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3 Software Stocks to Watch for in a Flourishing Industry
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The Zacks Computer Software industry benefits from the accelerated digital transformation drive across the globe. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. The role of software is constantly evolving. With the continuation of remote work setup and mainstream adoption of the hybrid/flexible work model, the demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Adobe (ADBE - Free Report) , Salesforce (CRM - Free Report) and Synopsys (SNPS - Free Report) .
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (primarily for semiconductor and electronics industries), digital media and marketing, customer relationship management, on-premises and cloud-based database management, accounting and tax purposes, human capital management, cybersecurity and application performance monitoring and cloud-based enterprise communications platform. Some companies develop and market simulation software (like computer-aided design or CAD, 3D modeling, product lifecycle management or PLM, data orchestration and experience creation), which engineers, designers and researchers use across various industries like architecture, engineering and construction, product design, manufacturing and digital media.
3 Trends Shaping the Future of the Software Industry
Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given higher spending by enterprises on software procurement. Continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for industry players. Cloud offers a flexible and cost-effective platform for developing and testing applications. The deployment time is also shorter compared with legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.
Cloud Computing Adoption Gaining Traction: The increasing need to secure cloud platforms amid growing cyber-attacks and hacking incidents drives demand for cyber security software. Enterprises are focused on rapid migration to the cloud and DevOps technologies to achieve scalability and agility for software development and IT operations. This helps deliver a flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. It is driving the demand for performance management monitoring tools that are scalable and suitable for cloud-based environments.
Macroeconomic Headwinds a Concern: The mainstream adoption of the distributed workforce model is fueling demand for enterprise communication, workspace management and human capital management software solutions. However, global macroeconomic weakness, prolonged Russia-Ukraine war and volatile supply chain dynamics are concerns. Increasing inflation could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #78, which places it in the top 32% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Computer Software industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry gained 20.9% over this period compared with the S&P 500 and the broader sector’ gain of 6% and 13.6%, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month P/E, a commonly-used multiple for valuing software companies, we see that the industry is currently trading at 30.40X compared with the S&P 500’s 19.24X. It is also above the sector’s forward-12-month P/E of 24.36X.
In the last five years, the industry has traded as high as 37.28X, as low as 22.63X and at the median of 28.71X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Software Stocks to Power Your Portfolio
Adobe: San Jose, CA-based Adobe is one of the largest software companies in the world. The company picks up licensing fees from customers, which form the bulk of its revenues.
It is benefiting from strong demand for its creative products. The company’s Creative Cloud, Document Cloud and Adobe Experience Cloud products are driving the top line. Rising subscription revenues and solid momentum across the mobile apps are major positives. Additionally, growth in emerging markets and robust online video creation demand are tailwinds.
The consensus mark for the company’s fiscal 2023 earnings is pegged at $15.70 per share, suggesting a rise of 14.5% year over year. The long-term growth rate is pegged at 13.3%. Shares have gained 31.4% in the past year.
Price and Consensus: ADBE
Synopsys: Headquartered in Mountain View, Synopsys is one of the vendors of electronic design automation (EDA) software for the semiconductor and electronics industries.
Synopsys is benefiting from strong design wins owing to a robust product portfolio. Growth in the hybrid working trend is driving demand for bandwidth. Strong traction for Synopsys’ Fusion Compiler product boosted the top line. Growing demand for advanced technology, design, IP and security solutions is also creating solid prospects. The rising impact of artificial intelligence, 5G, internet of things and big data is driving investments in new compute and machine learning architectures.
The stock carries a Zacks Rank #2. The consensus mark for the company’s fiscal 2023 earnings is pegged at $11.05 per share, up 24.2% in the past 60 days. The long-term growth rate is pegged at 16.4%. Shares have gained 23.4% in the past year.
Price and Consensus: SNPS
Salesforce: Headquartered in San Francisco, Salesforce is the leading provider of on-demand Customer Relationship Management (CRM - Free Report) software, which enables organizations to better manage critical operations, such as sales force automation, customer service and support, marketing automation, document management, analytics and custom application development.
Salesforce is benefiting from a robust demand environment as customers are undergoing a major digital transformation. Its sustained focus on introducing more aligned products per customer needs is driving its top line. Continued deal wins in the international market are another growth driver. The acquisition of Slack has positioned the company as a leader in enterprise team collaboration solution space and placed it at a better competitive position against Microsoft’s Teams product.
Salesforce carries a Zacks Rank #2. The company’s fiscal 2024 earnings are pegged at $7.44 per share, indicating a year-over-year growth of 42%. The long-term growth rate is pegged at 19.3%. The stock has gained 20.3% in the past year.
