Software stocks have been benefiting primarily from the ongoing digital transformation and steady demand for remote working and learning solutions. However, unfavorable forex, raging inflation and heightened price competition have been hurting industry participants. Small and medium businesses have deferred capital spending on infrastructure buildout due to higher interest rates and inflation. This doesn’t bode well for industry participants this earnings season.

The growing proliferation of SaaS-based services, the rapid migration to cloud platforms, low yet continued spending by enterprises on software procurement, the solid adoption of video-conferencing software and rising user penetration of online payment solutions are likely to have remained major tailwinds for software companies like Splunk , Salesforce (CRM Quick QuoteCRM - Free Report) , Adobe (ADBE Quick QuoteADBE - Free Report) and CrowdStrike (CRWD Quick QuoteCRWD - Free Report) .

Performance of Some Software Players So Far

The software space has so far displayed its flexibility and earnings power as reflected in the solid performances of tech giants like Microsoft (MSFT Quick QuoteMSFT - Free Report) and Cadence Design Systems.

Microsoft’s second-quarter fiscal 2023 results benefitted from consistent execution across renewal sales motions, including strong recapture rates and growth in Azure commitments on a high prior-year comparable, partially offset by a slowdown in growth of the new standalone business. Revenues benefited from the slow yet steady performance of Office 365 and Dynamics. Strength in Marketing Solutions and steady performance of Talent Solutions aided LinkedIn revenues.

However, Microsoft’s second-quarter earnings were negatively impacted by the slowdown in its cloud business and lower videogame sales. The decrease in Xbox content and services and Xbox hardware hurt gaming sales due to a decline in first-party content.

Cadence’s fourth-quarter 2022 performance benefited from strength across all segments, owing to healthy demand for the company’s diversified product portfolio.

Growing total payment volume (TPV) on increasing net new active accounts along with strong performance delivered by merchant services contributed to year-over-year top-line growth for PayPal in fourth-quarter 2022.

Software Stocks’ Prospects

The spike in the adoption of cloud-based services, the increasing proliferation of IoT and AR/VR devices and the accelerated deployment of 5G are expected to have aided the performance of software stocks this earnings season.

Strong momentum across enterprise collaboration software, remote desktop tools, natural language processing tool, time tracking tools and cybersecurity software is expected to have hugely favored the software industry this earnings season.

Additionally, the growing proliferation of AI-powered voice recognition, telemedicine, learning management, infrastructure monitoring and business spend management software is expected to have benefited industry players in the quarter under review.

Further, enterprise workspace solutions, enterprise communication platforms and online education portals, which have been high in demand throughout 2021 and 2022, are likely to have contributed well.

How to Make the Right Pick?

With the presence of several industry participants, finding the right software stocks with the potential to beat on earnings can be daunting. Our proprietary methodology, however, makes this task fairly simple.

You could narrow down your choices by looking at stocks that have the perfect combination of two key elements — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
 
Earnings ESP is our proprietary methodology for determining stocks that have maximum chances of beating estimates in their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
 
Our research shows that for stocks with this favorable mix of ingredients, the odds of a positive earnings surprise are as high as 70%.

Best Bets

Given below are four software stocks that have the favorable combination to beat on earnings this reporting cycle:

San Francisco, CA-based Splunk is scheduled to report fourth-quarter fiscal 2023 results on Mar 1. The company currently has an Earnings ESP of +0.39% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Splunk’s performance has been gaining traction from healthy customer engagement, evident from the consistently high net retention and competitive win rates alongside solid momentum with large orders overall. The company is improving the resilience and security of its critical system and driving efficiencies within its own internal operation. The company’s top line has been benefiting from high demand for its cloud solutions.

The Zacks Consensus Estimate for earnings has moved north by 0.9% to $1.11 per share in the past 60 days.

San Francisco, CA-based Salesforce is scheduled to report fiscal fourth-quarter 2023 results on Mar 1. The company currently has an Earnings ESP of +0.32% and a Zacks Rank #2.

Salesforce has been benefiting from a robust demand environment as customers are undergoing a major digital transformation. The rapid adoption of its cloud-based solutions has been driving demand for its products. Its sustained focus on introducing more aligned products per customer needs has been aiding its top line. Continued deal wins in the international market are another growth driver.

The Zacks Consensus Estimate for Salesforce has been stable at $1.36 per share in the past 60 days.

San Jose, CA-based Adobe is scheduled to report fiscal first-quarter 2023 results on Mar 15. The company currently has an Earnings ESP of +0.28% and a Zacks Rank #3.

Adobe has been benefiting from strong demand for its creative products. The company’s Creative Cloud, Document Cloud and Adobe Experience Cloud products have been driving top-line growth. Additionally, rising subscription revenues and solid momentum across mobile apps remain major positives. Further, growth in emerging markets, robust online video creation demand, strong Acrobat adoption and improving average revenue per user remain tailwinds.

The Zacks Consensus Estimate for earnings has moved north by 1.4% in the past 60 days to $3.66 per share.

Sunnyvale, CA-based CrowdStrike is scheduled to report fiscal fourth-quarter 2023 results on Mar 7. The company currently has an Earnings ESP of +2.33% and a Zacks Rank #3.

CrowdStrike has been benefiting from the rising demand for cyber-security solutions owing to the slew of data breaches and the increasing necessity for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud-migration strategies adopted by organizations are key growth drivers. Its portfolio strength, mainly the Falcon platform’s 10 cloud modules, boosts its competitive edge and helps add users. Additionally, strategic acquisitions, like that of Humio and Preempt, are expected to have driven growth for the company.

The Zacks Consensus Estimate for earnings has remained steady at 43 cents per share over the past 60 days.