Uncertainty prevailing over global macroeconomic conditions and inflationary pressure continue to be concerns for the Zacks Computer Software industry’s participants. However, players in this industry are positioned well to gain from the accelerated digital transformation drive globally. Software is ubiquitous and has become the focal point of technological innovation. The role of software is constantly evolving. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition. With the adoption of the hybrid/flexible work model, demand for voice and video communication and productivity software is expected to increase exponentially. These trends bode well for industry participants like Autodesk, Inc. ADSK, BlackBerry BB and Simulations Plus,Inc. SLP.
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to cloud computing, electronic design automation (primarily for semiconductor and electronics industries), digital media and marketing, customer relationship management, on-premises and cloud-based database management, accounting and tax purposes, human capital management, cybersecurity and application performance monitoring and cloud-based enterprise communications platform. Some companies develop and market simulation software (like computer-aided design or CAD, 3D modeling, product lifecycle management or PLM, data orchestration and experience creation), which engineers, designers, and researchers use across various industries like architecture, engineering and construction, product design, manufacturing and digital media.
3 Trends Shaping the Future of the Software Industry
Increases in IT Spending Bode Well But Macro Conditions Remain Concerns: Uncertain global macroeconomic conditions and supply chain dynamics are a drawback. Uncertainty in the macro backdrop and inflationary pressure could affect spending across small and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term.
However, optimism surrounding higher IT spending bodes well. Per a report from Gartner, worldwide IT spending is projected to reach $5.74 trillion in 2024, implying an increase of 9.3% from 2023 levels, as tech companies focus on building the supply-side infrastructure for GenAI. This is an improvement over the earlier projection of overall spending of $5.26 trillion, indicating a growth projection of 7.5%. The recent report also highlighted that data center systems spending growth is anticipated to be 15.5% in 2024. The upside will be driven by the increasing server sales. Gartner added that IT services spending is projected to grow 9.4% in 2025, while software spending is anticipated to increase 14% to $1.23 trillion. Both these segments will benefit as tech companies increase spending on AI-related projects, including email and authoring, added Gartner.
Higher Spending on Software Aids Prospects: The industry’s prospects are bright, given higher spending by enterprises on software procurement. The continued investment in big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these players. Cloud offers a flexible and cost-effective platform for developing and testing applications. The deployment time is also shorter compared with legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate.
Cloud Computing Adoption Gaining Traction: The increasing need to secure cloud platforms amid growing cyber-attacks and hacking incidents drives demand for cyber security software. Also, the rapid development of cutting-edge technologies like artificial intelligence, machine learning and the Internet of Things is leading to increased usage of advanced software applications. Enterprises are focused on rapid migration to the cloud and DevOps technologies to achieve scalability and agility for software development and IT operations. This helps deliver a flawless digital experience to clients. The trend brought immense value to application and infrastructure performance monitoring. It is driving the demand for scalable performance management monitoring tools that are suitable for cloud-based environments.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #142, which places it in the bottom 43% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bleak 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 two to one.
Before we present a few stocks you may want to consider for your portfolio, considering the industry’s bright prospects, let us look at its recent stock-market performance and valuation picture.
Industry Underperforms Both S&P 500 and the Sector
The Zacks Computer Software industry has lagged both the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry has rallied 17.9% over this period compared with the S&P 500 and the broader sector’s increase of 26.8% and 38.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
Based on the forward 12-month P/E, a commonly used multiple for valuing software companies, we see that the industry is currently trading at 31.73X compared with the S&P 500’s 22.23X. It is also above the sector’s forward 12-month P/E of 27.25X.
In the last five years, the industry has traded as high as 37.60X and as low as 22.96X, with the median being 31.54X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
Forward 12-Month P/E Ratio
3 Software Stocks to Add to the Watchlist
BlackBerry: Headquartered in Waterloo, Canada, BlackBerry provides intelligent security software and services to enterprises and governments worldwide.
