The Zacks Business-Software Services industry is benefiting from the heightened demand for digital transformation and the ongoing shift to the cloud. The growing automation of business processes across multiple industries and rapidly increasing enterprise data volumes are also driving the demand for business software and services. The growing demand for solutions that support hybrid operating environments is noteworthy. Increasingly sophisticated cyber-attacks are driving cybersecurity application demand. Robust IT spending on software is an upside for industry participants. Industry participants like Cognizant Technology Solutions CTSH, Tyler Technologies TYL, Guidewire Software GWRE and Q2 Holdings QTWO are gaining from these trends.
However, heightened geopolitical risks and still-high interest rates are major headwinds. Elevated operating expenses related to hiring new employees, and sales and marketing strategies to capture more market share are likely to strain margins in the near term.
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 resources and supply chain, among others. The industry consists of 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 companies provide investment-decision support tools. Manufacturing, retail, banking, insurance, telecommunication, healthcare and public sectors are the primary end markets for industry participants.
5 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) into 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 on-premise ones, expanding content accessibility. Enhanced interoperability features provide customers with differentiation and efficiency.
Subscription Model Gains 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. However, increasing investments in digital offerings and acquisitions might erode the industry’s profitability in the upcoming period.
Optimistic IT Spending Forecast: The latest forecast for worldwide IT spending by Gartner is an upside for industry participants. The worldwide IT spending is anticipated to increase 9.3% to $5.74 trillion in 2025. The research firm expects worldwide spending on software to grow 14% year over year in 2025.
Elevated Operating Expenses to Hurt Profitability: To survive in the highly competitive business software market, each player is continuously investing in broadening its capabilities. The players in the space are aggressively investing in research and development to enhance their product portfolios. Moreover, companies are investing heavily to boost their sales and marketing capabilities, particularly by increasing their sales force. Elevated operating expenses to capture more market share are likely to dent margins 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 #86, which places it in the top 35% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, indicates solid 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.
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 Underperforms Sector but Outperforms S&P 500
The Zacks Business-Software Services industry has underperformed the broader Zacks Computer and Technology sector’s performance over the past year but outperformed the S&P 500 index.
The industry has soared 28.3% during this period, while the broader sector and the S&P 500 have risen 35.8% and 26.2%, respectively.
One-Year Price Performance
Industry's Current Valuation
Comparing the industry with the S&P 500 composite and the 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 29.4 is higher than the S&P 500’s 25.08X but lower than the sector’s 32.02X.
Over the last five years, the industry has traded as high as 32.70X and as low as 17.52X and recorded a median of 24.15X, as the charts below show.
F12M Price-to-Earnings Ratio (Industry vs. S&P 500)
F12M Price-to-Earnings Ratio (Industry vs. Sector)
4 Business-Software Services Stocks to Watch
Q2 Holdings: It provides cloud-based digital banking and lending solutions, empowering financial institutions with secure, scalable platforms for enhanced customer engagement, streamlined operations and innovative financial service delivery.
Q2 Holdings is driving growth through its robust digital banking platform, catering to financial institutions' growing need for advanced fintech solutions. Expansion in the customer base, continuous innovation in AI-driven tools and the rising demand for personalized financial services are bolstering its market position and long-term growth potential.
Shares of this Zacks Rank #2 (Buy) company have soared 131.9% in 2024. The Zacks Consensus Estimate for 2025 earnings has moved north to $2.11 per share from $2.01 in the past 60 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: QTWO
Cognizant: It is a leading professional services company. Its services include digital services and solutions, consulting, application development, systems integration, application testing, application maintenance, infrastructure services and business process services.
Cognizant is benefiting from a robust product pipeline that includes a favorable mix of new opportunities. Acquisitions are contributing to top-line growth. An improved attrition rate bodes well for Cognizant. Continued strength among logistics, utility, travel and hospitality customers is a plus. Its strong momentum in securing large deals is a major upside. An expanding clientele due to growing partnerships with companies like Microsoft, NVIDIA, Shopify, Alphabet, McCormick & Company and Telstra has been a tailwind. It expects the NextGen initiative to help expand margins in the long haul.
CTSH, which currently carries a Zacks Rank #3 (Hold), has risen 1.8% last year. The consensus mark for 2025 earnings has remained unchanged at $4.97 per share in the past 60 days.
Price and Consensus: CTSH
Tyler Technologies: This Zacks Rank #3 company is a leading provider of integrated information management solutions and services to the public sector. Tyler serves its customers both on-premise and in the cloud.
Tyler is benefiting from higher recurring revenues, post-acquisition contributions of NIC and the rebound of market and sales activities to pre-COVID-19 levels. The public sector’s ongoing transition from on-premise and outdated systems to scalable cloud-based systems is an upside. The growing hybrid working trend is also driving the demand for its connectivity and cloud services. Its strong liquidity position is helping it pursue acquisitions, which are expected to continue to drive growth.
Shares of this Plano, TX-based company have soared 39% YTD. The Zacks Consensus Estimate for 2025 earnings has been revised downward by 16 cents to $10.89 per share over the past 30 days.
Price and Consensus: TYL
Guidewire Software: This San Mateo, CA-based company is a provider of software solutions for property and casualty insurers. The company's solutions aid in reducing risks via increased productivity, bringing speed to market, digital engagement and simplifying the IT infrastructure.
Guidewire is gaining from solid Tier-1 deal volume and increasing migration activity, especially in the Asia-Pacific. Guidewire Cloud continued to gain momentum with nine deal wins in the first quarter of fiscal 2025. Margin performance is powered by cloud infrastructure efficiency. A solid balance sheet and a robust SI partner ecosystem are major tailwinds. The company is likely to benefit as insurers modernize their legacy mainframe systems and replace previously modernized on-premise systems. Also, GWRE’s share repurchase program is noteworthy. Strategic acquisitions and collaborations, along with a less competitive market and a strong liquidity position, bode well.
Shares of this Zacks Rank #3 company have risen 54.6% in 2024. The consensus mark for fiscal 2025 earnings is pegged at $2.06 per share, revised 8 cents upward over the past 30 days.
Price and Consensus: GWRE
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