With organizations increasingly switching to cloud-based software solutions and other advanced services to scale up their business operations, the software industry is thriving. And because the industry is expected to grow and generate substantial profits this year and beyond, quality stocks in this space could be good bets now. However, because large-cap software stocks might have limited upside from their current price levels, we believe small-cap players Progress Software (NASDAQ:PRGS), QAD (NASDAQ:QADA), and Absolute Software (ABST) could be better picks now. Let’s discuss.The growing use of edge computing and artificial intelligence (AI), and increased IT spending to adopt these technologies to serve a bigger market efficiently, have been driving the growth of the business software and services industry. The rising utilization of cloud-based platforms has sparked demand for cloud-based software solutions and services from small- and medium-sized businesses. Also, the increasing use of sophisticated technologies, such as block chain, hybrid architecture and machine learning, are expected to contribute to the software industry’s growth. The software industry is expected to hit $9.29 billion between 2021 - 2025, growing at a CAGR of almost 3%.
While the large-cap players in the software space have grown significantly, capitalizing on the industry tailwinds, and their shares are trading at lofty valuations, small- and medium-sized companies still have plenty of room to grow. In fact, the Fed's decision to hold benchmark interest rates low has been benefiting small- and medium-sized enterprises by giving them more capacity to borrow and grow their operations.
Therefore, we believe fundamentally sound small-cap software stocks Progress Software Corporation (PRGS), QAD Inc. (QADA), and Absolute Software Corporation (ABST) could be solid bets now.