Software stocks have been benefiting primarily from the ongoing digital transformation and solid demand for remote working and learning solutions. However, unfavourable forex and the negative impact of the suspension of all new sales and services in Russia due to the ongoing Russia-Ukraine conflict are expected to have hurt top-line growth this earnings season.

The growing proliferation of SaaS-based services, the rapid migration to cloud platforms, increased 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 Fastly (FSLY Quick QuoteFSLY - Free Report) , Intuit (INTU Quick QuoteINTU - Free Report) , Atlassian (TEAM Quick QuoteTEAM - Free Report) and Unity Software (U Quick QuoteU - 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 fourth-quarter earnings were negatively impacted by a sharp slowdown in its cloud business, declining videogame sales and the effects of a strong dollar. Unfavorable forex hurt Microsoft’s earnings by 4 cents per share while the negative impact from the suspension of all new sales and services in Russia was a penny. A decrease in Xbox content and services and Xbox hardware hurt gaming revenues.

Nonetheless, Microsoft’s revenues benefited from the strong performance of Azure, Office 365 and Dynamics. Continued strength in Marketing Solutions and better-than-expected performance in Talent Solutions aided LinkedIn revenues.

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

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 performances 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 so far in 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 a favorable combination to beat on earnings this reporting cycle:

San Francisco, CA-based Fastly is scheduled to report second-quarter 2022 results on Aug 3. The company currently has an Earnings ESP of +8.40% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The company’s focus on attracting customers outside of the United States and expanding its international footprint is expected to have driven top-line growth. As of Mar 31, 2022, Fastly’s edge network spanned 54 markets and 33 countries that are outside of the United States.

On May 20, Fastly announced the acquisition of Glitch, a web coding platform that allows novice and experienced coders to quickly build and deploy small web apps. The acquisition follows a partnership between the companies earlier this year, which brought Glitch to Compute@Edge, one of Fastly's core products. Compute@Edge is a distributed application platform for running apps in edge environments on Fastly hardware.

The Zacks Consensus Estimate for loss has gone down by a penny to 16 cents per share in the past 30 days.

Mountain View, CA-based Intuit is scheduled to report fiscal fourth-quarter 2022 results on Aug 23. The company currently has an Earnings ESP of +1.92% and a Zacks Rank #2.

Intuit has been benefiting from strong momentum in online ecosystem revenues and solid professional tax revenues. The TurboTax Live offering has also been driving growth in the Consumer tax business. Solid momentum in the company’s lending product, QuickBooks Capital, remains a positive factor.

The Zacks Consensus Estimate for Intuit has been stable at a loss of 99 cents per share in the past 30 days.

Sydney, ASTL-based, Atlassian is scheduled to report fiscal fourth-quarter 2022 results on Aug 4. The company currently has an Earnings ESP of +1.92% and a Zacks Rank #3.

The company has been benefiting from the rising adoption of cloud-based solutions and the massive digitalization trend in organizations. The increasing demand for the company’s cloud products from new and existing clients using on-premises products is expected to have been a tailwind.

With more customers migrating to the cloud amid the ongoing work-from-anywhere and online learning wave, Atlassian has been witnessing strong demand for its premium and Enterprise edition cloud solutions. Growing traction for core products like Jira Software and Confluence Cloud and the rising adoption of new products like Jira Service Management may have acted as key catalysts.

The Zacks Consensus Estimate for earnings has been stable at 26 cents per share in the past 30 days.

San Francisco, CA-based Unity Software is slated to report second-quarter 2022 results on Aug 9. The company presently has an Earnings ESP of +5.82% and a Zacks Rank #3.

The company has been benefitting from robust demand for its software solutions from content creators like game developers, architects, automotive designers and filmmakers. Growing momentum in the Operate Solutions business has been a key catalyst.

The Zacks Consensus Estimate for loss has narrowed by a penny to 20 cents per share over the past 30 days.

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