4 Software Stocks Poised to Top Estimates This Earnings Season

Vasundhara Sawalka

Fri, May 6, 2022, 5:45 AM 6 min read

Software stocks have been benefiting primarily from the ongoing digital transformation and solid demand for remote working and learning solutions. However, unfavourable forex and the negative impact of the suspension of all new sales and services in Russia due to the ongoing Russia-Ukraine conflict is expected to hurt top-line growth this earnings season.

The growing proliferation of SaaS-based services, the rapid migration to cloud platforms, increased spending by enterprises on software procurement, solid adoption of video-conferencing software and rising user penetration of online payment solutions are likely to have remained major tailwinds for software companies like Arlo Technologies ARLO, Blend Labs BLND, 2U TWOU and Docebo DCBO.

Performance of Some Software Players So Far

The software space has so far displayed its flexibility and earnings power through solid performances by tech giants like Microsoft MSFT, Cadence Design Systems and PayPal.

Microsoft’s third-quarter fiscal 2022 results benefited from the strong performance of Azure, Office 365, Dynamics, LinkedIn and Server products.

Cadence’s first-quarter, 2022 performance was driven by strength across all segments owing to healthy demand for the company’s diversified product portfolio. Solid adoption continues for Palladium and Protium platforms on the back of strong demand for growing hardware capacity.

Meanwhile, digital and contactless payments also gained significant traction amid the coronavirus outbreak, which has benefited Internet-based payment providers like PayPal.

Growing total payment volume (TPV) on increasing net new active accounts along with strong performance delivered by Venmo and merchant services contributed to the year-over-year top-line growth for PayPal in first-quarter 2022.

Software Stocks’ Prospects

The spike in the adoption of cloud-based services, the increasing proliferation of IoT and AR/VR devices, and the accelerated deployment of 5G are expected to have aided the performances of software stocks this earnings season.

Strong momentum across enterprise collaboration software, remote desktop tools, natural language processing tool, time tracking tools and cybersecurity software is expected to have hugely favored the software industry this earnings season.

Additionally, the growing proliferation of AI-powered voice recognition, telemedicine, learning management, infrastructure monitoring and business spend management software is expected to have benefited industry players in the quarter under review.

Further, enterprise workspace solutions, enterprise communication platforms, and online education portals, which have been high in demand throughout 2021 and so far in 2022, are likely to have contributed well.

How to Make the Right Pick?

With the presence of several industry participants, finding the right software stocks with the potential to beat on earnings can be daunting. Our proprietary methodology, however, makes this task fairly simple.

You could narrow down your choices by looking at stocks that have the perfect combination of two key elements: a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP is our proprietary methodology for determining stocks that have maximum chances of beating estimates in their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this favorable mix of ingredients, the odds of a positive earnings surprise are as high as 70%.

Best Bets

Given below are four software stocks that have a favorable combination to beat on earnings this reporting cycle:

San Francisco, CA-based Blend Labs, is scheduled to report first-quarter 2022 results on May 12. The company currently has an Earnings ESP of +1.92% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Blend Labs designs and develops software. The company offers a platform that focuses on mortgage lending, as well as provides an application experience for the home buying process for both buyers and lenders.

The Zacks Consensus Estimate for Blend Labs has been stable at a loss of 17 cents per share in the past 30 days.

Blend Labs, Inc. Price and EPS Surprise

Blend Labs, Inc. price-eps-surprise | Blend Labs, Inc. Quote

Carlsbad, CA-based Arlo Technologies is slated to report first-quarter 2022 results on May 10. The company presently has an Earnings ESP of +33.33% and a Zacks Rank #3.

Arlo Technologies’ product design, wireless connectivity, cloud infrastructure and cutting-edge AI capabilities focus on delivering a seamless, smart home experience. The company's cloud-based platform provides users with visibility, insight and a powerful means to help protect and connect in real time.

The Zacks Consensus Estimate has remained steady at a loss of 3 cents per share over the past 30 days.

Arlo Technologies, Inc. Price and EPS Surprise

Arlo Technologies, Inc. price-eps-surprise | Arlo Technologies, Inc. Quote

Landover, MD-based 2U is scheduled to report first-quarter 2022 results on May 10. The company currently has an Earnings ESP of +29.25% and a Zacks Rank #3.

2U is an education technology company. It is a provider of cloud-based software-as-a-service (SaaS) solutions that enable non-profit colleges and universities to deliver their education to students anywhere. It also offers a suite of technology-enabled services including content development, student acquisition, and state authorization services, as well as application advising, student and faculty support, and in-program student field placements.

The Zacks Consensus Estimate for loss has gone up by a penny to 35 cents per share in the past 60 days.

2U, Inc. Price and EPS Surprise

2U, Inc. price-eps-surprise | 2U, Inc. Quote

Toronto, Canada-based, Docebo has an Earnings ESP of +19.23% and a Zacks Rank of 3.

Docebo offers a cloud-based enterprise learning solution with AI superpowers. The solution was designed to produce learning experiences to train customers, partners and employees.

The company is scheduled to report first-quarter fiscal 2022 results on May 12. The consensus estimate for loss has gone down by 2 cents to 4 cents per share over the past 30 days.