industry
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Uncertainty prevailing over global macroeconomic conditions, inflationary pressure and volatile supply chain dynamics are persistent concerns for the Zacks Computer Software industry. However, the accelerated pace of digital transformation taking place across the globe is likely to benefit industry participants. 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 adoption of the hybrid/flexible work model, demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like The Descartes Systems Group Inc (DSGX - Free Report) , Blackbaud Inc (BLKB - Free Report) and BlackBerry (BB - Free Report) .
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (primarily 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. The continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these 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. Also, the rapid development of cutting-edge technologies like artificial intelligence, machine learning, and the Internet of Things is leading to increased usage of advanced software applications. 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. The trend 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.
Increases in IT Spending Bodes Well But Macro Conditions Remain Concerning: Per a report from Gartner, worldwide IT spending is now projected to reach $5.06 trillion in 2024, calling for an increase of 8% from 2023 levels. This is an improvement over the earlier projection of 6.8%. The report also highlighted that spending on IT services is set to become the biggest market, with revenue growth of 9.7% in 2024. Spending on data center systems is expected to increase owing to the focus on planning for generative AI. The data center systems market is set to witness an increase of 10% in 2024 compared with 4% in 2023. Gartner added that AI servers will comprise nearly 60% of hyperscalers total server spending in 2024. Moreover, the devices segment is expected to bounce in 2024. The integration of GenAI capabilities in premium and basic phones will fuel growth for this particular market, added the report.
However, uncertain global macroeconomic conditions and supply chain dynamics are persistent concerns. Uncertainty in the macro backdrop and inflationary pressure 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 Bleak Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #145, which places it in the bottom 42% of more than 252 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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 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 S&P 500 But Lags Sector
The Zacks Computer Software industry lags behind the broader Zacks Computer and Technology sector but has outperformed the S&P 500 Index in the past year.
The industry has rallied 31.2% over this period compared with the S&P 500 and the broader sector’s increase of 23.5% and 40.3%, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing software companies, we see that the industry is currently trading at 31.52X compared with the S&P 500’s 20.75X. It is also above the sector’s forward-12-month P/E of 26.10X.
In the last five years, the industry has traded as high as 37.50X, as low as 22.97X and at the median of 30.50X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Software Stocks to Keep An Eye On
BlackBerry Limited: Headquartered in Waterloo, Canada, BlackBerry provides intelligent security software and services to enterprises and governments around the world. The company uses machine learning and artificial intelligence (AI) to provide cutting-edge solutions for cybersecurity, safety and data privacy. BlackBerry is a well-known name in the areas of endpoint security and management, encryption and embedded systems.
The company recently reported strong fourth-quarter fiscal 2024 results driven by revenue growth across IoT and Cybersecurity divisions. Revenues from the Cybersecurity business totaled $92 million, up 5% year over year. Revenues were driven by solid momentum in the Spark product group, which includes Cylance and UEM.
Revenues from the IoT business totaled $66 million, up 25% year over year. The uptick was caused by solid demand for the company’s solution in the automotive market and robust QNX development seat revenues. The rapid adoption of the QNX platform in the General Embedded market is a tailwind. QNX royalty backlog at the end of the fourth quarter was $815 million.
The company anticipates to report positive operating cash flow and adjusted EBITDA for the fiscal 2025 owing to various cost reductions. The company expects fiscal 2025 total revenues in the range of $586-$616 million.
However, the company expects fiscal first-quarter IoT revenues to be affected by material delays in software-defined vehicle programs. Also, ongoing budget constraints by some of its leading government customers amid unfavorable macroeconomic backdrop is a major headwind.
The company plans to separate the IoT and Cybersecurity businesses into standalone entities but will no longer pursue an IPO of the IoT business.
The Zacks Consensus Estimate for BB 2024 EPS has improved to a loss of 3 cents from a loss of 5 cents in the past 60 days.
BlackBerry’s earnings beat the Zacks Consensus Estimate in three of the last four quarters while missing in the remaining quarter. The average earnings surprise is pegged at 130%.
