Software is ubiquitous and has become the focal point of technological innovation. Software stocks have been benefiting from accelerated demand for digital transformation and the ongoing shift to the cloud. However, weakened consumer spending amid ongoing macroeconomic headwinds is hurting industry participants. Enterprises are postponing their large IT spending plans due to a weakening global economy amid inflationary pressure, higher interest rates and unfavorable forex. These do not bode well for industry participants this earnings season.

The high demand for Software as a Service or SaaS-based solutions due to the mainstream adoption of the hybrid/flexible work model is noteworthy. The growing demand for solutions that support hybrid operating environments, including voice and video communication and productivity software, and online payment solutions are likely to have remained major tailwinds for software companies like CrowdStrike (CRWD Quick QuoteCRWD - Free Report) , Ringcentral (RNG Quick QuoteRNG - Free Report) , Twilio (TWLO Quick QuoteTWLO - Free Report) , Cadence Design Systems (CDNS Quick QuoteCDNS - Free Report) and Snap (SNAP Quick QuoteSNAP - Free Report) .

What's Driving Software Stocks?

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.

Rapid digitalization, driven by the pandemic, has increased the demand for cloud-based applications, virtualized software and container-based software. Applications are being developed in the cloud, which is creating opportunities and, at the same time, challenges for industry participants in terms of performance and security.

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.

Rising cyber-attacks, including Distributed Denial of Service attacks and attacks using malware through Transport Layer Security and Secure Sockets Layer protocols, are redefining the cyber threat landscape. Enterprises are spending more on cloud-based security solutions. Moreover, the software-defined approach is increasingly getting preferred over legacy hardware-centric models due to the need for agility.

The increasing customer-centric approach is allowing end-users to perform all required actions with minimal intervention from software providers. The pay-as-you-go model helps Internet Software providers scale their offerings per the needs of different users. The subscription-based business model ensures recurring revenues for the industry participants. The affordability of the SaaS delivery model, particularly for small and medium-sized businesses, is another major driver.

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. Enterprise workspace solutions, enterprise communication platforms and online education portals, which saw high demand throughout 2021, 2022 and 2023 are likely to have contributed as 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

CrowdStrike is scheduled to report fourth-quarter fiscal 2024 results on Mar 5. The company currently has an Earnings ESP of +0.53% and sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

CrowdStrike has been benefiting from the rising demand for cyber-security solutions due to a slew of data breaches and the increasing need for security and networking products amid the growing hybrid working trend. Continued digital transformation and cloud migration strategies adopted by organizations also drive growth. The company’s portfolio strength, mainly the Falcon platform’s 10 cloud modules, boosts its competitive edge and helps add users. Additionally, strategic acquisitions, such as Bionic and Reposify, are expected to have fueled growth.

The Zacks Consensus Estimate for earnings has remained steady at 82 cents per share in the past 30 days.
 

RingCentral is scheduled to report fourth-quarter 2023 results on Feb 20. The company currently has an Earnings ESP of +1.61% and carries a Zacks Rank #2.

RingCentral has been riding on solid demand for its Unified Communications as a Service (UCaaS) and contact center SaaS solutions. Its increasing international presence and strong partner base are major catalysts. The launch of RingSense and RingCX solutions has expanded RingCentral’s product portfolio. The acquisition of the Events and Session product lines from Hopin has expanded its video portfolio.

The Zacks Consensus Estimate for earnings has remained steady at 83 cents per share in the past 30 days.

Twilio is scheduled to report fourth-quarter 2023 results on Feb 14. The company currently has an Earnings ESP of +31.37% and carries a Zacks Rank #2.

The company’s selective acquisitions and strategic investments in businesses and technologies have been enhancing its product portfolio and fortifying its global presence. It is not only gaining traction from the solid expansion of its existing clientele but also from first-time deals with new customers due to its firm focus on introducing products and its go-to-market sales strategy. The company’s ongoing cost-saving initiatives are driving profits and margins, which is praiseworthy.

The Zacks Consensus Estimate for earnings has moved north by 3.6% to 57 cents per share in the past 30 days.

Cadence Design Systems is scheduled to report fourth-quarter 2023 results on Feb 12. The company currently has an Earnings ESP of +2.88% and carries a Zacks Rank #3.

Cadence’s performance has been driven by strength across all segments due to higher customer demand. Accelerated design activity owing to transformative generational trends, such as generative AI, hyperscale computing, 5G and autonomous driving, is likely to have boosted the top line. Management noted that the comprehensive JedAI Generative AI platform has been witnessing continued momentum, with sales of its GenAI solutions nearly tripling last year. Frequent new product launches and strategic collaborations bode well.

The Zacks Consensus Estimate for earnings has moved north by 0.8% to $1.34 per share in the past 30 days.

Snap is scheduled to report fourth-quarter 2023 results on Feb 6. The company currently has an Earnings ESP of +2.88% and carries a Zacks Rank #3.

Snap has been riding on user growth and improving user engagement, driven by the strong adoption of Augmented Reality Lenses, Discover content, Shows and Snap Map, which are used by 350 million users on a monthly basis. It reaches over 75% of 13 to 34-year-olds in more than 20 countries, representing more than 50% of global advertising spend. It made considerable progress in diversifying revenues with Snapchat+, ARES and AR advertising. An expanding partner base, with the likes of ITV in the U.K. and ESPN in the Netherlands, is noteworthy.

The Zacks Consensus Estimate for earnings has moved north by 16.7% to 7 cents per share in the past 30 days.