3 Software Stocks to Watch Closely in a Thriving Industry

The Zacks Computer Software industry participants are well-positioned to benefit from the accelerated digital transformation drive globally. The shift to cloud and the rise of SaaS (Software-as-a-Service) models offer recurring revenue visibility for vendors while offering flexibility and scalability for users. The industry growth is also being fueled by the proliferation of artificial intelligence (AI) and machine learning (ML). The cutting-edge technologies are being integrated into enterprise and consumer applications. Software vendors are increasingly embedding generative AI into productivity tools, customer service platforms, and enterprise resource planning systems.

According to a Grand View Research report, the global software market is expected to witness a CAGR of 11.3% from 2025 to 2030 and reach 1,397.31 billion. These trends augur well for industry participants, such as Microsoft Corporation MSFT, PTC Inc PTC and Manhattan Associates MANH. Uncertainty prevailing over global macroeconomic conditions and stiff competition continues to be concerning for the participants.   

Industry Description

The Zacks Computer Software industry includes companies that provide software applications related to AI, cloud computing, electronic design automation (primarily for semiconductor and electronics industries), digital media and marketing, customer relationship management, on-premises and cloud-based database management, accounting and tax purposes, human capital management, cybersecurity and application performance monitoring and cloud-based enterprise communications platform. Some companies develop and market simulation software (like computer-aided design or CAD, 3D modeling, product lifecycle management or PLM, data orchestration and experience creation), which engineers, designers and researchers use across various industries like architecture, engineering and construction, product design, manufacturing and digital media.

3 Trends Shaping the Future of the Software Industry

Higher Spending on AI and Cloud: The industry’s prospects are bright, given higher spending by enterprises on the latest software upgrades. The continued investment in AI, big data and analytics and the ongoing adoption of SaaS open up opportunities for these players. Going ahead, AI and ML tech are expected to be widely integrated into the software tools. This increasing demand for AI-powered software tools for automation, personalization, predictive analytics and decision-making augurs well. 

Further, cloud computing will continue to be a dominant force in the software industry, with businesses adopting hybrid and multi-cloud environments to meet their growing needs for flexibility and scalability. Cloud offers a flexible and cost-effective platform for developing and testing applications. The deployment time is also shorter compared with legacy systems. SaaS companies are expected to register strong top-line growth on a higher percentage of recurring revenues, subscription gross margin and a lower churn rate. 

Increased Cybersecurity Focus: The increasing need to secure cloud platforms amid growing cyberattacks and hacking incidents drives demand for cybersecurity software. As software becomes more interconnected, cloud-native and AI-powered, it is driving the demand for performance management monitoring tools that are scalable and suitable for cloud-based environments. Zero-trust architectures, identity and access management and real-time threat detection underpinned by AI are becoming key features of next-gen software platforms. 

Macroeconomic Headwinds a Concern: Global macroeconomic weakness and volatile supply chain dynamics are persistent concerns. Though tariff troubles are unlikely to affect the software industry directly, higher tariffs on hardware would lead to higher costs. This would affect the software pricing as well. Inflation could affect spending across small and medium-sized businesses globally. The uncertainty in business visibility could dent the industry’s performance in the near term. According to a report from Gartner, worldwide IT spending is now projected to reach $5.43 trillion in 2025, calling for an increase of 7.9% from 2024 levels. This is below its January forecast of 9.8% growth. The research firm added that spending on software and services will slow down due to this global uncertainty, but AI-related infrastructure spending will continue to increase. 

Zacks Industry Rank Indicates Bright Prospects

The Zacks Computer Software industry is housed within the broader Zacks Computer and Technology sector. It carries a Zacks Industry Rank #95, which places it in the top 39% of more than 245 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than two to one.

Before we present a few stocks you may want to consider for your portfolio, given their bright prospects, let us look at the industry’s recent stock-market performance and valuation picture.

Industry Underperforms the Sector and S&P 500

The Zacks Computer Software industry has underperformed the broader Zacks Computer and Technology sector and the S&P 500 Index in the past year.

The industry has gained 18.2% over this period compared with the S&P 500 and the broader sector’s increase of 18.8% and 30%, respectively.

One-Year Price Performance

 

Industry's Current Valuation

Based on the forward 12-month P/E, a commonly used multiple for valuing software companies, we see that the industry is currently trading at 33.11X compared with the S&P 500’s 23.24X. It is also above the sector’s forward-12-month P/E of 28.69X.

In the last five years, the industry has traded as high as 34.97X and as low as 27.4X, with the median being 31.71X, as the chart below shows.

Forward 12-Month Price-to-Earnings (P/E) Ratio

Forward 12-Month P/E Ratio

 

3 Software Stocks to Strengthen Portfolio

Manhattan Associates: Atlanta, GA-based Manhattan Associates provides supply chain execution and optimization solutions. It enables operational excellence through its warehouse, transportation, distributed order management, reverse logistics and trading partner management solutions, as well as its RFID, performance management and event management capabilities. 

MANH has a strong presence across verticals, including food distribution, life sciences, retail, grocery, industrial, technology, airlines, and third-party logistics. Driven by strong demand, MANH reported a 22% increase in cloud revenues for the second quarter of 2025. 70% of MANH’s new cloud bookings were generated from net new logos. New logos represented 35% of the current pipeline. Total revenues were up 2.7% year over year. RPO jumped 26% year over year and exceeded $2 billion at the quarter-end.

MANH expects bookings from net new logos to return to the standard one-third of the bookings over time. It is investing in sales and marketing to boost sales velocity and capture a large portion of its addressable market.

MANH currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. 

The Zacks Consensus Estimate for the company’s 2025 earnings is pegged at $4.81 per share, indicating year-over-year growth of 1.9%. The stock has plunged 20.1% in the past year. 

Price and Consensus: MANH

Price and Consensus: PTC

Price and Consensus: MSFT

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Microsoft Corporation (MSFT): Free Stock Analysis Report
 
Manhattan Associates, Inc. (MANH): Free Stock Analysis Report
 
PTC Inc. (PTC): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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