4 Stocks to Watch From the Thriving Business-Software Services Industry

Industry Overview - The Zacks Business-Software Services industry is experiencing growth due to increased demand for digital transformation, cloud migration, and automation of business processes [1][3] - The industry is characterized by companies providing application-specific software products and services, including finance, sales & marketing, human resources, and supply chain applications [3] Key Trends - Transition to Cloud: There is a robust demand for multi-cloud-enabled software solutions as companies shift from legacy systems to modern cloud infrastructure, incorporating AI for enhanced functionality [4] - Subscription Model Gains Traction: The industry is moving towards subscription and term license-based revenue models, which provide better revenue visibility but may impact short-term top-line growth [5] - Continuous M&A Activity: Companies are engaging in mergers and acquisitions to enhance their product offerings, although this may affect profitability due to increased investments [5] Financial Outlook - IT Spending Forecast: Worldwide IT spending is projected to increase by 7.5% to $5.26 trillion in 2024, with software spending expected to grow by 13.9% year-over-year [6] - Elevated Operating Expenses: Companies are investing heavily in R&D and sales to capture market share, which may strain margins in the near term [6] Industry Performance - Zacks Industry Rank: The industry holds a Zacks Industry Rank of 27, placing it in the top 11% of over 250 Zacks industries, indicating solid near-term prospects [8] - Underperformance Compared to Benchmarks: The industry has increased by 31.6% over the past year, underperforming the S&P 500 and broader sector, which rose by 39.6% and 33.9%, respectively [9] Valuation Metrics - Current Valuation: The industry's forward 12-month price-to-earnings ratio is 29.2, higher than the S&P 500's 21.57 and the sector's 25.99 [10] Company Highlights - MSCI: Benefits from strong demand for custom index modules and ESG solutions, with shares up 4% YTD and a consensus estimate for 2024 earnings at $14.79 per share [13][14] - Tyler Technologies: A leading provider for the public sector, benefiting from higher recurring revenues and a strong liquidity position, with shares up 39% YTD and a consensus estimate for 2024 earnings at $9.36 per share [15] - Cognizant: A professional services company with a robust product pipeline and strong partnerships, shares up 1.3% YTD with a consensus estimate for 2024 earnings at $4.62 per share [16][17] - Guidewire Software: Provides software solutions for insurers, gaining from cloud migration and strategic acquisitions, with shares up 67.1% YTD and a consensus estimate for fiscal 2025 earnings at $1.97 per share [18]