By: Awantika Poddar
Microsoft Corporation MSFT is a dominant name in the software industry. Its Windows operating system is installed in the majority of computers globally. Through Azure cloud services the company is also one of the leading providers of cloud infrastructure and service
The rapid evolution of technology over the years has radically changed the way organizations conduct their businesses and people connect with each other, leading to a tectonic shift in the dynamics of the software industry.
Software has become the focal point of technological innovation. The last few years have witnessed a series of breakthroughs in cloud computing, predictive analysis, artificial intelligence (AI), self-driving vehicles, digital personal assistants and Internet of Things (IoT), consequently setting the stage for strong growth in the software industry.
Moreover, continued enterprise investment in big data and analytics along with the ongoing adoption of Software-as-a-Service (SaaS) presents significant growth opportunity for industry players.
IDC 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.Microsoft, based on its portfolio strength, is well-poised to grab this growth opportunity. With its sustained focus on innovation, the world’s largest software company now has a market capitalization of over $839.28 billion.
Office 365, Azure Driving Microsoft
Notably, Microsoft shares have outperformed the industry in a year’s time. The stock has returned 47.8%, outperforming the industry’s growth of 35.5%.
Azure’s expanding clientele, strong adoption of Office 365 along with Microsoft’s unique position as a hybrid cloud solution provider have been the key catalysts.
Microsoft’s strategic growth investments in cloud business and AI are likely to help the company become a dominant hybrid cloud provider, going forward.Further, the company’s strategic initiatives to enter the augmented reality (AR) and virtual reality (VR) market are other positives.
Microsoft has a dominant position in the desktop PC market, with its operating systems being used in the majority of PCs worldwide. Windows 10 is now active on more than 700 million devices, with continued deployments across enterprises.
Preliminary data released by Gartner displayed that PC shipments in the second quarter were up 1.4% year over year to 62.1 million units. The IDC report stated that PC shipments increased 2.7% from the year-ago period to approximately 62.3 million units, surpassing its expectation of 0.3% increase.
Moreover, continuing consumer shift to Windows-as-a-serviceis a strong growth driver.
Further, acquisitions like PlayFab and GitHub expand Microsoft’s total addressable market (TAM) and penetration.
Microsoft has also been consistently surpassing the Zacks Consensus Estimate. The company beat the Zacks Consensus Estimate in the trailing four quarters with an average positive earnings surprise of 11.4%. In the last reported quarter, the company’s top and bottom lines surpassed the respective estimates.
We believe that this Zacks Rank #1 (Strong Buy) stock has huge growth potential,especially considering the positive earnings outlook and strong fundamentals of the Azure and Windows operating system which appear assertive enough to drive its stock higher in the near term.
3 Other Software Stocks with Solid Potential
However, Microsoft is not the only stock in the software industry that has attractive growth prospects. We use the Zacks Growth Style Score to identify these stocks.
Our Growth Style Score condenses all the essential metrics from the company’s financial statements to achieve a true sense of quality and sustainability of its growth. Our research shows that stocks with Growth Style Scores of A or B when combined with a Zacks Rank #1 or 2 (Buy) offer the best investment opportunities in the growth investing space.
Apart from this, all the stocks listed below have delivered positive average earnings surprises over the preceding four quarters.
CommVault Systems, Inc. CVLT
CommVault provides Unified Data Management solutions for high-performance data protection, universal availability and simplified management of data on complex storage networks. As of Mar 31, 2018, the company provided data and information management software service to more than 26,000 registered customers.
This company has delivered positive earnings surprise in one of the four trailing quarters, recording an average surprise of 1.3%. It also has a Growth Style Score of A. Apart from this, CommVault has a long-term EPS growth rate of 15.8% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Cadence Design Systems, Inc. CDNS
Based in San Jose, CA, Cadence Design offers products and tools that help customers to design electronic products. Through System Design Enablement (“SDE”) strategy the company offers software, hardware, services and reusable IC design blocks (IPs) to electronic systems and semiconductor customers.
With a Growth Style Score of A and a Zacks Rank #2, Cadence Design has reported positive earnings surprises in three of the trailing four quarters, with an average beat of 5.2%. Moreover, the stock has long-term earnings EPS growth rate of 12%.
Progress Software Corporation PRGS
Progress Software offers the leading platform for developing and deploying mission-critical business applications. It provides leading data connectivity to all sources, and award-winning predictive analytics that brings the power of machine learning to any organization. Headquartered in Ireland, the company sells products primarily in North America and Europe, as well as in other markets, including Australia, Israel and China
Not only does this stock carry a Zacks Rank #2, it also has an attractive Growth Style Score of A. Further, the company has a trailing four-quarter positive average earnings surprise of 7.9%.
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