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Business-Software Services Industry: Near-Term Outlook Solid
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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.
The industry participants are modifying their business models 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.
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 (MSFT - Free Report) , Azure and Amazon’s (AMZN - Free Report) cloud-computing arm 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 Solid Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #65, which places it at the top 26% 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 bright 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.
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 gained 16.5% compared with the S&P 500’s rise of 23.8% and the broader sector’s 27% 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 24.12X is higher than the S&P 500’s 18.3X and the sector’s 13.1X.
Over the last five years, the industry has traded as high as 24.12X, as low as 7.29X and recorded a median of 21.76X 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.
Based in Herndon, VA, ePlus inc. (PLUS - Free Report) provides information technology solutions to enable organizations to optimize their information technology environment and supply chain processes in the United States.This stock with a Zacks Rank of 1 came up with average four-quarter beat of 13.49%.The Zacks Consensus Estimate for current fiscal-year earnings has been intact at $5.87 over the past 30 days.
Price and Consensus: PLUS
Based in India, Wipro Limited (WIT - Free Report) is a consulting, information technology and business process services company.The stock carries a Zacks Rank of 2. The Zacks Consensus Estimate for fiscal 2020 earnings has been flat at 24 cents over the past 30 days.
Price and Consensus: WIT
Moreover, below are two stocks from the same space with a Zacks Rank #3 (Hold) that investors can hold onto.
Fremont, CA-domiciled SYNNEX Corporation (SNX - Free Report) is a business process services company providing business-to-business services. This stock has delivered average four-quarter positive surprise of 9.13%. The Zacks Consensus Estimate for current fiscal-year earnings has been stable at $12.61 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 Zacks #2 Ranked stock came up with average four-quarter beat of 137.32%.The Zacks Consensus Estimate for current fiscal-year earnings has been raised 1.7% to $1.19 over the past 30 days.
Price and Consensus: GWRE
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
Image: Bigstock
Business-Software Services Industry: Near-Term Outlook Solid
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 Solid Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #65, which places it at the top 26% 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 bright 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.
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 gained 16.5% compared with the S&P 500’s rise of 23.8% and the broader sector’s 27% 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 24.12X is higher than the S&P 500’s 18.3X and the sector’s 13.1X.
Over the last five years, the industry has traded as high as 24.12X, as low as 7.29X and recorded a median of 21.76X 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.
Below are the two stocks that carry either a Zacks Rank #1 (Strong Buy) or a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Based in Herndon, VA, ePlus inc. (PLUS - Free Report) provides information technology solutions to enable organizations to optimize their information technology environment and supply chain processes in the United States.This stock with a Zacks Rank of 1 came up with average four-quarter beat of 13.49%.The Zacks Consensus Estimate for current fiscal-year earnings has been intact at $5.87 over the past 30 days.
Price and Consensus: PLUS
Based in India, Wipro Limited (WIT - Free Report) is a consulting, information technology and business process services company.The stock carries a Zacks Rank of 2. The Zacks Consensus Estimate for fiscal 2020 earnings has been flat at 24 cents over the past 30 days.
Price and Consensus: WIT
Moreover, below are two stocks from the same space with a Zacks Rank #3 (Hold) that investors can hold onto.
Fremont, CA-domiciled SYNNEX Corporation (SNX - Free Report) is a business process services company providing business-to-business services. This stock has delivered average four-quarter positive surprise of 9.13%. The Zacks Consensus Estimate for current fiscal-year earnings has been stable at $12.61 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 Zacks #2 Ranked stock came up with average four-quarter beat of 137.32%.The Zacks Consensus Estimate for current fiscal-year earnings has been raised 1.7% to $1.19 over the past 30 days.
Price and Consensus: GWRE
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through Q3 2019, while the S&P 500 gained +39.6%, five of our strategies returned +51.8%, +57.5%, +96.9%, +119.0%, and even +158.9%.
This outperformance has not just been a recent phenomenon. From 2000 – Q3 2019, while the S&P averaged +5.6% per year, our top strategies averaged up to +54.1% per year.
See their latest picks free >>