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Business-Software Services Industry: Near-Term Outlook Grim
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The Zacks Business-Software Services industry primarily comprises companies that deliver application-specific software products and services. The 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 industry’s three major themes:
The companies in this industry are benefiting from robust demand for multi cloud-enabled software solutions, given the ongoing transition from legacy platforms to modern cloud-based infrastructure. The industry players are incorporating AI and tools like ML in their applications to make the same more dynamic and result-oriented. Escalated demand for enterprise software, which is ramping up productivity and improving decision-making process, is a key catalyst. Additionally, business software providers are keeping pace with the global regulatory and business practice regulations, thereby helping customers incorporate industry-best practices while complying with the governmental and industry norms. However, current weakness in global capital market demand, particularly the European banks, and softness in the healthcare and manufacturing sectors raise concerns.
The industry participants are modifying their business model to cope with the clients’ changing requirements. Subscription and term-licence based revenue pricing models became extremely popular and these are replacing the legacy upfront payment prototype.Increased revenue visibility and higher recurring revenues bode well for investors in the long haul. However, due to this transition, top-line growth of these companies is expected to suffer in the near term as term license revenues include advance payments whereas subscription-based revenues are a bit delayed. The transition related investments are also anticipated to compress margins.
Most industry players are now offering a cloud-based version of their solutions in addition to the on-premise one, thereby expanding content accessibility. The enhanced interoperability feature provides customers with differentiation and efficiency. Moreover, the companies in this industry are resorting to frequent mergers and acquisitions to supply complementary and end-to-end software products. Moreover, partnerships with major cloud providers like Microsoft Azure and Amazon Web Services (AWS) are strengthening the companies’ product portfolio. Nonetheless, rising investment in digital offerings persists as a threat to the industry’s profitability in the near term.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #158, which places it at the bottom 38% 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 gloomy near-term prospects. 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 within the bottom 50% of the Zacks-ranked industries is the result of a bearish earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 6.4% downward.
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, S&P 500
The Zacks Business-Software Services industry has underperformed the Zacks S&P 500 composite over the past year as well as the broader Zacks Computer and Technology sector.
The industry has dipped 0.8% against the S&P 500’s rise of 3.9% and the broader sector’s 0.5% growth.
One-Year Price Performance
Industry’s Current Valuation
Comparing the industry with the Zacks S&P 500 composite on the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing business-software services stocks, we see, the industry’s ratio of 21.41X is higher than the S&P 500’s 17.16X and the sector’s 20.31X.
Over the last five years, the industry has traded as high as 24.12X, as low as 7.21X and recorded a median of 21.73X as the charts below show.
Price-to-Earnings (P/E) Ratio (F12M)
Bottom Line
Business-Software Services companies are trying to fast adapt to the changing user needs. Focus on providing offerings that address the need for transparency and efficiency in organizations augurs well for the industry participants.
However, the shift to a cloud-based model will be a persistent overhang on the top line of the industry players in the short term.
Fremont, CA-domiciled SYNNEX Corporation (SNX - Free Report) is a business process services company providing business-to-business services. This stock with a Zacks Rank of 2 has delivered average four-quarter positive surprise of 6.51%. The Zacks Consensus Estimate for current fiscal-year earnings has been raised 1.6% to $12.1 over the past 30 days.
Price and Consensus: SNX
Foster City, CA-based Guidewire Software, Inc. (GWRE - Free Report) is a provider of software solutions for property and casualty (P&C) insurers. This stock with a Zacks Rank #2 came up with average four-quarter beat of 72.63%.The Zacks Consensus Estimate for current fiscal-year earnings has been flat at $1.39 over the past 30 days.
Price and Consensus: GWRE
Moreover, below are two stocks from the same space with a Zacks Rank #3 (Hold) that investors can hold onto.
Based in Dallas, TX,Tyler Technologies, Inc. (TYL - Free Report) is engaged in providing integrated information management solutions and services to the public sector. The stock pulled off average four-quarter beat of 1.08%. The Zacks Consensus Estimate for current fiscal-year earnings has been intact at $5.29 over the past 30 days.
Price and Consensus: TYL
Headquartered in Richardson, TX, RealPage, Inc. is a provider of on-demand property management solutions. The stock delivered average four-quarter positive surprise of 2.8%.The Zacks Consensus Estimate for current fiscal-year earnings has been stable at $1.76 over the past 30 days.
Price and Consensus: RP
Today's Best Stocks from Zacks
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This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
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Business-Software Services Industry: Near-Term Outlook Grim
The Zacks Business-Software Services industry primarily comprises companies that deliver application-specific software products and services. The 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 industry’s three major themes:
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #158, which places it at the bottom 38% 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 gloomy near-term prospects. 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 within the bottom 50% of the Zacks-ranked industries is the result of a bearish earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have been revised 6.4% downward.
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, S&P 500
The Zacks Business-Software Services industry has underperformed the Zacks S&P 500 composite over the past year as well as the broader Zacks Computer and Technology sector.
The industry has dipped 0.8% against the S&P 500’s rise of 3.9% and the broader sector’s 0.5% growth.
One-Year Price Performance
Industry’s Current Valuation
Comparing the industry with the Zacks S&P 500 composite on the basis of the forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing business-software services stocks, we see, the industry’s ratio of 21.41X is higher than the S&P 500’s 17.16X and the sector’s 20.31X.
Over the last five years, the industry has traded as high as 24.12X, as low as 7.21X and recorded a median of 21.73X as the charts below show.
Price-to-Earnings (P/E) Ratio (F12M)
Bottom Line
Business-Software Services companies are trying to fast adapt to the changing user needs. Focus on providing offerings that address the need for transparency and efficiency in organizations augurs well for the industry participants.
However, the shift to a cloud-based model will be a persistent overhang on the top line of the industry players in the short term.
Below are the two stocks that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fremont, CA-domiciled SYNNEX Corporation (SNX - Free Report) is a business process services company providing business-to-business services. This stock with a Zacks Rank of 2 has delivered average four-quarter positive surprise of 6.51%. The Zacks Consensus Estimate for current fiscal-year earnings has been raised 1.6% to $12.1 over the past 30 days.
Price and Consensus: SNX
Foster City, CA-based Guidewire Software, Inc. (GWRE - Free Report) is a provider of software solutions for property and casualty (P&C) insurers. This stock with a Zacks Rank #2 came up with average four-quarter beat of 72.63%.The Zacks Consensus Estimate for current fiscal-year earnings has been flat at $1.39 over the past 30 days.
Price and Consensus: GWRE
Moreover, below are two stocks from the same space with a Zacks Rank #3 (Hold) that investors can hold onto.
Based in Dallas, TX,Tyler Technologies, Inc. (TYL - Free Report) is engaged in providing integrated information management solutions and services to the public sector. The stock pulled off average four-quarter beat of 1.08%. The Zacks Consensus Estimate for current fiscal-year earnings has been intact at $5.29 over the past 30 days.
Price and Consensus: TYL
Headquartered in Richardson, TX, RealPage, Inc. is a provider of on-demand property management solutions. The stock delivered average four-quarter positive surprise of 2.8%.The Zacks Consensus Estimate for current fiscal-year earnings has been stable at $1.76 over the past 30 days.
Price and Consensus: RP
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>