3 Market-Leading Software Stocks That Might Lose Sheen In 2020
Zacks Investment Research | Dec 29, 2019 08:51PM ET
The year 2019 has been extremely volatile for the technology sector wherein the same grappled with several macro issues, such as the U.S.-China trade war and related tariffs, Brexit concerns and recession fears.
However, the software industry maintained its bull run, courtesy of the consistently strong digital transformation environment. The growing proliferation of cloud computing, predictive analysis, AI, Robotic Process Automation, self-driving vehicles, digital personal assistants and IoT coupled with strong enterprise spending is a major driver.
Growing adoption of software among numerous industries including retail, manufacturing, banking, financial services and insurance plus enterprises, academia, government organizations, healthcare and telecommunication is a key catalyst.
Notably, Invesco Dynamic Software ETF (PSJ) has surged 35.9% so far this year. Additionally, SPDR S&P Software & Services ETF (NYSE:XSW) and iShares North American Tech-Software ETF (IGV) have returned 37% and 35.5%, respectively.
We note that the primary mode of software deployment underwent a shift from legacy on-premise to cloud architecture with software-as-a-service (SaaS) becoming the preferred delivery mode.
The software players are modifying their business model to cope with the clients’ changing requirements. Subscription and term-licence based revenue pricing models became extremely popular and these are replacing the legacy upfront payment prototype. Increased revenue visibility and higher recurring revenues bode well for investors in the long haul.
However, due to this transition, top-line growth of these companies is under pressure in the near term as term license revenues include advance payments whereas subscription-based revenues are a bit delayed. Moreover, growing investments of software companies in cloud infrastructure pose a major threat to profitability.
Software Stocks to Avoid in 2020
While it will be wise to invest in software stocks at present, a caution is that not all have strong prospects.
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