Price and Consensus: BB
The Descartes Systems Group Inc: Based in Canada, Descartes Systems Group provides software-as-a-service logistics solutions to businesses, including transportation and logistics, manufacturing, retail and healthcare. The company is benefitting from momentum in real-time visibility, Global Trade Intelligence, and routing and scheduling solutions. In the last reported quarter, revenues were up 18% to $148.2 million, with services revenues (92% of total revenues) rising 20% year over year to $135.7 million.
The company has also been active on the acquisition front. Buyouts have aided growth by expanding product portfolio and adding competence. DSGX recently announced the acquisition of Aerospace Software Developments. Based in Dublin, Ireland, ASD is a software company that builds mission-critical applications based on modern RFID technology, specifically engineered for the Aerospace and Aviation market sector.
Prior to that, In March 2024, the company acquired OCR Services, Inc., specializing in global trade compliance solutions and content. OCR’s controlled export data is instrumental in broadening DSGX’s vast global trade content library for customers and partners, including SAP and Oracle. Some other notable acquisitions in the recent past are Localz (2023), GroundCloud (2023) and Supply Vision (2023).
Descartes carries a Zacks Rank #2. The company’s fiscal 2025 earnings are pegged at $1.69 per share, indicating year-over-year growth of 26.1%. The stock has gained 18.9% in the past year.
Price and Consensus: DSGX
Blackbaud: Headquartered in Charleston, SC, Blackbaud Inc. is a leading cloud software company working for social causes. The company combines technology and expertise to help organizations achieve their missions.
Blackbaud’s performance is benefiting from solid organic growth and extensive cost-cutting measures coupled with momentum in both contractual and transactional recurring revenues. Blackbaud is likely to gain from its new contractual pricing approach. Frequent product launches, along with benefits from renewal rate increases and bookings, are tailwinds. It is also working toward rolling out AI-enabled capabilities across its portfolio to help clients optimize fundraising. Blackbaud expects non-GAAP revenues to be between $1.17 billion and $1.20 billion for 2024. Weakness prevailing over global macroeconomic conditions along with forex volatility, leveraged balance sheet and stiff competition remain headwinds.
The stock carries a Zacks Rank #2. The consensus mark for the company’s 2024 earnings is pegged at $4.22 per share. Shares have gained 13.5% in the past year.
Price and Consensus: BLKB
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3 Software Stocks to Keep an Eye on in a Troubled Industry
Uncertainty prevailing over global macroeconomic conditions, inflationary pressure and volatile supply chain dynamics are persistent concerns for the Zacks Computer Software industry. However, the accelerated pace of digital transformation taking place across the globe is likely to benefit industry participants. 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 adoption of the hybrid/flexible work model, demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like The Descartes Systems Group Inc (DSGX - Free Report) , Blackbaud Inc (BLKB - Free Report) and BlackBerry (BB - Free Report) .
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (primarily 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. The continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these 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. Also, the rapid development of cutting-edge technologies like artificial intelligence, machine learning, and the Internet of Things is leading to increased usage of advanced software applications. 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. The trend 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.
Increases in IT Spending Bodes Well But Macro Conditions Remain Concerning: Per a report from Gartner, worldwide IT spending is now projected to reach $5.06 trillion in 2024, calling for an increase of 8% from 2023 levels. This is an improvement over the earlier projection of 6.8%. The report also highlighted that spending on IT services is set to become the biggest market, with revenue growth of 9.7% in 2024. Spending on data center systems is expected to increase owing to the focus on planning for generative AI. The data center systems market is set to witness an increase of 10% in 2024 compared with 4% in 2023. Gartner added that AI servers will comprise nearly 60% of hyperscalers total server spending in 2024. Moreover, the devices segment is expected to bounce in 2024. The integration of GenAI capabilities in premium and basic phones will fuel growth for this particular market, added the report.
However, uncertain global macroeconomic conditions and supply chain dynamics are persistent concerns. Uncertainty in the macro backdrop and inflationary pressure 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 Bleak Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #145, which places it in the bottom 42% of more than 252 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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 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 S&P 500 But Lags Sector
The Zacks Computer Software industry lags behind the broader Zacks Computer and Technology sector but has outperformed the S&P 500 Index in the past year.
