3 Software Stocks to Watch in a Booming Industry

The software sector is positioned to benefit significantly from the global surge in digital transformation. Software now plays a critical role not only in running applications but also in managing infrastructure, becoming a central part of technological innovation. The software and application landscape is evolving rapidly, fueled by the shift towards cloud computing and flexible work models. Industry players like Cadence Design Systems (CDNS), Progress Software Corporation (PRGS), and BlackBerry (BB) are set to thrive in this evolving landscape. However, inflationary pressures and uncertain global macroeconomic conditions pose some challenges.

Industry Overview

The software industry encompasses a variety of sectors, including cloud computing, digital marketing, and cybersecurity. Companies within this space offer solutions ranging from customer relationship management to performance monitoring. Many also develop software's applications, such as simulation tools used by engineers and designers across various industries. The ongoing shift towards cloud platforms and the increasing importance of cybersecurity software have made this industry indispensable.

Key Areas of Growth:

• Cloud Computing: The demand for cloud solutions is growing rapidly due to the flexibility and cost-effectiveness they provide.

• Artificial Intelligence (AI) and Machine Learning (ML): These technologies are being integrated into software applications, enhancing functionality and security.

• Enterprise Software: Platforms for human capital management, tax purposes, and cybersecurity are in high demand.

3 Emerging Trends in the Software Industry

1. Increased Investment in Software

As enterprises continue to invest heavily in software's, opportunities for growth within the sector are expanding. Companies are focusing on big data and analytics, while software as a service (SaaS) continues to dominate, offering recurring revenue models and lower churn rates. Additionally, cloud computing offers a cost-efficient platform for application development, shortening deployment times compared to legacy systems.

2. Cloud Computing Gaining Traction

With the rise in cyber-attacks, there's an increasing demand for cybersecurity software that protects cloud platforms. Furthermore, cutting-edge technologies such as AI, ML, and the Internet of Things (IoT) are driving the need for more advanced software applications. As companies migrate to the cloud, the need for tools that ensure performance and scalability is also rising.

3. Higher IT Spending

According to Gartner, global IT spending is projected to reach $5.26 trillion in 2024, up from $5.06 trillion in 2023. This growth is primarily driven by increasing demand for compute power, driven by Generative AI and other advanced technologies. However, some segments, such as business process services, may see slower growth due to uncertain economic conditions.

Stock Performance in the Software Industry

The Zacks Computer Software industry has underperformed compared to both the broader technology sector and the S&P 500 over the past year. While the industry posted a 26.6% rally, this lagged behind the S&P 500's 32.4% gain and the technology sector's 38.6% rise.

Industry Valuation and Market Performance

Currently, the software industry is trading at a forward 12-month P/E ratio of 31.88X, higher than both the S&P 500 (22.08X) and the broader technology sector (26.78X). Over the past five years, the industry's P/E has ranged from 22.97X to 37.50X, with a median of 31.41X.

Top Software Stocks to Watch

Progress Software Corporation (PRGS)

Progress Software, headquartered in Burlington, MA, specializes in AI-powered software applications. The company continues to benefit from steady demand for its products and has enhanced its portfolio with advanced AI features. Progress Software's acquisition of ShareFile for $875 million strengthens its position in the software market, particularly in document-focused collaboration platforms.

BlackBerry (BB)

BlackBerry, known for its security software, recently posted positive quarterly results, driven by strong demand for its IoT and Cybersecurity solutions. The company's continued focus on cost-cutting and restructuring has also led to improvements in margins. BlackBerry is making significant progress in separating its IoT and Cybersecurity businesses, with a strategic review ongoing.

Cadence Design Systems (CDNS)

Cadence Design Systems is a leader in electronic design automation, and its latest hardware solutions are in demand by companies in the AI and automotive industries. Despite slowing growth in the verification business, Cadence is expected to see strong long-term growth, driven by transformative trends like Generative AI and hyperscale computing.