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Bright Near-Term Prospects for Business-Software Services

Zacks Equity Research

The Zacks Business-Software Services industry primarily comprises companies that deliver application-specific software products and services. The offerings include applications related to finance, human resource and supply chain, among others. Manufacturing, retail, banking, insurance, telecommunication, healthcare and public sectors are the primary end-markets for the industry participants.

Industry participants, like Cognizant Technology Solutions (CTSH), offer digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services, and business process. Some of the companies like MSCI Inc. (MSCI) provide investment-decision support tools, which are used in several areas of investment process.

Here are the industry’s four major themes:

  • The companies in this industry have been benefiting from the robust demand for multi cloud-enabled software solutions, given the ongoing transition from legacy platforms to modern cloud-based infrastructure. These industry players are incorporating AI and tools like ML in their applications to make the same more dynamic and result oriented. Elevated demand for enterprise software, which is ramping up productivity and improving decision-making process, is a key catalyst. Additionally, business software providers are keeping pace with the global regulatory and business practice regulations, thereby helping customers incorporate industry-best practices, while complying with the governmental and industry norms.
     

  • The industry participants are modifying their business models to cope with clients’ changing requirements. Subscription and term-license based revenue pricing models have become highly popular and are now replacing the legacy upfront payment prototype. Increased revenue visibility and higher recurring revenues bode well for investors over the long haul. However, due to this transition, top-line growth of these companies might be hurt in the days to come as term-license revenues include advance payments, whereas subscription-based revenues are a bit delayed.
     

  • Most industry players are now offering a cloud-based version of their solutions in addition to the on-premise one, thereby expanding content accessibility. The enhanced inter-operability feature provides customers with differentiation and efficiency. Further, the companies in this industry are resorting to frequent mergers and acquisitions to supply complementary and end-to-end software products. Nonetheless, rising investment in digital offerings and acquisitions are threat to the industry’s profitability in the near term.
     

  • Due to uncertainties over global economic and business activities due to the COVID-19 pandemic, business-software and services providers are expected to witness declines in new bookings as well as IT spending cutbacks across multiple industries, including, travel & hospitality, oil & gas, financial services, retail and manufacturing.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #70, which places it at the top 28% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically 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 outperforms the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms the S&P 500

The Zacks Business-Software Services industry has outperformed the S&P 500, but underperformed the Zacks Computer and Technology sector in the past year.

The stocks in this industry have collectively gained 28% compared with the Zacks Computer and Technology sector’s rally of 37.6% and the S&P 500’s 16.6%.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry with the S&P 500 composite on the basis of the forward 12-month price-to-earnings ratio, which is a commonly-used multiple for valuing business-software services stocks, we see, the industry’s ratio of 26.4X is higher than the S&P 500’s 22.81X and the sector’s 26.39X.

Over the last five years, the industry has traded as high as 26.4X, as low as 20.09X and recorded a median of 21.69X as the charts below show.

Price-to-Earnings (P/E) Ratio (F12M)

 

 

Bottom Line

Business-Software Services companies are trying to fast adapt to the evolving user needs. Focus on providing offerings that address the need for transparency and efficiency in organizations augurs well for the industry participants.

None of the stocks in our Business-Software Services industry currently sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Here we present two stocks carrying a Zacks Rank of 2 (Buy).

MSCI Inc. provides investment decision support tools, including indexes, portfolio construction and risk management products and services, Environmental, Social and Governance (“ESG”) research and ratings, and real estate research, reporting and benchmarking offerings. The stock has surpassed the Zacks Consensus Estimate in all of the trailing four quarters, the average surprise being 6.3%. The Zacks Consensus Estimate for current-year earnings moved up 18 cents to $7.27 over the past 30 days.

Price and Consensus: MSCI

Wipro Ltd. (WIT) provides comprehensive IT solutions and services, including systems integration, Information Systems outsourcing, package implementation, software application development and maintenance, and research and development services to corporations globally. In the preceding four quarters, the stock has matched the consensus mark on two occasions, surpassed in another and missed in the other, the average beat being 0.83%. The Zacks Consensus Estimate for the ongoing-year earnings has been revised downward by a penny to 22 cents in the past 30 days.

Price and Consensus: WIT

 

Moreover, below are two stocks from the same space with a Zacks Rank #3 that investors can hold on to.

Q2 Holdings, Inc. (QTWO) provides secure, cloud-based virtual banking solutions to financial institutions across the United States. The stock has beat estimates in each of the last four quarters, the average beat being 217.9%. The Zacks Consensus Estimate of break-even earnings for 2020 indicates upward estimate revisions in the last seven days from a loss per share of 2 cents.

Price and Consensus: QTWO

Guidewire Software, Inc. (GWRE) is a provider of software solutions for property and casualty (P&C) insurers. This stock has delivered an average four-quarter positive surprise of 164.2%. The Zacks Consensus Estimate for current fiscal-year earnings has remained unchanged at 89 cents over the past 30 days.

Price and Consensus: GWRE

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Wipro Limited (WIT) : Free Stock Analysis Report
 
Q2 Holdings, Inc. (QTWO) : Free Stock Analysis Report
 
MSCI Inc (MSCI) : Free Stock Analysis Report
 
Guidewire Software, Inc. (GWRE) : Free Stock Analysis Report
 
Cognizant Technology Solutions Corporation (CTSH) : Free Stock Analysis Report
 
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