Uncertainty prevailing over global macroeconomic conditions continues to be concerning for the Zacks Computer Software industry. Nonetheless, these participants are well-positioned to benefit from the accelerated digital transformation drive across the globe. Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage has been extended to managing infrastructure. The industry is primarily gaining from the ongoing cloud transition and rapid proliferation of AI and machine learning. The role of software is constantly evolving. These trends augur well for industry participants like Microsoft Corporation MSFT, Open Text Corporation OTEX and ACI Worldwide, Inc. ACIW.
Industry Description
The Zacks Computer Software industry includes companies that provide software applications related to artificial intelligence (AI) 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
Higher Spending on AI and Cloud: The industry’s prospects are bright, given higher spending by enterprises on the latest software upgrades. The continued investment in AI, big data and analytics and the ongoing adoption of software as a service or SaaS opens up opportunities for these players. Going ahead, AI and machine learning tech are expected to be widely integrated into the software tools. Increasing demand for AI-powered software tools for automation, personalization, predictive analytics, and decision-making augurs well.
Further, cloud computing will continue to be a dominant force in the software industry, with businesses adopting hybrid and multi-cloud environments to meet their growing needs for flexibility and scalability. 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. Per a report from Gartner, worldwide IT spending is now projected to reach $5.61 trillion in 2025, calling for an increase of 9.8% from 2024 levels. Software is expected to grow 14.2% in 2025, mainly due to generative AI hardware upgrades, added the report.
Increased Cybersecurity Focus: The increasing need to secure cloud platforms amid growing cyber-attacks and hacking incidents drives demand for cybersecurity 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 performance management monitoring tools that are scalable and suitable for cloud-based environments.
Macroeconomic Headwinds a Concern: Global macroeconomic weakness and volatile supply chain dynamics are persistent concerns. Though tariff troubles are unlikely to affect the software industry directly, higher tariffs on hardware would lead to increases in costs. This would affect the pricing of software as well. Inflation 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Computer Software industry is housed within the broader Zacks Computer And Technology sector. It carries a Zacks Industry Rank #135, which places it in the bottom 45% of more than 246 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates dull 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, given their bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.
Industry Underperforms the Sector and S&P 500
The Zacks Computer Software industry underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.
The industry has declined 2% over this period compared with the S&P 500 and the broader sector’s increase of 10.5% and 10.4%, 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 28.19X compared with the S&P 500’s 20.92X. It is also above the sector’s forward-12-month P/E of 24.25X.
In the last five years, the industry has traded as high as 37.27X and as low as 22.81X, with the median being 31.21X, as the chart below shows.
Forward 12-Month Price-to-Earnings (P/E) Ratio
3 Software Stocks to Strengthen Portfolio
ACI Worldwide: The company offers software solutions that power intelligent payment orchestration in real time for banks, merchants and billers. ACIW powers electronic payments for more than 6,000 organizations globally. This includes 1,000 of the largest financial institutions and intermediaries that rely on ACIW to execute billions of transactions per day.
ACIW reported 10% increases in revenues for 2024 driven by strength across Bank, Merchant and Biller segments. ACIW’s focus on next-generation modernization and software, particularly the payments hub product, bodes well.
For 2024, adjusted EBITDA of $466 million was up 18%, while cash flow from operating activities was $359 million, up 113% from 2023. For 2025, ACIW expects revenues to grow in the range of 7% to 9% on a constant currency basis.
ACIW sports a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company’s 2025 earnings are pegged at $2.73 per share, indicating year-over-year growth of 3.4%. The stock has gained 65.9% in the past year.
Price and Consensus: ACIW
Open Text Corporation: Open Text is one of the leading Information Management software and services companies, boasting a wide-ranging suite of Business Clouds, Business AI and Business Technology solutions that empower businesses to navigate intricate issues.
OTEX is focusing on business opportunities in cloud, security and AI. OpenText has been pivoting towards cloud-based solutions as enterprises increasingly adopt cloud computing. The company’s next-generation platform, Titanium X (Cloud Editions 25.2) is on track for delivery in the fiscal fourth quarter of 2025.
OTEX currently carries a Zacks Rank #2 (Buy). The company’s fiscal 2025 earnings are pegged at $3.86 per share, unchanged in the past seven days.
Price and Consensus: OTEX
Microsoft: The company is one of the largest broad-based technology providers in the world. The company dominates the PC software market, with more than 73% of the market share for desktop operating systems.
Microsoft is benefiting from steady growth in AI business and Copilot adoption amid decelerating growth in the Azure cloud infrastructure unit. Productivity and Business Processes revenues continue to rise due to the strong adoption of Office 365 Commercial solutions. ARPU growth is driven by E5 as well as M365 Copilot. Intelligent Cloud revenues are gaining from growth in Azure AI services and a rise in AI Copilot business. Non-AI growth trends are experiencing sluggishness due to go-to-market execution challenges.
However, Microsoft Office's declining commercial licensing due to the continued customer shift to cloud offerings is an overhang. Higher operating expenses and spending on Azure amid stiff competition in the cloud space from Google Cloud and Amazon Web Services remain concerns.
MSFT carries a Zacks Rank #3 (Hold). The company’s fiscal 2025 earnings are pegged at $13.08 per share, indicating year-over-year growth of 10.9%. The long-term growth rate is pegged at 14.4%.
Price and Consensus: MSFT
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