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Uncertainties related to global macroeconomic conditions and Inflationary pressure are a persistent concern for participants of the Zacks Computer Software industry. However, these industry participants are nonetheless positioned well to gain 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 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 Intuit Inc (INTU - Free Report), Progress Software Corporation (PRGS - Free Report), and Canaan Inc (CAN - Free Report).

The Industry's 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 platforms.

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, as well as 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, Macro Conditions are a Concern: Per a report from Gartner, worldwide IT spending is projected to reach $5.26 trillion in 2024, calling for an increase of 7.5% from 2023 levels. This is an improvement over the earlier projection of overall spending of $5.06 trillion, but this does suggest 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.

However, 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.

The Zacks Industry Rank Indicates Bleak Prospects

The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #141, which places it in the bottom 44% 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 bleak 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.

Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. Since May 31, 2024, the industry’s earnings estimate for 2024 has decreased by 3.4%.

Before we present a few stocks you may want to consider for your portfolio, considering the space's bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.

The Industry Outperforms the S&P 500 but Lags the Sector

The Zacks Computer Software industry lags behind the broader Zacks Computer and Technology sector, but it has outperformed the S&P 500 Index in the past year.

The industry has rallied 22.7% over this period compared with the S&P 500 and the broader sector’s increase of 21.7% and 32.9%, respectively.

One-Year Price Performance

Image Source: Zacks Investment Research

The Industry's Current Valuation

Based on the forward 12-month P/E, a commonly used multiple for valuing software companies, we can see that the industry has recently been seen trading at 32.70X compared with the S&P 500’s 21.59X. It has also been above the sector’s forward-12-month P/E of 27.43X.

In the last five years, the industry has traded as high as 37.50X, as low as 22.97X, and at the median of 30.71X, as the chart below shows

Forward 12-Month Price-to-Earnings (P/E) Ratio

Image Source: Zacks Investment Research

Forward 12-Month P/E Ratio

Image Source: Zacks Investment Research

3 Software Stocks to Keep An Eye On - Canaan 

Based in Singapore, Canaan is a technology company with a primary focus on designing ASIC high-performance computing chips. It is also engaged in chip research and development, computing equipment production, and software services.

The company is benefiting from improving sales executions, as well as optimization of mining operations. In the last reported quarter, the company generated Mining revenues of $10.5 million, up 182.1% sequentially.

Increasing the uptake of new A1566 mining machines and the continued demand for the A14 series (post the halving) have been driving the top-line performance. For the second and third quarters of 2024, Canaan expects total revenues to be $70 million. For third-quarter of 2024, the company expects total revenues to be also $70 million.

Canaan's stock maintains a Zacks Rank #3 (Hold) rating. The company’s 2024 earnings are pegged at a loss of 90 cents per share, indicating an improvement from a loss of $1.63 reported in the prior-year quarter.

Price and Consensus: CAN

Image Source: Zacks Investment Research

Intuit

Headquartered in Mountain View, CA, Intuit is a business and financial software company that develops and sells financial, accounting, and tax preparation software and related services for small businesses, consumers, and accounting professionals globally.

Robust growth in revenues, driven by the Online and Consumer Group business segments, has been driving top-line expansion, along with steady momentum in international online revenues and solid professional tax revenues. The TurboTax Live offering has also been driving growth in the Consumer tax business.

Momentum in QuickBooks Capital is an added positive. The company’s efforts at migrating its business to a cloud-based subscription model will help generate stable revenues over the long run. Higher costs and expenses stemming from increased investments in marketing and engineering teams are likely to continue denting bottom-line results in the near-term.

Intuit's stock carries a Zacks Rank #2 (Buy) rating. The Zacks Consensus Estimate for the stock's 2024 EPS has improved 2.6% over the last 60 days to $16.83. Intuit's earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 16.2%. The long-term growth rate stands at 37.9%

Price and Consensus: INTU

Image Source: Zacks Investment Research

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. 

Progress Software's 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. Progress Software also remains focused on mergers and acquisitions to drive top-line performance further. 

The company expects non-GAAP revenues to be between $174 million and $178 million for the third quarter of 2024. For the full-year 2024, revenues are expected to be between $725 million and $735 million. 

Progress Software's stock carries a Zacks Rank #2 (Buy). The consensus mark for the company’s 2024 earnings is pegged at $4.75 per share. The company’s earnings beat the Zacks Consensus Estimate in all of the last four quarters, with the average earnings surprise pegged at 11.1%. The long-term earnings growth stands at 2%.

Price and Consensus: PRGS

Image Source: Zacks Investment Research

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