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3 Software Stocks to Keep an Eye on in a Flourishing Industry
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The Zacks Computer Software industry participants are positioned well to gain from the accelerated digital transformation drive globally. Software is ubiquitous and has become the focal point of technological innovation. The role of software is constantly evolving. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. With the adoption of the hybrid/flexible work model, demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Cadence Design Systems (CDNS - Free Report) , Progress Software Corporation (PRGS - Free Report) and BlackBerry (BB - Free Report) . However, inflationary pressure and the uncertainty prevailing over global macroeconomic conditions are a concern.
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. The continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these 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. Also, the rapid development of cutting-edge technologies like artificial intelligence, machine learning, and the Internet of Things is leading to increased usage of advanced software applications. 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. The trend 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.
Increases in IT Spending Bodes Well: Per a report from Gartner, worldwide IT spending is projected to reach $5.26 trillion in 2024, implying an increase of 7.5% from 2023 levels. This is an improvement over the earlier projection of overall spending of $5.06 trillion but suggests a decline from the previous growth projection of 8%. The report also highlighted that data center systems spending growth is anticipated to be 24% in 2024, up from the previous projection of 10% growth. The upside will be driven by the increasing compute power demand owing to the rapid proliferation of Generative AI. However, Gartner added that IT services spending is now projected to grow 7.1% in 2024, down from 9.7% projected earlier. This is mainly due to sluggish spending across subsegments, including business process services and consulting.
Uncertain global macroeconomic conditions and supply chain dynamics are a drawback. Uncertainty in the macro backdrop and inflationary pressure 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 #68, which places it in the top 27% of more than 250 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 two to one.
Before we present a few stocks you may want to consider for your portfolio, considering the industry’s bright prospects, let us look at its recent stock-market performance and valuation picture.
Industry Underperforms Both S&P 500 and the Sector
The Zacks Computer Software industry has lagged both the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry has rallied 26.6% over this period compared with the S&P 500 and the broader sector’s increase of 32.4% and 38.6%, 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 31.88X compared with the S&P 500’s 22.08X. It is also above the sector’s forward-12-month P/E of 26.78X.
In the last five years, the industry has traded as high as 37.50X and as low as 22.97X, with the median being 31.41X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Software Stocks to Add to the Watchlist
Progress Software Corporation: Headquartered in Burlington, MA, Progress Software is a leading provider of AI-powered infrastructure software.
The company aids clients with the development, deployment and management of responsible AI-powered applications. PRGS’ performance is being cushioned by steady demand for its products and solutions. The addition of advanced AI features is likely to further drive demand for its portfolio amid the rapid proliferation of AI applications.
PRGS also remains focused on mergers and acquisitions to drive top-line performance further. In September 2024, the company announced the acquisition of ShareFile, a division of Cloud Software Group, Inc. for $875 million. The sum will be paid as a combination of cash and Progress’ current revolving credit facility. ShareFile unit offers an AI-driven, SaaS-native and document-focused collaboration platform. It serves clients across various industry segments like construction, financial services, business and professional services, and healthcare. The acquisition is expected to close within the company’s ongoing fiscal year (ending Nov. 30, 2024), subject to regulatory and customary closing conditions.
PRGS has suspended dividends following the closing of the ShareFile acquisition. It plans to allocate capital toward the repayment of debt to boost liquidity for future strategic acquisitions and buybacks.
PRGS expects non-GAAP revenues to be between $725 million and $735 million for the fiscal 2024.
The consensus mark for PRGS’ fiscal 2024 earnings is pegged at $4.80 per share, unchanged over the past seven days. The company’s earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 11.8%. The long-term earnings growth stands at 2%.
Price and Consensus: PRGS
BlackBerry: Headquartered in Waterloo, Canada, BlackBerry provides intelligent security software and services to enterprises and governments worldwide.
The company recently reported its second-quarter fiscal 2025 results. It reported breakeven earnings, better than the company’s estimate of a loss per share of 2-4 cents. Strong revenue growth and cost discipline aided the bottom-line performance. Quarterly revenues of $145 million increased 9.9% year over year and also surpassed the company’s guidance of $136-$144 million. The top-line expansion was driven by strong growth across the Internet of Things (IoT) and Cybersecurity businesses.
