3 Software Stocks to Watch as Industry Witnesses Strong Tailwinds

Software is ubiquitous and has become the focal point of technological innovation. Apart from running devices and applications, its usage has been extended to managing infrastructure. The Zacks Computer Software industry participants are well-positioned to benefit from the accelerated digital transformation drive across the globe. The shift to cloud and the rise of SaaS (Software-as-a-Service) models offers recurring revenue visibility for vendors 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 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 like Intuit INTU, Adobe ADBE and Pegasystems. PEGA. 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 software as a service or SaaS opens up opportunities for these players. Going ahead, AI and ML tech are expected to be widely integrated into the software tools. 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. Per a report from Gartner, worldwide IT spending is now projected to reach $5.61 trillion in 2025, calling for an increase of 9.8% from 2024 levels. Software is expected to grow 14.2% in 2025, mainly due to generative AI hardware upgrades, according to the report. 

Increased Cybersecurity Focus: The increasing need to secure cloud platforms amid growing cyberattacks and hacking incidents drives demand for cybersecurity software. Also, the rapid development of cutting-edge technologies like AI, ML and the Internet of Things is leading to increased usage of advanced software applications. Enterprises are focused on rapid migration to the cloud and DevOps technologies to achieve scalability and agility for software development and IT operations. This helps deliver a flawless digital experience to clients. The trend brought immense value to application and infrastructure performance monitoring. It is driving the demand for performance management monitoring tools that are scalable and suitable for cloud-based environments.

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 increases in costs. This would affect the pricing of software 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 #30, which places it in the top 12% 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 Outperforms the Sector and S&P 500

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

The industry has gained 11.5% over this period compared with the S&P 500 and the broader sector’s increase of 9.2% and 6.7%, 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 32.97X compared with the S&P 500’s 21.87X. It is also above the sector’s forward-12-month P/E of 26.3X.

In the last five years, the industry has traded as high as 37.52X and as low as 22.79X, with the median being 31.42X, 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

Intuit: INTU is a business and financial software company that develops and sells financial, accounting and tax preparation software and related services for small businesses, consumers and accounting professionals globally.

INTU’s strategy of shifting its business to a cloud-based subscription model will help generate stable revenues over the long run. The introduction of Intuit Assist, a generative-AI-powered financial assistant, underscores INTU’s AI push. Intuit is embedding AI across key products like TurboTax, QuickBooks, Credit Karma and Mailchimp.

Intuit’s third-quarter fiscal 2025 revenues of $7.75 billion beat the consensus mark by 2.78% and increased 15.1% year over year. QuickBooks Online Accounting revenues were up 21% year over year to $1.04 billion, driven by higher effective prices, customer growth and mix-shift. Online Services revenues, which include payroll, payments, time tracking and capital, jumped 18% year over year to $1.05 billion, driven by growth in money and payroll offerings. The Credit Karma business contributed $579 million to Intuit’s fiscal third-quarter total revenues, which increased 30.7% year over year, driven by strength in credit cards, personal loans, and auto insurance.

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

The Zacks Consensus estimate for the company’s fiscal 2025 earnings is pegged at $20.06 per share, indicating year-over-year growth of 18.4%. The stock has gained 25.4% in the past year. 

Price and Consensus: INTU

Price and Consensus: ADBE

Price and Consensus: PEGA

 

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Intuit Inc. (INTU): Free Stock Analysis Report
 
Adobe Inc. (ADBE): Free Stock Analysis Report
 
Pegasystems Inc. (PEGA): Free Stock Analysis Report

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

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