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 MSCI MSCI, Tyler Technologies TYL, TD SYNNEX SNX and Guidewire Software GWRE are gaining from these trends.
The pandemic-induced health crisis has opened up new channels of growth for business software services providers over the past two years. 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.
Strong IT Spending Forecast Bodes Well: The latest forecast for worldwide IT spending by Gartner is positive for industry players. Worldwide IT spending is anticipated to be $4.43 trillion in 2022, suggesting an increase of 4% from 2021. Gartner in its research report stated that the ongoing geopolitical disruptions, inflationary pressure and protracted pandemic-induced supply chain troubles will not affect the recovery seen in IT spending globally. This bodes well for the industry’s performance.
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 #95, which places it in the top 38% 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 about this group’s earnings growth potential. The industry’s earnings estimate for 2022 has moved up by 12.9% 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 declined 8.1% during this period compared with the broader sector’s decline of 15.9% and the S&P 500’s decrease of 3.2%.
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 that the industry’s ratio of 21.19 is higher than the S&P 500’s 17.30 and the sector’s 20.31.
Over the last five years, the industry has traded as high as 37.75X, as low as 6.60X, and recorded a median of 22.11X 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 an Eye on
Tyler Technologies: This Zacks Rank #2 (Buy) 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. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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 is a positive. The coronavirus-led remote-working trend is also driving demand for its connectivity and cloud services.
Shares of this Plano, TX-based company have plunged 12.5% over the past year. The Zacks Consensus Estimate for 2022 earnings has moved up by 9 cents to $7.59 per share over the past 30 days.
Price and Consensus: TYL
TD SYNNEX: Founded in 1980, it is a leading business process services company. The 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.
TD SYNNEX is benefiting from the coronavirus-led work-and-learn from home wave, which is driving demand for offsite-working and learning hardware and software. Moreover, a steady IT spending environment on the back of rapid digital transformation is a positive. Acquisitions and partnerships are helping the company expand its product portfolio.
This Fremont, CA-based company carries a Zacks Rank #2 at present. The Zacks Consensus Estimate for fiscal 2022 earnings has moved up by 42 cents to $11.48 per share over the past 60 days. Shares of SNX have declined 15.5% over the past year.
Price and Consensus: SNX
MSCI: This Zacks #3 (Hold) 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, a recurring revenue business model and the growing adoption of its ESG solution in the investment process. MSCI’s expanding portfolio of climate tools is expected to drive the top line. Acquisitions have enhanced its ability to provide climate-risk assessment and assist investors with climate-risk disclosure requirements. Moreover, strong traction from client segments like wealth management, banks and broker dealers is a positive.
Shares of this New York-based company have fallen 10.2% during the past year. The Zacks Consensus Estimate for 2022 earnings has moved 16 cents south to $11.38 per share over the past 30 days.
Price and Consensus: MSCI
Guidewire Software: This San Mateo, CA-based company is a provider of software solutions for property and casualty (P&C) insurers. The company’s solutions aid in reducing risk via increased productivity, bringing speed to market, digital engagement and simplifying IT infrastructure.
Guidewire is riding on higher subscription revenues, as reflected by its fiscal second-quarter results. The company’s subscription-based offerings are gaining from the robust adoption of the InsuranceSuite Cloud platform. Further, its focus on enhancing the Guidewire Cloud platform with new capabilities is expected to boost sales of subscription-based solutions in the long haul. Guidewire’s cloud deployment partner, Amazon Web Services is also gaining traction. Strategic acquisitions and collaborations, along with a less competitive market and strong liquidity position, bode well.
This Zacks Rank #3 stock has plunged approximately 15% in the trailing 12 months. The consensus mark for fiscal 2022 is pegged at a loss of 53 cents per share, having widened by a penny in 60 days’ time.
Price and Consensus: GWRE
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MSCI Inc (MSCI) : Free Stock Analysis Report
TD SYNNEX Corp. (SNX) : Free Stock Analysis Report
Guidewire Software, Inc. (GWRE) : Free Stock Analysis Report
Tyler Technologies, Inc. (TYL) : Free Stock Analysis Report