4 Stocks to Watch From the Prospering Business-Software Services Industry

Steven Spielberg

The Zacks Business-Software Services industry is benefiting from heightened demand for digital transformation and the ongoing shift to the cloud. Growing automation business processes across multiple industries and rapidly increasing enterprise data volumes are also driving demand for business software and services. Industry participants like Cognizant Technology Solutions CTSH, MSCI MSCI, Tyler Technologies TYL, and ePlus PLUS 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. SaaS offers a flexible and cost-effective delivery method of applications. It also cuts down on the deployment time compared to legacy systems. Moreover, SaaS attempts to deliver applications to any user, anywhere, anytime, and on any device.

Industry Description

The Zacks Business-Software Services industry primarily comprises companies that deliver application-specific software products and services. The applications are typically either license-based or cloud-based. The offerings generally include applications related to finance, sales & marketing, human resource, and supply chain, among others. The industry includes a broad range of companies offering a wide range of products and services including business processing and consulting, application development, testing and maintenance, office productivity suits, systems integration, infrastructure services, and network security applications. Some of the companies provide investment-decision support tools. 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 interoperability features provide 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 companies over the long haul. However, due to this transition, the 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.

Evolving COVID-19 Situation Might Hurt Tech Spending: According to the latest report from Gartner, enterprises are likely to spend more on technology as they realize that sound technological infrastructure is the key to positive business outcomes. Therefore, the independent research firm estimates worldwide IT spending to increase 5.5% year over year and reach $4.5 trillion in 2022. However, with the emergence of the more contagious coronavirus variants — Delta and Omicron —several parts of the world are grappling with a massive spike in infection rates, leading to stringent lockdowns. This could affect IT spending across small- and medium-sized businesses, globally, as organizations may push back their investments in big and expensive technology products due to the global economic slowdown concerns. The uncertainty in business visibility could dent the industry’s performance in the near term.

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 #80, which places it in the top 31% 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 outperform the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of the positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. The industry’s earnings estimate for 2022 has moved up by 18.5% to 96 cents over the past year.

Estimate Revision For 2022

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 Lags S&P 500, Outperforms Sector

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

The industry has risen 23.9% during this period compared with the broader sector’s rise of 19% and the S&P 500’s rally of 25.4%.

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, which is a commonly-used multiple for valuing business-software services stocks, we see, the industry’s ratio of 29.61X is higher than the S&P 500’s 21.59X and the sector’s 27.84X.

Over the last five years, the industry has traded as high as 37.74X, as low as 6.60X, and recorded a median of 21.85X as the charts below show.

F12M Price-to-Earnings Ratio (Industry Vs S&P 500)

F12M Price-to-Earnings Ratio (Industry Vs Sector)

4 Stocks to Keep a Close Eye On

MSCI: This Zacks #2 (Buy) 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

MSCI is benefiting from solid demand for custom and factor index modules, a 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, the 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 30.2% during the past year. The Zacks Consensus Estimate for 2022 earnings has moved 7 cents north to $11.20 per share over the past seven days.

Price and Consensus: MSCI

Cognizant Technology Solutions: It is a leading professional services company. The company offers digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services.

Cognizant’s domain expertise and the ability to harness the ongoing digital transition are key catalysts. It is witnessing strength in high quality, lower-cost technology services including cloud and digital engineering services, and increased demand for interactive, Internet of Things and analytics solutions. Steady growth in Healthcare, Communications, Media and Technology clients is a positive.

This Teaneck, NJ-based company carries a Zacks Rank #3 (Hold) at present. The Zacks Consensus Estimate for 2022 earnings has moved up by a penny to $4.50 per share over the past 60 days. Shares of CTSH have gained 8.9% over the past year.

Price and Consensus: CTSH

Tyler Technologies: This Zacks Rank #3 company is a leading provider of integrated information-management solutions and services to the public sector. The company serves its customers both on-premise and in the cloud.

Tyler is benefiting from higher recurring revenues, post-acquisition contributions of NIC, and constant rebound of the market and sales activities to pre-COVID levels. The public sector’s ongoing transition from on-premise and outdated systems to scalable cloud-based systems are positives. The coronavirus-led remote-working trend is also driving demand for its connectivity and cloud services.

Shares of this Plano, TX-based company have gained 14.5% over the past year. The Zacks Consensus Estimate for 2021 earnings has moved up by 5 cents to $6.74 per share over the past 60 days.

Price and Consensus: TYL

ePlus: This Herndon, VA-based company enables organizations to optimize their IT infrastructure and supply-chain processes by delivering world-class IT products from top manufacturers, professional services, flexible lease financing, proprietary software, and patented business methods.

The company is benefiting from the pandemic-driven demand for work-from-home hardware and software including, PCs, tablets, connectivity, collaboration, and security products. Apart from this, the company’s strategy of acquiring regional solution providers is helping it grow across the higher-margin IT services market.

This Zacks Rank #3 stock has gained approximately 9.4% in the trailing 12 months. The consensus mark for fiscal 2022 earnings has remained unchanged at $3.87 per share in 90 days’ time.

Price and Consensus: PLUS

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Cognizant Technology Solutions Corporation (CTSH) : Free Stock Analysis Report

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