The search for software stocks to buy provides both opportunities and challenges. On the one hand, software develops and changes at a rapid pace, paving the way for ever-increasing chances to profit. However, rapid changes can make it a challenge to maintain market share. Moreover, between application, business, healthcare, internet and security software, there is a dizzying array of choices when it comes to software stocks.
Existing software firms can stand out from the crowd by redefining themselves. As such, they can bring new technical abilities to the marketplace, reviving their companies and their respective stocks. With a little research, investors can find these software stocks before valuations move too high.
These three software stocks should provide both the growth and the new technology needed to drive their stock prices higher for years to come.
Editor’s Note: This article was originally published on Aug. 29. It has been updated to reflect changes in the market.
Progress Software Corporation (PRGS)
Progress Software (NASDAQ:PRGS) provides software-based security solutions via the cloud. The company divides itself into three sections. OpenEdge, its original product from the early 1980’s, is a programming language focused on developing multi-language business applications. The company also offers cloud-based applications through its Data Connectivity and Integration division. Finally, Application Development and Deployment creates and deploys specialized apps for its clients.
Despite its long history, the company may now be seeing its highest stock price growth ever. PRGS stock maintained a steady growth path following the 2008 financial crisis. And then, in 2017, the stock price almost doubled. After hitting a high of $53.60 early this year — before the market dip — PRGS has since fallen back to the $32 per share level.
Such a move could constitute a buying opportunity. The forward price-to-earnings ratio for the stock now stands at just under 19. This comes after seeing profit growth of over 30% this year. Although analysts expect profit growth to stagnate next year, they predict average annual net income growth of 10% over the next five years.
Also, as the cloud industry begins an inevitable consolidation, PRGS stock could become a buyout target. Its $1.8 billion market cap makes it a size any larger firm could easily absorb. The double-digit profit growth should further its appeal in that respect. With the importance of cloud-related security, low valuation and double-digit profit growth, PRGS stock could stand out among software stocks to buy.
National Instruments Corporation (NATI)
Some software stocks revolve around research. Such is the case with National Instruments (NASDAQ:NATI). National Instruments designs and sells software to engineers and scientists. Their software covers a variety of research-related applications, such as data mining and data analysis. Some National Instruments software can perform tests within a manufacturing environment and configure other applications for real-time experiments. These simulations allow engineers and scientists to test ideas before bearing the high costs of manufacturing or building real-world models.
The company has existed since 1976. However, this decade for the company has really hit its stride. Net income growth averaged just under 8% per year over the last five years. Analysts expect 14% growth this year. But over the next five years, they predict that growth figure will rise to an average of 44.4% per year.
This growth has begun to appear in its stock. NATI stock traded under $30 per share less than two years ago. Today, it sells at about $44 per share, down from a record of high of $53.57 per share back in March. As for its valuation, growth has taken its five-year average P/E ratio to just above 50. Due to the recent pullback, the forward P/E has fallen to 42.7. While that might appear high, the 44.4% growth rate would take the price-to-earnings-to-growth (PEG) ratio to just under one. Also, despite its growth and long existence, NATI’s market cap stands at about $6 billion. Although it may have taken decades to come into its own, NATI stock presents a compelling value proposition to customers and investors alike.
Symantec Corporation (SYMC)
Symantec (NASDAQ:SYMC) has long served as the provider of Norton AntiVirus software. This stood out among software stocks to buy during the 90s tech boom as it became a leading security platform during the PC era. As of late, SMYC has seen slower growth due to slower PC sales.
However, the company focuses on more than just PCs. Symantec also provides security for both network and cloud applications. Additionally, its acquisition of LifeLock offers protection in the financial realm as well.
Analysts expect these new areas of focus to bolster the stock. SYMC stock saw net income growth fall by an average of 6.9% per year over the last five years. Due to its move away from PC-related applications, Analysts expect income growth to resume next year when they predict it to come in at 15.2%. They also expect growth to reach an average of 10.56% per over the next five years.
SYMC stock also trades at a discount. After reaching as high as $34.20 per share last September, the stock trades at under $20 per share today. An audit investigation sent its stock down by 33% despite beating earnings in May. This audit investigation continues.
Still, this could have also created a chance to buy SYMC at a lower price. Its current forward P/E stands at just over 13. Also, keep in mind that income growth will probably return to the double-digits starting next year. Moreover, in most cases, stocks recover from such investigations. More likely than not, SYMC stock will recover much like other companies who have faced similar issues.
PC-focused companies such as Microsoft (NASDAQ:MSFT) and Intel (NASDAQ:INTC) have found prosperity after the decline of their one-time core product. I believe the same thing is happening to Symantec. The audit will continue to loom over the stock in the near-term. However, with the low P/E and the prospects for growth, now could be an opportune time to buy.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
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