Back to top

Image: Bigstock

3 Skyrocketed Software Stocks That Might Lose Sheen in 2021

Read MoreHide Full Article

The software space witnessed robust growth through 2020 on strong demand for Software-as-a-Service or SaaS-based services amid the coronavirus crisis triggered digitalization wave.

Momentum in AI-powered voice recognition, natural language processing, enterprise collaboration, web-based conferencing, remote desktop tools, time tracking tools, telemedicine, learning management, drug development, security software, and business spend management (BSM) software has been on a high through this tumultuous year.

These factors led to scintillating performance for software stocks, including Coupa Software Incorporated (COUP - Free Report) , Nuance Communications, Inc. (NUAN - Free Report) and Simulations Plus, Inc. (SLP - Free Report) , which registered year-to-date gains of 150.8%, 142.9% and 126.6%, respectively. The price surge has led the stocks, Coupa, Nuance and Simulations Plus, to hit market capitalization of $26.48 billion, $12.23 billion, and $1.31 billion, respectively.

Year-to-Date Price Performance

However, a quick revaluation of these three software companies as to whether the momentum will continue through 2021 is a must.

Perceptibly, Coupa, Nuance and Simulations Plus might not sustain market beating run in 2021, due to persistent broad-based macroeconomic weakness across small and medium sized business (SMBs) induced by the coronavirus outbreak.

Further, resurgence in infected cases makes us skeptical regarding the prospects of these stocks in the coming year. Moreover, at present, these three companies either have a Zacks Rank #5 (Strong Sell) or 4 (Sell), suggesting investors to stay cautious and reassess their portfolio management strategies.

Coupa Software

Although strength in its BSM and Coupa Pay offerings favored run on the bourses in 2020, Coupa Software is bearing the brunt of increasing spend on product development and acquisitions, amid stiff competition from SAP SE’s (SAP - Free Report) Ariba and Oracle’s (ORCL - Free Report) Procurement Cloud offerings, in the Procure-to-Pay (P2P) space. This is likely to keep margins under pressure at least in the near term.

Markedly, in November 2020, Coupa Software acquired LLamasoft for $1.5 billion to boost its supply chain capabilities. LLamasoft offers AI-based design and planning solutions for supply chains and lists Boeing and Nestle, among others, as its clients.

Also, coronavirus-led lower spend on travel is expected to hinder adoption of Coupa Travel Sabre, formerly known as Yapta, which in turn, is likely to have weigh on this Zacks Rank #4 company’s top-line growth. Markedly, during fourth-quarter fiscal 2020, Coupa Software acquired Seattle-based Yapta, with an aim to strengthen Coupa BSM Platform’s Travel and Expense offering with travel price optimization capabilities and provide travel savings to businesses in real-time.

Notably, in the third quarter of fiscal 2021 earnings conference, management noted that the company anticipates no contribution from Coupa Travel Sabre through 2020. However, it was previously (in the beginning of 2020) envisioned to contribute $20 million to billings and revenues.

The Zacks Consensus Estimate for fiscal 2021 earnings has been steady in the past seven days at 48 cents per share, which indicates a decline of 7.7% on a year-over-year basis.

Nuance Communications

Nuance has been performing impressively in 2020, however, declining revenues and earnings keeps investors on tenterhooks while contemplating 2021 investing strategy in software space.

Prospects pertaining to emerging cloud businesses, and underpenetrated healthcare transcription market amid telemedicine wave are eclipsed by coronavirus crisis induced delay in payments and renewals related to its HIM Transcription and EHR businesses.

Markedly, this Zacks Rank #5 company is divesting these businesses to Assure Healthcare Partners or AHP and Aries Technology Group, which will lead to the establishment of an independent company — Deliver Health Solutions.

The Zacks Consensus Estimate for fiscal 2021 earnings has moved south by 10.7% in the past 30 days to 75 cents per share, which indicates a slump of 9.6% on a year-over-year basis.

Simulations Plus

Growing uptick in modeling and simulations workflow platform for drug development across pharma and biotech industries led to remarkable streak in 2020 for Simulations Plus.

However, the company has been witnessing difficulty in winning new business due to the disruption caused by the coronavirus pandemic. Notably, software renewal rate of 88% in the last-reported quarter (fourth quarter of fiscal 2020) was lower owing to seasonality and coronavirus crisis induced business uncertainty.

Also, broad-based economic weakness led by resurgence in coronavirus cases across Europe, where the company is strengthening its position (Lixoft buyout deserves a special mention), keeps us vigilant on its impact on renewals and top-line growth.

The Zacks Consensus Estimate for fiscal 2021 earnings for this Zacks Rank #4 company has been revised downward by 3.6% in the past 30 days to 54 cents per share. The figure indicates a decline of 3.6% on a year-over-year basis.

To Conclude

Investors need not worry as there are good software options available, with strong fundamentals nicely poised to thrive through 2021. Encouraging trends across remote working, learning and health diagnosis set the tone for a prosperous 2021 for enterprise software stocks. Markedly, per Gartner’s latest report, enterprise software-related IT spending is expected to grow 7.2% year over year in 2021.

You can count on well proven names, including Microsoft (MSFT - Free Report) , Cadence (CDNS - Free Report) , Digital Turbine (APPS), CrowdStrike Holdings (CRWD), j2 Global (JCOM), NIC (EGOV) and Covetrus (CVET), to capitalize on the projected upside. While NIC currently sports a Zacks Rank #1 (Strong Buy), the remaining the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Zacks Top 10 Stocks for 2021

In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?

These 10 are painstakingly hand-picked from over 4,000 companies covered by the Zacks Rank. They are our primary picks to buy and hold.

Start Your Access to the New Zacks Top 10 Stocks >>