BlackBerry’s IoT business is gaining from strength in the automotive segment, particularly strong demand for its solutions across the advanced driver assistance systems market and digital cockpit domain. The rapid adoption of the QNX platform in both the Auto and General Embedded markets is positive. Continued design win momentum is anticipated to further strengthen the QNX royalty backlog. Revenues from the IoT business increased 13% year over year and surpassed the company’s guidance in the last reported quarter due to strong revenues from royalties and development seat licenses.
BB also recently announced a divisional name change and the relaunch of its QNX brand to drive recognition. ‘BlackBerry IoT' division has been renamed as ‘QNX.' The decision to rebrand the QNX was driven by valuable feedback from customers, partners, employees and stakeholders. The QNX unit also recently announced several collaborations, including one with Microsoft.
Secure Communications revenues were driven by strength in the SecuSmart, UEM endpoint management and AtHoc critical events management solutions. Owing to the Cylance sale, BB announced that it is “standing down” from all previously provided guidance related to cybersecurity and the overall guidance for the company. It is now providing guidance only for the new Secure Communications division. It will provide revised guidance for fiscal 2026 for both the Secure Communications division and total revenues during the fourth quarter of fiscal 2025. For the Secure Communications division, revenues are expected to be in the range of $267-$271 million.
BlackBerry currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for BB’s fiscal 2025 EPS stands at 1 cent, improved from a loss of 2 cents in the last 60 days. BB’s earnings beat the Zacks Consensus Estimate in all the last four quarters, with the average earnings surprise being 131.3%.
Price and Consensus: BB
Autodesk: San Fransisco-based Autodesk develops model-based design, engineering and documentation software. The company serves customers in architecture, engineering and construction, product design and manufacturing, and digital media and entertainment industries.
Autodesk’s performance is being driven by new business growth and steady subscription renewal rates. Higher demand for its cloud-based products, mobile solutions and design suites are driving its revenues. The rapid adoption of BIM 360 products and the success of the maintenance of the subscription program bode well for the growth of the company. Autodesk’s top-line growth is expected to remain strong, thanks to solid demand for its AEC, AutoCAD and manufacturing product families. Autodesk’s subscription revenues (92.8% of total revenues) increased 10.88% year over year to $1.45 billion in the last reported quarter. Recurring revenues contributed 97% to Autodesk’s third-quarter fiscal 2025 revenues.
Autodesk projects fiscal 2025 revenues between $6.11 billion and $6.13 billion, indicating approximately 11% growth. Billings are estimated in the $5.9-$5.98 billion band, suggesting an increase of 14-15% year over year.
ADSK currently carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for ADSK's fiscal 2025 EPS stands at $8.31, improved from $8.24 in the last 60 days. ADSK's earnings beat the Zacks Consensus Estimate in all the last four quarters, with the average earnings surprise pegged at 5.65%.
Price and Consensus: ADSK
Simulations Plus: Simulations Plus is a leading-edge developer of simulation software for pharmaceutical, chemical and biotechnology companies across the globe. The simulation software is used for drug discovery, development, research and regulatory submissions.
Simulations Plus’ performance is gaining from solid momentum in the software business unit, owing to healthy traction witnessed for GastroPlus, MonolixSuite and ADMet Predictor.
SLP has been focused on supplementing its organic growth with strategic acquisitions. In June 2024, SLP made one of the most important acquisitions, Pro-ficiency, which doubled its total addressable market to $8 billion and expanded market opportunity. In the last reported quarter, the acquisition added $2.3 million to total revenues. SLP also remains focused on expanding cross-selling opportunities to drive top-line growth.
Service revenues are gaining from steady growth in QSP and CPP business units. The company also continues to expand its global footprint by increasing its presence in Europe, Asia and Latin America.
SLP currently carries a Zacks Rank #2. The Zacks Consensus Estimate for SLP’s fiscal 2025 EPS stands at $1.11, improved from 89 cents in the last 60 days. The company’s earnings have surpassed the Zacks Consensus Estimate in three of the trailing four quarters while missing once, with the average earnings surprise being 17.69%.
Price and Consensus: SLP
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