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 – Free Report) , Tyler Technologies (TYL – Free Report) , and ePlus (PLUS – Free Report) 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.
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 inter-operability 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 8.6% year over year and reach $4.2 trillion in 2021. However, with the emergence of the more contagious coronavirus variant — Delta — several parts of the world, including India, Australia, Indonesia, and Japan, are grappling with a massive spike in infection rates, leading to stringent lockdowns. Even some parts of the United States are witnessing Delta variant outbreaks. 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 #82, which places it in the top 32% 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 2021 has moved up by 2.6% to 78 cents over the past year. Similarly, the earnings estimate for 2022 has moved north by 21.1% to 86 cents from 71 cents as of Sep 30, 2020.
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 Sector and S&P 500
The Zacks Business-Software Services industry has outperformed the broader sector and the Zacks S&P 500 composite over the past year.
The industry has surged 49% during this period compared with the broader sector’s rise of 39.3% and the S&P 500’s rally of 32.5%.
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 34.25X is higher than the S&P 500’s 21.82X and the sector’s 28.53X.
Over the last five years, the industry has traded as high as 34.93X, as low as 6.70X, and recorded a median of 21.40X as the charts below show.
Price-to-Earnings (P/E) Ratio (F12M)
Price-to-Earnings (P/E) Ratio (F12M)
3 Stocks to Watch Out For
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.
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 11.7% in the year-to-date period. 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 #2 stock has gained approximately 22.5% in the year-to-date period. The consensus mark for fiscal 2022 earnings has moved 12.9%s north to $7.34 per share in 30 days’ time.
Price and Consensus: PLUS
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 45.4% during the past year. The Zacks Consensus Estimate for 2021 earnings has moved 15 cents north to $9.75 per share over the past 60 days.
Price and Consensus: MSCI