Price and Consensus: CRM
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3 Software Stocks to Watch for in a Flourishing Industry
The Zacks Computer Software industry benefits from the accelerated digital transformation drive across the globe. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. The role of software is constantly evolving. With the continuation of remote work setup and mainstream adoption of the hybrid/flexible work model, the demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Adobe (ADBE - Free Report) , Salesforce (CRM - Free Report) and Synopsys (SNPS - Free Report) .
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (primarily for semiconductor and electronics industries), digital media and marketing, customer relationship management, on-premises and cloud-based database management, accounting and tax purposes, human capital management, cybersecurity and application performance monitoring and cloud-based enterprise communications platform. Some companies develop and market simulation software (like computer-aided design or CAD, 3D modeling, product lifecycle management or PLM, data orchestration and experience creation), which engineers, designers and researchers use across various industries like architecture, engineering and construction, product design, manufacturing and digital media.
3 Trends Shaping the Future of the Software Industry
Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given higher spending by enterprises on software procurement. Continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for industry players. Cloud offers a flexible and cost-effective platform for developing and testing applications. The deployment time is also shorter compared with legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.
Cloud Computing Adoption Gaining Traction: The increasing need to secure cloud platforms amid growing cyber-attacks and hacking incidents drives demand for cyber security software. Enterprises are focused on rapid migration to the cloud and DevOps technologies to achieve scalability and agility for software development and IT operations. This helps deliver a flawless digital experience to clients. This trend has brought immense value to application and infrastructure performance monitoring. It is driving the demand for performance management monitoring tools that are scalable and suitable for cloud-based environments.
Macroeconomic Headwinds a Concern: The mainstream adoption of the distributed workforce model is fueling demand for enterprise communication, workspace management and human capital management software solutions. However, global macroeconomic weakness, prolonged Russia-Ukraine war and volatile supply chain dynamics are concerns. Increasing inflation could affect spending across small- and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #78, which places it in the top 32% of more than 245 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
Before we present a few stocks you may want to consider for your portfolio, considering bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector and S&P 500
The Zacks Computer Software industry has outperformed the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry gained 20.9% over this period compared with the S&P 500 and the broader sector’ gain of 6% and 13.6%, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month P/E, a commonly-used multiple for valuing software companies, we see that the industry is currently trading at 30.40X compared with the S&P 500’s 19.24X. It is also above the sector’s forward-12-month P/E of 24.36X.
In the last five years, the industry has traded as high as 37.28X, as low as 22.63X and at the median of 28.71X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Software Stocks to Power Your Portfolio
Adobe: San Jose, CA-based Adobe is one of the largest software companies in the world. The company picks up licensing fees from customers, which form the bulk of its revenues.
It is benefiting from strong demand for its creative products. The company’s Creative Cloud, Document Cloud and Adobe Experience Cloud products are driving the top line. Rising subscription revenues and solid momentum across the mobile apps are major positives. Additionally, growth in emerging markets and robust online video creation demand are tailwinds.
Adobe carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The consensus mark for the company’s fiscal 2023 earnings is pegged at $15.70 per share, suggesting a rise of 14.5% year over year. The long-term growth rate is pegged at 13.3%. Shares have gained 31.4% in the past year.
Price and Consensus: ADBE
Synopsys: Headquartered in Mountain View, Synopsys is one of the vendors of electronic design automation (EDA) software for the semiconductor and electronics industries.
Synopsys is benefiting from strong design wins owing to a robust product portfolio. Growth in the hybrid working trend is driving demand for bandwidth. Strong traction for Synopsys’ Fusion Compiler product boosted the top line. Growing demand for advanced technology, design, IP and security solutions is also creating solid prospects. The rising impact of artificial intelligence, 5G, internet of things and big data is driving investments in new compute and machine learning architectures.
The stock carries a Zacks Rank #2. The consensus mark for the company’s fiscal 2023 earnings is pegged at $11.05 per share, up 24.2% in the past 60 days. The long-term growth rate is pegged at 16.4%. Shares have gained 23.4% in the past year.
Price and Consensus: SNPS
Salesforce is benefiting from a robust demand environment as customers are undergoing a major digital transformation. Its sustained focus on introducing more aligned products per customer needs is driving its top line. Continued deal wins in the international market are another growth driver. The acquisition of Slack has positioned the company as a leader in enterprise team collaboration solution space and placed it at a better competitive position against Microsoft’s Teams product.
Salesforce carries a Zacks Rank #2. The company’s fiscal 2024 earnings are pegged at $7.44 per share, indicating a year-over-year growth of 42%. The long-term growth rate is pegged at 19.3%. The stock has gained 20.3% in the past year.
Price and Consensus: CRM