Demand for SecuSmart, UEM endpoint management and AtHoc solutions aided the Cybersecurity segment while higher revenues from royalties acted as a tailwind for the IoT segment. The rapid adoption of the QNX platform in both the Auto and General Embedded markets is another positive. Margin performance is gaining from cost-cutting and restructuring measures. The company reiterated its fiscal 2025 revenue projection for the Cybersecurity business but raised the lower end of expectations for IoT revenues.
In May 2023, BlackBerry announced that it was undertaking a strategic evaluation of the company’s business to boost its shareholders’ value. It plans to separate the IoT and Cybersecurity businesses into standalone entities but will no longer pursue an IPO of the IoT business. In the first quarter of fiscal 2025, management announced that “significant progress” was being made as far as separation was concerned. No updates were given during the latest quarterly announcement.
BlackBerry currently sports a Zacks Rank #1. The Zacks Consensus Estimate for BB’s fiscal 2025 EPS stands at a loss of 2 cents, improved from a loss of 5 cents in the last 60 days. BB earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 131.3%.
Price and Consensus: BB
Cadence Design Systems: Cadence is a leader in the electronic design automation space. The company’s Intelligent System Design strategy aids users to transform design concepts into reality by offering computational software, hardware and IP.
Robust demand trends for differentiated solutions, strong bookings and a healthy backlog are key growth catalysts for Cadence. Its latest hardware (Palladium Z3 and Protium X3 systems) solutions are likely to witness demand, notably by AI, hyperscale and automotive companies. Rapid design activity owing to transformative generational trends (gen AI, hyperscale computing, 5G and autonomous driving), is likely to drive top-line expansion in the long run.
However, it does not expect massive revenue growth in the Verification business in 2024 but it will be an improved performance over 2023. Verification revenues are likely to pick up pace in 2025 once the company completes building inventory of its new systems. Moreover, CDNS cut the full-year EPS outlook, owing to the dilutive impact of 12 cents of the BETA CAE acquisition.
CDNS carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for CDNS’ 2024 EPS has improved by 1 cent over the last 60 days to $5.88. Its earnings beat the Zacks Consensus Estimate in all the last four quarters, with the average earnings surprise pegged at 3.7%. The long-term growth rate stands at 17.6%.
Price and Consensus: CDNS
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3 Software Stocks to Keep an Eye on in a Flourishing Industry
The Zacks Computer Software industry participants are positioned well to gain from the accelerated digital transformation drive globally. Software is ubiquitous and has become the focal point of technological innovation. The role of software is constantly evolving. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. With the adoption of the hybrid/flexible work model, demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Cadence Design Systems (CDNS - Free Report) , Progress Software Corporation (PRGS - Free Report) and BlackBerry (BB - Free Report) . However, inflationary pressure and the uncertainty prevailing over global macroeconomic conditions are a concern.
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. The continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these 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. Also, the rapid development of cutting-edge technologies like artificial intelligence, machine learning, and the Internet of Things is leading to increased usage of advanced software applications. 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. The trend 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.
Increases in IT Spending Bodes Well: Per a report from Gartner, worldwide IT spending is projected to reach $5.26 trillion in 2024, implying an increase of 7.5% from 2023 levels. This is an improvement over the earlier projection of overall spending of $5.06 trillion but suggests a decline from the previous growth projection of 8%. The report also highlighted that data center systems spending growth is anticipated to be 24% in 2024, up from the previous projection of 10% growth. The upside will be driven by the increasing compute power demand owing to the rapid proliferation of Generative AI. However, Gartner added that IT services spending is now projected to grow 7.1% in 2024, down from 9.7% projected earlier. This is mainly due to sluggish spending across subsegments, including business process services and consulting.
Uncertain global macroeconomic conditions and supply chain dynamics are a drawback. Uncertainty in the macro backdrop and inflationary pressure 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 #68, which places it in the top 27% of more than 250 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 two to one.
Before we present a few stocks you may want to consider for your portfolio, considering the industry’s bright prospects, let us look at its recent stock-market performance and valuation picture.
Industry Underperforms Both S&P 500 and the Sector
The Zacks Computer Software industry has lagged both the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry has rallied 26.6% over this period compared with the S&P 500 and the broader sector’s increase of 32.4% and 38.6%, 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 31.88X compared with the S&P 500’s 22.08X. It is also above the sector’s forward-12-month P/E of 26.78X.