The industry has rallied 31.2% over this period compared with the S&P 500 and the broader sector’s increase of 23.5% and 40.3%, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing software companies, we see that the industry is currently trading at 31.52X compared with the S&P 500’s 20.75X. It is also above the sector’s forward-12-month P/E of 26.10X.
In the last five years, the industry has traded as high as 37.50X, as low as 22.97X and at the median of 30.50X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Software Stocks to Keep An Eye On
BlackBerry Limited: Headquartered in Waterloo, Canada, BlackBerry provides intelligent security software and services to enterprises and governments around the world. The company uses machine learning and artificial intelligence (AI) to provide cutting-edge solutions for cybersecurity, safety and data privacy. BlackBerry is a well-known name in the areas of endpoint security and management, encryption and embedded systems.
The company recently reported strong fourth-quarter fiscal 2024 results driven by revenue growth across IoT and Cybersecurity divisions. Revenues from the Cybersecurity business totaled $92 million, up 5% year over year. Revenues were driven by solid momentum in the Spark product group, which includes Cylance and UEM.
Revenues from the IoT business totaled $66 million, up 25% year over year. The uptick was caused by solid demand for the company’s solution in the automotive market and robust QNX development seat revenues. The rapid adoption of the QNX platform in the General Embedded market is a tailwind. QNX royalty backlog at the end of the fourth quarter was $815 million.
The company anticipates to report positive operating cash flow and adjusted EBITDA for the fiscal 2025 owing to various cost reductions. The company expects fiscal 2025 total revenues in the range of $586-$616 million.
However, the company expects fiscal first-quarter IoT revenues to be affected by material delays in software-defined vehicle programs. Also, ongoing budget constraints by some of its leading government customers amid unfavorable macroeconomic backdrop is a major headwind.
The company plans to separate the IoT and Cybersecurity businesses into standalone entities but will no longer pursue an IPO of the IoT business.
BB sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BB 2024 EPS has improved to a loss of 3 cents from a loss of 5 cents in the past 60 days.
BlackBerry’s earnings beat the Zacks Consensus Estimate in three of the last four quarters while missing in the remaining quarter. The average earnings surprise is pegged at 130%.
Price and Consensus: BB
The company has also been active on the acquisition front. Buyouts have aided growth by expanding product portfolio and adding competence. DSGX recently announced the acquisition of Aerospace Software Developments. Based in Dublin, Ireland, ASD is a software company that builds mission-critical applications based on modern RFID technology, specifically engineered for the Aerospace and Aviation market sector.
Prior to that, In March 2024, the company acquired OCR Services, Inc., specializing in global trade compliance solutions and content. OCR’s controlled export data is instrumental in broadening DSGX’s vast global trade content library for customers and partners, including SAP and Oracle. Some other notable acquisitions in the recent past are Localz (2023), GroundCloud (2023) and Supply Vision (2023).
Descartes carries a Zacks Rank #2. The company’s fiscal 2025 earnings are pegged at $1.69 per share, indicating year-over-year growth of 26.1%. The stock has gained 18.9% in the past year.
Price and Consensus: DSGX
Blackbaud: Headquartered in Charleston, SC, Blackbaud Inc. is a leading cloud software company working for social causes. The company combines technology and expertise to help organizations achieve their missions.
Blackbaud’s performance is benefiting from solid organic growth and extensive cost-cutting measures coupled with momentum in both contractual and transactional recurring revenues. Blackbaud is likely to gain from its new contractual pricing approach. Frequent product launches, along with benefits from renewal rate increases and bookings, are tailwinds. It is also working toward rolling out AI-enabled capabilities across its portfolio to help clients optimize fundraising. Blackbaud expects non-GAAP revenues to be between $1.17 billion and $1.20 billion for 2024. Weakness prevailing over global macroeconomic conditions along with forex volatility, leveraged balance sheet and stiff competition remain headwinds.
The stock carries a Zacks Rank #2. The consensus mark for the company’s 2024 earnings is pegged at $4.22 per share. Shares have gained 13.5% in the past year.
Price and Consensus: BLKB