4 Reasons Why Enterprise Software Firms Can Be Great Investments

So far as part of the great industries for investment series, we've taken a look at two "green dot" industries that are generally attractive for investment, and three "red dot" industries that are probably best to stay away from:

"Red Dot" Industries

  1. Airlines
  2. Restaurants
  3. Brick and Mortar Retail

"Green Dot" Industries

  1. Payment Processing
  2. Social Networks

Today, we add a third industry to the "green dot" list.

Over the last 30-40 years, this industry has produced some of the best long-term performers in the entire stock market, and yet today, there is more opportunity than ever. The industry we will look at today is enterprise software. More specifically, cloud-delivered enterprise software, known as "software-as-a-service", or SaaS.

This is, without a doubt, one of my favorite areas to go digging for stock ideas. Here are four reasons why.

The Addressable Market Is Enormous

Enterprise software is one of the largest industries in the world. According to Statista, global spending in enterprise software in 2017 was more than $352 billion dollars. That's up from about $225 billion in 2009, a strong 5.7% compound annual growth rate.

Those are already some attractive stats, but it appears that the industry is facing an inflection point. That same report predicts enterprise software spending to explode, growing to $425 billion over the next 2 years - a growth rate of 9.8%.

Why? Companies are relying on software more and more for critical business intelligence applications, systems monitoring, project management, supply chain optimization, and so on. Nearly every aspect of business is moving to "real-time" monitoring to keep up with competitive threats. These require investment in new types of software categories.

The need for ever expanding software solutions is not something that will slow down anytime soon, giving increasing competition and the need for efficiency to effectively compete. The size and growth of this market affords investors in it the opportunity to see some big gains, particularly from early-stage software vendors who manage to gain a solid foothold.

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Disclosure: Steve owns no stocks referenced here.

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