In the last five years, the industry has traded as high as 37.50X and as low as 22.97X, with the median being 31.41X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Software Stocks to Add to the Watchlist
Progress Software Corporation: Headquartered in Burlington, MA, Progress Software is a leading provider of AI-powered infrastructure software.
The company aids clients with the development, deployment and management of responsible AI-powered applications. PRGS’ performance is being cushioned by steady demand for its products and solutions. The addition of advanced AI features is likely to further drive demand for its portfolio amid the rapid proliferation of AI applications.
PRGS also remains focused on mergers and acquisitions to drive top-line performance further. In September 2024, the company announced the acquisition of ShareFile, a division of Cloud Software Group, Inc. for $875 million. The sum will be paid as a combination of cash and Progress’ current revolving credit facility. ShareFile unit offers an AI-driven, SaaS-native and document-focused collaboration platform. It serves clients across various industry segments like construction, financial services, business and professional services, and healthcare. The acquisition is expected to close within the company’s ongoing fiscal year (ending Nov. 30, 2024), subject to regulatory and customary closing conditions.
PRGS has suspended dividends following the closing of the ShareFile acquisition. It plans to allocate capital toward the repayment of debt to boost liquidity for future strategic acquisitions and buybacks.
PRGS expects non-GAAP revenues to be between $725 million and $735 million for the fiscal 2024.
The company currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The consensus mark for PRGS’ fiscal 2024 earnings is pegged at $4.80 per share, unchanged over the past seven days. The company’s earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 11.8%. The long-term earnings growth stands at 2%.
Price and Consensus: PRGS
The company recently reported its second-quarter fiscal 2025 results. It reported breakeven earnings, better than the company’s estimate of a loss per share of 2-4 cents. Strong revenue growth and cost discipline aided the bottom-line performance. Quarterly revenues of $145 million increased 9.9% year over year and also surpassed the company’s guidance of $136-$144 million. The top-line expansion was driven by strong growth across the Internet of Things (IoT) and Cybersecurity businesses.
Demand for SecuSmart, UEM endpoint management and AtHoc solutions aided the Cybersecurity segment while higher revenues from royalties acted as a tailwind for the IoT segment. The rapid adoption of the QNX platform in both the Auto and General Embedded markets is another positive. Margin performance is gaining from cost-cutting and restructuring measures. The company reiterated its fiscal 2025 revenue projection for the Cybersecurity business but raised the lower end of expectations for IoT revenues.
In May 2023, BlackBerry announced that it was undertaking a strategic evaluation of the company’s business to boost its shareholders’ value. It plans to separate the IoT and Cybersecurity businesses into standalone entities but will no longer pursue an IPO of the IoT business. In the first quarter of fiscal 2025, management announced that “significant progress” was being made as far as separation was concerned. No updates were given during the latest quarterly announcement.
BlackBerry currently sports a Zacks Rank #1. The Zacks Consensus Estimate for BB’s fiscal 2025 EPS stands at a loss of 2 cents, improved from a loss of 5 cents in the last 60 days. BB earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 131.3%.
Price and Consensus: BB
Robust demand trends for differentiated solutions, strong bookings and a healthy backlog are key growth catalysts for Cadence. Its latest hardware (Palladium Z3 and Protium X3 systems) solutions are likely to witness demand, notably by AI, hyperscale and automotive companies. Rapid design activity owing to transformative generational trends (gen AI, hyperscale computing, 5G and autonomous driving), is likely to drive top-line expansion in the long run.
However, it does not expect massive revenue growth in the Verification business in 2024 but it will be an improved performance over 2023. Verification revenues are likely to pick up pace in 2025 once the company completes building inventory of its new systems. Moreover, CDNS cut the full-year EPS outlook, owing to the dilutive impact of 12 cents of the BETA CAE acquisition.
CDNS carries a Zacks Rank #2 (Buy) at present. The Zacks Consensus Estimate for CDNS’ 2024 EPS has improved by 1 cent over the last 60 days to $5.88. Its earnings beat the Zacks Consensus Estimate in all the last four quarters, with the average earnings surprise pegged at 3.7%. The long-term growth rate stands at 17.6%.
Price and Consensus: CDNS