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Bleak Near-Term Outlook for Business-Software Services Industry
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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.
Industry participants, like Cognizant Technology Solutions (CTSH - Free Report) , offer digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services, and business process. Some of the companies like MSCI Inc. (MSCI - Free Report) provide investment-decision support tools, which are used in several areas of investment process.
Here are the industry’s four 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. These industry players are incorporating AI and tools like ML in their applications to make the same more dynamic and result-oriented. Elevated 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 clients’ changing requirements. Subscription and term-license 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 over 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. Further, the companies in this industry are resorting to frequent mergers and acquisitions to supply complementary and end-to-end software products. Nonetheless, rising investment in digital offerings and acquisitions poses threat to the industry’s profitability in the near term.
The industry’s near-term prospect looks gloomy due to the global business disruptions caused by the coronavirus-led global lockdown. Due to uncertainty over global economic and business activities, business-software and services providers are likely to witness drastic declines in new bookings as well as IT spending cutbacks across multiple industries, including, travel & hospitality, oil & gas, financial services, retail and manufacturing..
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #190, which places it at the bottom25% 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 position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Apr 30, 2019, the industry’s earnings estimate for the current year has moved down approximately 17%.
Despite the industry’s drab near-term prospects, we will present a few stocks that are worth noting. But before that, it’s better to take a look at the industry’s market performance and current valuation first.
Industry Lags the S&P 500 and Sector
The Zacks Business-Software Services industry has underperformed the S&P 500 composite over the past year as well as the broader Computer and Technology sector.
The industry has depreciated 19.9% during this period compared with the S&P 500 Index’s decline of 14.3% and the broader sector’s decrease of 6.9%.
One-Year Price Performance
Industry’s Current Valuation
Comparing the industry with the 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 19.15X is higher than the S&P 500’s 15.3X and the sector’s 18.27X.
Over the last five years, the industry has traded as high as 24.55X, as low as 7.29X and recorded a median of 21.75X as the charts below show.
Price-to-Earnings (P/E) Ratio (F12M)
Bottom Line
Though the long-term prospects look bright, lower anticipated spending by enterprises due to the coronavirus-led business disruptions globally are expected to hurt business software and services providers in the near term.
Here we present a stock that carries a Zacks Rank #2 (Buy).
Q2 Holdings, Inc. (QTWO - Free Report) is the only stock in the Business-Software Services space that carries a Zacks Rank #2. The company provides secure, cloud-based virtual banking solutions to financial institutions across the United States. In the trailing four quarters, the stock has surpassed the Zacks Consensus Estimate on three occasions and missed in the other, the average positive beat being 130.4%. The Zacks Consensus Estimate for current-year earnings moved down by a penny to 2 cents over the past 30 days.
Price and Consensus: QTWO
Moreover, below are two stocks from the same space with a Zacks Rank #3 that investors can hold onto.
Based in Herndon, VA, ePlus inc. (PLUS - Free Report) provide solutions and services that enable organizations to optimize their information-technology environment and supply-chain processes. Over the preceding four quarters, the stock has missed the consensus mark on three occasions and missed in the other, the average positive beat being 15.1%. The Zacks Consensus Estimate for the current fiscal-year earnings has been lowered by 13.6% to $5.39 over the past 30 days.
Price and Consensus: PLUS
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 has delivered average four-quarter positive surprise of 133%. The Zacks Consensus Estimate for current fiscal-year earnings has moved 5.7% south to 83 cents over the past 30 days.
Price and Consensus: GWRE
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Image: Bigstock
Bleak Near-Term Outlook for Business-Software Services Industry
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.
Industry participants, like Cognizant Technology Solutions (CTSH - Free Report) , offer digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services, and business process. Some of the companies like MSCI Inc. (MSCI - Free Report) provide investment-decision support tools, which are used in several areas of investment process.
Here are the industry’s four major themes:
Zacks Industry Rank Indicates Dismal Prospects
The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #190, which places it at the bottom25% 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 position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since Apr 30, 2019, the industry’s earnings estimate for the current year has moved down approximately 17%.
Despite the industry’s drab near-term prospects, we will present a few stocks that are worth noting. But before that, it’s better to take a look at the industry’s market performance and current valuation first.
Industry Lags the S&P 500 and Sector
The Zacks Business-Software Services industry has underperformed the S&P 500 composite over the past year as well as the broader Computer and Technology sector.
The industry has depreciated 19.9% during this period compared with the S&P 500 Index’s decline of 14.3% and the broader sector’s decrease of 6.9%.
One-Year Price Performance
Industry’s Current Valuation
Comparing the industry with the 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 19.15X is higher than the S&P 500’s 15.3X and the sector’s 18.27X.
Over the last five years, the industry has traded as high as 24.55X, as low as 7.29X and recorded a median of 21.75X as the charts below show.
Price-to-Earnings (P/E) Ratio (F12M)
Bottom Line
Though the long-term prospects look bright, lower anticipated spending by enterprises due to the coronavirus-led business disruptions globally are expected to hurt business software and services providers in the near term.
None of the stocks in our Business-Software Services industry currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Here we present a stock that carries a Zacks Rank #2 (Buy).
Q2 Holdings, Inc. (QTWO - Free Report) is the only stock in the Business-Software Services space that carries a Zacks Rank #2. The company provides secure, cloud-based virtual banking solutions to financial institutions across the United States. In the trailing four quarters, the stock has surpassed the Zacks Consensus Estimate on three occasions and missed in the other, the average positive beat being 130.4%. The Zacks Consensus Estimate for current-year earnings moved down by a penny to 2 cents over the past 30 days.
Price and Consensus: QTWO
Moreover, below are two stocks from the same space with a Zacks Rank #3 that investors can hold onto.
Based in Herndon, VA, ePlus inc. (PLUS - Free Report) provide solutions and services that enable organizations to optimize their information-technology environment and supply-chain processes. Over the preceding four quarters, the stock has missed the consensus mark on three occasions and missed in the other, the average positive beat being 15.1%. The Zacks Consensus Estimate for the current fiscal-year earnings has been lowered by 13.6% to $5.39 over the past 30 days.
Price and Consensus: PLUS
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 has delivered average four-quarter positive surprise of 133%. The Zacks Consensus Estimate for current fiscal-year earnings has moved 5.7% south to 83 cents over the past 30 days.
Price and Consensus: GWRE
Breakout Biotech Stocks with Triple-Digit Profit Potential
The biotech sector is projected to surge beyond $775 billion by 2024 as scientists develop treatments for thousands of diseases. They’re also finding ways to edit the human genome to literally erase our vulnerability to these diseases.
Zacks has just released Century of Biology: 7 Biotech Stocks to Buy Right Now to help investors profit from 7 stocks poised for outperformance. Our recent biotech recommendations have produced gains of +50%, +83% and +164% in as little as 2 months. The stocks in this report could perform even better.
See these 7 breakthrough stocks now>>