Technology stocks are anticipated to see lackluster first-quarter 2019 results primarily due to softness in the semiconductor space. Per the latest Earnings Outlook, the sector’s earnings are expected to decline 8.3% year over year despite 2.7% growth in revenues.
Semiconductors, which are the building blocks of most emerging technologies like AI and IoT, have been negatively impacted by falling memory prices (both DRAM and NAND) as well as lower demand from smartphone OEMs. Tariffs resulting from the U.S.-China trade war have also hurt growth.
However, the sluggish performance from semiconductors is expected to be negated by rapidly growing software stocks.
Notably, iShares Expanded Tech-Software Sector ETF (IGV) has returned 26.2% on a year-to-date basis. Moreover, Invesco Dynamic Software ETF (PSJ) has gained 27.7% over the same period.
Software stocks are benefiting from continued strong digital transformation environment. The breakthroughs in cloud computing, predictive analysis, AI, self-driving vehicles, digital personal assistants, IoT coupled with strong enterprise spending bode well for software stocks.
Per Gartner, IT spending in 2019 will be driven by strong growth (8.5%) in enterprise software spending. The robust outlook bodes well for software providers.
Strong result from Adobe ADBE reflected this trend. Adobe’s subscription revenues jumped 28.5% on a year-over-year basis to $2.3 billion (88.6% of its total revenues) in first-quarter fiscal 2019.
Moreover, the ongoing adoption of cloud is a key catalyst. This was particularly evident from Microsoft’s MSFT latest quarterly result. Commercial cloud revenues were $9.6 billion, surging 41% year over year (43% at cc). Moreover, Azure revenues soared 73% year over year (up 75% at cc).
Software-as-a-Service (SaaS) companies do register strong top-line growth due to a higher percentage of recurring revenues. Notably, Citirx Systems CTXS SaaS revenues were $85 million (60% of total subscription business), up 43% year over year in the recently reported first-quarter 2019.
The emergence of hybrid cloud platform is also a major growth driver.
Further, the increasing need to secure cloud platforms, amid growing incidents of cyber attacks and hacking, is driving demand for cyber security software. Additionally, strong demand for application and infrastructure performance monitoring tools are likely to drive growth for software stocks.
How to Make the Right Pick?
With the existence of a number of industry players, finding the right software stocks that have the potential to beat earnings can be a daunting task. Our proprietary methodology, however, makes it fairly simple for investors.
You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Earnings ESP is our proprietary methodology for determining stocks that have the best chance to surprise with their next earnings announcement. It is the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Given below are four software stocks that have the right combination of elements to post an earnings beat this season:
Holon, Israel-based Sapiens International SPNS has an Earnings ESP of +6.67% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.
The company is scheduled to report first-quarter 2019 results on May 6.
Sapiens beat the Zacks Consensus Estimate in the last four quarters, the positive average earnings surprise being 17%. The Zacks Consensus Estimate for earnings has remained steady at 15 cents over the past 30 days.
Price & Consensus: SPNS
Mountain View, CA-based Intuit INTU has a Zacks Rank #2 and an Earnings ESP of +1.49%. The company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the positive average earnings surprise being 55.6%.
Intuit is set to report third-quarter fiscal 2019 results on May 23. The consensus mark for earnings has increased by a couple of cents to $5.42 over the past 30 days.
Price & Consensus: INTU
Another Mountain View, CA-based company Synopsis SNPS has an Earnings ESP of +1.15% and a Zacks Rank #2.
The company surpassed the Zacks Consensus Estimate in two of the trailing four quarters, the positive average earnings surprise being 3.7%. The consensus mark for earnings has increased by a penny to $1.09 over the past 30 days.
Synopsis is expected to report second-quarter fiscal 2019 results on May 22.
Price & Consensus: SNPS
Canada-based Open Text Corporation OTEX has a Zacks Rank #3 and an Earnings ESP of +2.98%. The company beat the Zacks Consensus Estimate in three of the trailing four quarters, the positive average earnings surprise being 1.2%.
Open Text is set to report third-quarter fiscal 2019 results on May 1. The consensus estimate for earnings has remained unchanged at 59 cents over the past month.
Price & Consensus: OTEX
Zacks' Top 10 Stocks for 2019
In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?
Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.
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Open Text Corporation (OTEX) : Free Stock Analysis Report
Adobe Systems Incorporated (ADBE) : Free Stock Analysis Report
Synopsys, Inc. (SNPS) : Free Stock Analysis Report
Intuit Inc. (INTU) : Free Stock Analysis Report
Microsoft Corporation (MSFT) : Free Stock Analysis Report
Citrix Systems, Inc. (CTXS) : Free Stock Analysis Report
Sapiens International Corporation N.V. (SPNS) : Free Stock Analysis Report
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