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3 Market-Leading Software Stocks That Might Lose Sheen in 2020

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The year 2019 has been extremely volatile for the technology sector wherein the same grappled with several macro issues, such as the U.S.-China trade war and related tariffs, Brexit concerns and recession fears.

However, the software industry maintained its bull run, courtesy of the consistently strong digital transformation environment. The growing proliferation of cloud computing, predictive analysis, AI, Robotic Process Automation, self-driving vehicles, digital personal assistants and IoT coupled with strong enterprise spending is a major driver.

Growing adoption of software among numerous industries including retail, manufacturing, banking, financial services and insurance plus enterprises, academia, government organizations, healthcare and telecommunication is a key catalyst.

Notably, Invesco Dynamic Software ETF (PSJ) has surged 35.9% so far this year. Additionally, SPDR S&P Software & Services ETF (XSW) and iShares North American Tech-Software ETF (IGV) have returned 37% and 35.5%, respectively.

We note that the primary mode of software deployment underwent a shift from legacy on-premise to cloud architecture with software-as-a-service (SaaS) becoming the preferred delivery mode.

The software players are modifying their business model 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 under pressure in the near term as term license revenues include advance payments whereas subscription-based revenues are a bit delayed. Moreover, growing investments of software companies in cloud infrastructure pose a major threat to profitability.

Software Stocks to Avoid in 2020

While it will be wise to invest in software stocks at present, a caution is that not all have strong prospects.

With the help of the Zacks Stock Screener, we shortlisted three such software companies with a market cap of more than $1 billion, which have outperformed the S&P 500 so far this year but don’t have much upside left for 2020.

Year-to-Date Price Performance

These stocks carry a Zacks Rank #4 (Sell) and have been witnessing downward earnings estimate revisions for 2020 over the past 60 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Cambridge, MA, Pegasystems (PEGA - Free Report) is one of the leading providers of customer relationship management software that enables transaction-intensive organizations to manage a broad array of customer interactions. The company has a market cap of $6.3 billion. Shares have soared 66.1% year to date.

The Zacks Consensus Estimate for 2020 earnings of 13 cents has been revised 69% downward over the past 60 days. Rising investments due to its cloud-first strategy are an overhang on earnings.

Boston, MA-based Rapid7 RPD offers security data and analytics solutions. The company has a market cap of $2.83 billion. Shares have jumped 83.8% so far this year.

The Zacks Consensus Estimate for 2020 earnings of 22 cents has been revised 35% downward over the past 60 days. Increasing competition in the cyber-security space is a major concern for the stock.

Domiciled in France, Dassault Systemes DASTY is a provider of 3D design and product lifecycle management software. The company has a market cap of $42.5 billion. Shares have gained 40.1% so far this year.

The Zacks Consensus Estimate for 2020 earnings of $4.55 has moved 0.7% south over the past 60 days. Weakness in the automotive supply chain is a dampener.

Zacks Top 10 Stocks for 2020

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