3 Business-Software Services Stocks to Watch in a Challenging Industry

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The Zacks Business-Software Services industry is benefiting from heightened demand for digital transformation and the ongoing shift to cloud. Industry participants like SYNNEX Corporation (SNX), MSCI Inc. (MSCI) and Guidewire Software (GWRE) are gaining from these trends.

Though the pandemic-induced chaos is expected to hurt in the near term, the health crisis has opened up new channels of growth for business software services providers. The industry participants have witnessed solid demand for software-as-a-service (SaaS) amid the pandemic-triggered surging need for remote working, online learning and diagnosis software.

Industry Description

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 industry participants.

4 Trends Shaping the Future of the Business-Software Services Industry

Transition to Cloud Creating Opportunities: Companies in this industry have been gaining 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 artificial intelligence (AI) in their applications to make the same more dynamic and result oriented. Most industry players are now offering cloud-based versions of their solutions in addition to the on-premise ones, thereby expanding content accessibility. The enhanced inter-operability feature provides customers with differentiation and efficiency.

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

Continuous M&A to Expand Product Offerings: The players in this industry are resorting to frequent mergers and acquisitions to supply complementary and end-to-end software products. Nonetheless, increasing investments in digital offerings and acquisitions might erode the industry’s profitability in the upcoming period.

IT Spending Cuts Might Mar Near-Term Prospects: The industry’s near-term prospect looks gloomy due to the global business disruptions caused by the coronavirus crisis. Due to uncertainty over global economic and business activities, organizations might cut or push back their big technology spending. As a result,business-software and services industry participants are likely to witness declines in new bookings. Also, decline in retail and consumer goods, and travel and hospitality clients are expected to affect business software services providers’ top line in the near term.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Business-Software Services industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #231, which places it at the bottom 8% 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 gloomy 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.

Despite the gloomy industry outlook, few stocks are worth watching in the market. But before we present the top industry picks, it is worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector, Outperforms the S&P 500

The Zacks Business-Software Services industry has underperformed the broader Zacks Computer And Technology sector but outperformed the S&P 500 Index over the past year.

The industry has surged 53.9% during this period compared with the broader sector’s gain of 63.9% and the S&P 500’s rally of 46.4%.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry with the S&P 500 composite and broader sector 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 31.59X is higher than the S&P 500’s 22.93X and the sector’s 28.15X.

Over the last five years, the industry has traded as high as 34.93X, as low as 6.70X and recorded a median of 21.32X as the charts below show.

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

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

3 Business-Software Services Stocks to Watch Out For

SYNNEX: Fremont, CA-based company provides a comprehensive range of distribution, logistics and integration services for the technology industry and outsourced services focused on customer engagement to a broad range of enterprises.

SYNNEX is benefiting from the pandemic-led work-from-home and online-learning wave which is spurring demand for offsite-working and learning hardware and software. Moreover, acquisitions and partnerships are helping the company expand its product portfolio. Additionally, the split of the Technology Solutions and Concentrix businesses into two publicly-traded entities will add shareholder value and enhance the company’s competitive position.

Shares of this Zacks Rank #3 (Hold) company have soared 276% over the past year. The consensus mark for fiscal 2021 earnings has been revised 3.7% upward to $8.04 per share in the past 60 days.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: SNX

MSCI: This Zacks #3 Ranked company offers 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.

MSCI is benefiting from solid demand for custom and factor index modules, recurring revenue business model and the growing adoption of its ESG solution in the investment process. The acquisition of Carbon Delta also enhances MSCI’s ability to provide climate-risk assessment and assist investors with climate-risk disclosure requirements. Additionally, a strong traction from client segments like wealth management, banks and broker dealers is a positive for the company.

Shares of this New York-based company have gained 48% during the past year. The Zacks Consensus Estimate for 2021 earnings has moved 8 cents north to $9.38 per share over the past 30 days.

Price and Consensus: MSCI

Guidewire Software: This Zacks Rank #3 company is a leading provider of software solutions for property and casualty (P&C) insurers.

Guidewire is gaining from the pandemic-triggered demand for cloud-based insurance software solutions. The firm’s cloud-based subscription products are witnessing traction as insurers are increasingly looking to digitally transform their business processes. Furthermore, the growing proliferation of Guidewire across the Canadian P&C industry is a key catalyst.

Shares of this San Mateo, CA-based company have rallied 18% in the past year. The Zacks Consensus Estimate for fiscal 2021 earnings has moved 20.8% north to 29 cents per share over the past 60 days.

Price and Consensus: GWRE

These Stocks Are Poised to Soar Past the Pandemic

The COVID-19 outbreak has shifted consumer behavior dramatically, and a handful of high-tech companies have stepped up to keep America running. Right now, investors in these companies have a shot at serious profits. For example, Zoom jumped 108.5% in less than 4 months while most other stocks were sinking.

Our research shows that 5 cutting-edge stocks could skyrocket from the exponential increase in demand for “stay at home” technologies. This could be one of the biggest buying opportunities of this decade, especially for those who get in early.

See the 5 high-tech stocks now>>

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