3 Software Stocks to Watch as the Industry Gains Momentum

The Zacks Computer Software industry participants are positioned for solid growth as businesses around the globe accelerate their digital transformation efforts. The migration to cloud and the widespread adoption of Software-as-a-Service (SaaS) models continue to provide recurring revenue visibility for vendors while giving customers the scalability, flexibility and cost efficiency they increasingly demand.

At the same time, rapid advances in artificial intelligence (“AI”) and machine learning (“ML”) are reshaping the industry. The cutting-edge technologies are being swiftly integrated into enterprise and consumer applications. Software vendors are increasingly embedding generative AI into productivity tools, customer service platforms and enterprise resource planning systems. Per 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 Synopsys SNPS, The Descartes Systems Group Inc. DSGX and Simulations Plus, Inc. SLP.

However, the sector is not without challenges. Uncertainty prevailing over global macroeconomic conditions and stiff competition continues to be concerning for the participants. Despite these headwinds, the industry's evolving trends point to sustained momentum ahead.

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 a 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: 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. 

However, AI, Generative AI, in particular, is now becoming the defining force behind the next phase of software evolution. The continued investment in AI, big data and analytics, and the ongoing adoption of SaaS open up opportunities for these players. Going forward, 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. 

According to a report from Gartner, worldwide IT spending is now projected to reach $6.08 trillion in 2026, calling for an increase of 9.8% from 2025 levels. For 2025, the IT spending is expected to increase 10% year over year. The research firm added that spending on software and services is expected to be up 15.2% in 2026. 

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 powered by AI are becoming essential features of modern 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.

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 #68, which places it in the top 28% of more than 243 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 the 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 3.3% over this period compared with the S&P 500 and the broader sector’s increase of 16.3% and 26.9%, 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 29.28X compared with the S&P 500’s 23.59X. It is also above the sector’s forward-12-month P/E of 29.03X.

In the last five years, the industry has traded as high as 37.35X and as low as 22.71X, with the median being 31.32X, as the chart below shows.

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

Forward 12-Month P/E Ratio

3 Software Stocks to Boost Portfolio Returns

Simulations Plus: SLP develops advanced modeling and simulation software, as well as consulting services that assist every stage of drug discovery, development and regulatory review. The company solutions connect AI and ML with physiologically based pharmacokinetic modeling, quantitative systems pharmacology and toxicology, and population PK/PD methodologies, creating a unified platform for modern pharmaceutical research.

It recently reported fourth-quarter fiscal 2025 results, wherein revenues declined 6% year over year to $17.5 million due to reduced software revenues. The top line matched the consensus mark. Shifting market dynamics, cautious biopharma spending and a strategic pivot toward cloud, AI and integrated workflows are likely to shape the company’s next stage of growth. Despite revenue pressure in the fourth quarter, Simulations Plus met its revised fiscal 2025 guidance and delivered full-year growth in key performance metrics, highlighting the operational resilience and evolving product strategy. For fiscal 2025, Simulations Plus’ revenues grew 13% to $79.2 million.

For fiscal 2026, management expects low single-digit revenue growth at the mid-point of guidance, continued cautious spending across the customer base and potential upside if the macro environment improves.

SLP 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 SLP’s fiscal 2026 EPS has improved by 1 cent in the past 30 days to $1.04. 

Price and Consensus: SLP

Price and Consensus: SNPS

Price and Consensus: DSGX

 

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Synopsys, Inc. (SNPS): Free Stock Analysis Report
 
Simulations Plus, Inc. (SLP): Free Stock Analysis Report
 
The Descartes Systems Group Inc. (DSGX): Free Stock Analysis Report

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

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