Why Is The Software Market So Hot Right Now?

Software, the programs that interface between human and machine to increase the efficiency of everyday operation and communication, is taking over our lives. For one thing, children these days lead much more digitized lives than we ever did, and for another, we do a lot of things on our mobile phones than our parents ever did on their desktops. Suddenly, it’s cooler to create a Facebook (NASDAQ:FB) post than personally talk to people about what’s going on with us.

Exponential growth in the number of machines: The really strong growth in the number of machines didn’t really start until smartphones. But once it was discovered that basic communication devices can be programed to do much more, they became far more coveted. Smartphones are getting smarter by the day with companies even offering personal digital assistants, but consumers today have also incorporated other smart devices like wearables, connected home products and the Internet of Things.

So everyday things that incorporate a chip can now collect and transfer information based on programs written for them. This has led to an expansion in the definition of machines to anything that can hold a chip, and that’s the scope of software for the consumer segment.

Exponential growth in data: In the past, information was shared in a format that didn’t easily lend itself to management, organization and analytics. But with a large chunk of communication now happening through electronic devices, it becomes possible to collect, store and evaluate the data to generate information for businesses, healthcare providers and consumers.

IDC estimates that the world will create 180 zettabytes of this data (or 180 trillion gigabytes) in 2025, up from less than 10 zettabytes in 2015. What’s more, it expects data monetization (the transformation of raw data to actionable information that is then sold for a price) to become a major revenue generator by 2017-end.

Consequently, it estimates that the market for big data and business analytics will grow at a compound annual growth rate (CAGR) of 11.7% from $130.1 billion in 2016 to more than $203 billion in 2020. Software programs work on the data at every stage and it’s again software that delivers the data where required.

Cloud computing and virtualization: Both companies and individuals are getting increasingly comfortable with highly scalable shared infrastructure called the cloud. While a lot of work still remains to be done, the cloud has opened up huge possibilities for software companies, whether providing the infrastructure (IaaS), or hosting software (PaaS) or providing applications for specific functions (SaaS).

Increased virtualization of workloads and computing resources, employing both public and hybrid cloud environments indicate that the growth trend will continue. Another point to note is the relatively low penetration of the cloud in the SMB segment, which is what prompted companies like Facebook, Twitter, Google (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT) to step up their game.

Security: The growing digital assets of companies mean increasing demand for security software. Although the market hasn’t done exceptionally well in the last year, the secular growth prospects are obvious. Particularly considering the number of security attacks in recent times.

Digitization of entertainment: With companies like Netflix (NASDAQ:NFLX), Amazon, Google’s YouTube, Twitter and Facebook increasingly bringing us favorite shows, programs, movies and games on our digital devices, a growing number of people -- mainly millennials and Generation Z -- are moving away from TV. This is also broadening the market for software providers.

Need for automation: Another driver is increasing automation, not only of routine mental jobs like customer care that can be handled by chatbots, but also on the factory floor where robots are taking over many routine functions. These bots work on the basis of their software programming and also increasingly incorporate artificial intelligence.

As a result, a recent survey by Morgan Stanley (NYSE:MS) of Chief Information Officers (people who determine and disburse IT budgets across industries) shows that the group expects external software spending to increase more than 4.2% this year beating IT budget growth rates of 3.5%.

Given this backdrop, it isn’t hard to find stocks in the Zacks-categorized Computer-Software industry, which is in the top 41% of the 256 industries covered by Zacks. So here are a few you may want to put in the kitty, selected on the basis of their Buy ranks:

Red Hat. (NYSE:RHT)

Red Hat Inc., a Zacks Rank #1 (Strong Buy), is a leading developer and provider of open source software and services, including the Red Hat Linux operating system. Unlike proprietary software, open source software has publicly available source code and can be copied, modified and distributed with minimal restrictions. The web site, REDHAT.COM, is a leading online source of information and news about open source software and one of the largest online communities of open source software users and developers.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Last four-quarter average earnings surprise is 11.1%.

Revenue expected to grow 16.1% in fiscal 2018 and 14.1% in fiscal 2019 ending February.

Earnings expected to grow 19.1% in fiscal 2018 and 19.6% in fiscal 2019.

Verint Systems Inc. (NASDAQ:VRNT)

Verint Systems Inc. is a leading provider of analytic solutions for communications interception, digital video security and surveillance, and enterprise business intelligence.

Zacks Rank #1.

Last four-quarter average earnings surprise is 36.7%.

Revenue expected to grow 7.4% in fiscal 2018 and 7.9% in fiscal 2019 ending January.

Earnings expected to grow 11.7% in fiscal 2018 and 23.3% in fiscal 2019.

Exa Corporation (NASDAQ:EXA)

Exa Corporation develops, markets, sells, and supports software products, and provides professional services for simulation-driven design. The Company offers PowerFLOW simulation engine, automatic fluid grid generation engine, mesh preparation, advanced simulation analysis, and rapid design geometry modification products.

The company's software suite includes PowerDELTA, PowerCASE, PowerCLAY, PowerTHERM, PowerCOOL, PowerINSIGHT, PowerVIZ and PowerACOUSTICS. Its products are used in various applications, including aerodynamics, thermal management, aeroacoustics, climate control, and powertrain. Exa Corporation is headquartered in Burlington, Massachusetts.

Zacks Rank #1.

Last four-quarter average earnings surprise is 91.7%.

Revenue expected to grow 5.7% in fiscal 2018 and 9.4% in fiscal 2019 ending January.

The company is not expected to make a profit, but losses are expected to come down dramatically during this time.

Progress Software Corporation (NASDAQ:PRGS)

Progress Software Corporation is a global supplier of application development, deployment and management technology, Internet and intranet enabling technologies and support services to business, industry and government. The company's software products and services address these challenges by increasing developer productivity, by delivering applications with a low total cost of ownership and by enhancing performance and availability. The company's products include application servers, databases, development tools and application management products.

Zacks Rank #1.

Last four-quarter average earnings surprise is 18.5%.

The company is expected to generate positive revenue growth by fiscal 2018 ending November.

Earnings estimates are trending up.

Adobe Systems Inc. (NASDAQ:ADBE)

Adobe Systems is a provider of graphic design, publishing, and imaging software for Web and print production. It offers a market-leading line of application software products for creating, distributing and managing information of all types. The company licenses its industry-standard technologies to major hardware manufacturers, software developers, and service providers. It also offers integrated software solutions to businesses of all sizes.

Zacks Rank #2 (Buy).

Last four-quarter average earnings surprise is 8.1%.

Revenue expected to grow 22.9% in fiscal 2017 and 19.4% in fiscal 2018 ending November.

Earnings expected to grow 31.6% in fiscal 2018 and 25.5% in fiscal 2019.

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