The prices of most software stocks have soared over the past year as the remote lifestyle requirements forced individuals and businesses to depend on software, particularly  software that facilitates cloud-based services. Investors’ interest in the software stocks is evidenced by the SPDR S&P Software & Services ETF’s (XSW) 53.8% returns over the past year versus the tech-heavy Nasdaq’s 44.8% returns.

The recent tech sell-off, which was triggered by concerns over rising inflation, has affected many software stocks, but the majority of them should recover in the near term given the growing demand for software by almost every industry. According to Grand View Research, the global business software and services market is expected to grow at an 11.3% CAGR  between 2021 – 2028.

Even though the overall software industry’s future looks promising, not all stocks are destined to benefit from the industry tailwinds. So, we think it  could be wise to scoop up the shares of SAP SE (SAP) and SS&C Technologies Holdings, Inc. (SSNC) based on their solid financials and continuing  technical innovations. Conversely, we think it is better to avoid Bill.com Holdings, Inc. (BILL) and Five9, Inc. (FIVN) because their near-term prospects look bleak.

Click here to check out our Software Industry Report for 2021

Stocks to Buy:

SAP SE (SAP)

Headquartered in Walldorf, Germany, SAP is a software application company that operates  through four segments: Applications, Technology & Support, Concur, Qualtrics, and Services. Its offerings include SAP S/4HANA, SAP Integrated Business Planning, SAP Intelligent Asset Management, and SAP SuccessFactors Human Experience Management Suite.

On May 19, the  company announced  that Deichmann, WAGO Kontakttechnik GmbH & Co., KG, Wacker Chemie, and Interroll Group have selected its SAP Customer Experience products to gain a 360-degree view of their customers. This is expected to increase SAP’s sales. On May 18,  SAP announced that Arapahoe County, which is part of the Denver metropolitan area, has completed its migration to SAP S/4HANA. This reflects the increasing demand for the company’s solutions.

SAP’s cloud revenue increased 7% year-over-year to $2.14 billion for the first quarter ended March 31. Its non-IFRS operating profit grew 17% year-over-year to $1.74 billion, while its non-IFRS profit after tax increased 70% year-over-year to $1.72 billion. The company’s non-IFRS EPS increased 63% year-over-year to $1.40.

Analysts expect SAP’s EPS to increase 8.8% year-over-year to $1.49 for the current quarter ending June 30. It surpassed consensus EPS estimates in each of the trailing four quarters. Its revenue is expected to be $8.29 billion for the quarter ending September 30,  which represents a 6.3% year-over-year rise. The stock has soared nearly 17% over the past year to close yesterday’s trading session at $137.10.

SAP’s POWR Ratings reflect this promising outlook. The company has an overall A rating, which translates to Strong Buy in our proprietary ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock has an A grade for Sentiment, and a B grade for Stability, Value and Quality. Within the Software – Application industry, SAP is ranked #3 of 125 stocks. To see the additional POWR Ratings for SAP (Momentum and Growth), click here.

SS&C Technologies Holdings, Inc. (SSNC)

SSNC provides software products and services mainly to the financial and healthcare industries. The company’s software-enabled services include SS&C GlobeOp, SS&C Retirement Solutions and Bluedoor. Its software products include portfolio management software, trading software, and banking and lending solutions.

On May 14, 2021, SSNC amended the Scheme Implementation Deed with Mainstream Group Holdings Limited and proposed to acquire the company subject to customary conditions. Mainstream is  a provider of investment administration and fund accounting, among other services for leading fund managers and superannuation funds, family offices and dealer groups. This  acquisition could  prove profitable for SSNC.

The company’s revenue increased 5.1% year-over-year to $1.23 billion for the first quarter ended March 31, 2021. Its operating income grew 23% year-over-year to $269.10 million, while its net income increased 76.3% year-over-year to $174.90 million. The company’s EPS increased 75.7% year-over-year to $0.65.

For the current quarter, ending June 30, 2021, analysts expect SSNC’s EPS to increase 9.6% year-over-year to $1.14. It surpassed the Street’s EPS estimates in each of the trailing four quarters. For the quarter ending September 30, 2021, its revenue is expected to be $1.21 billion, which represents a 7.1% year-over-year rise. The stock has surged 30.7% over the past year to close yesterday’s trading session at $73.49.

SSNC’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. It has an A grade for Momentum, and a B grade for Stability, Growth, Quality, Sentiment and Value.

Click here to access all SSNC’s ratings. SSNC is ranked #3 of 60 stocks in the Software – Business industry.

Stocks to Sell:

Bill.com Holdings, Inc. (BILL)

BILL delivers  cloud-based software that digitizes and automates back-office financial operations for small- and mid-size businesses worldwide. It offers artificial intelligence (AI)-enabled financial software platforms. The company also provides software-as-a-service (Saas) and cloud-based payments products, which allow users to automate accounts payable and accounts receivable transactions.

On May 7, the company entered  an agreement  to acquire Divvy in a stock and cash transaction valued at roughly $2.5 billion. However, this deal could further take a toll on its already weak financials in the near term.

BILL’s loss from operations was $15.30 million for its fiscal third quarter ended March 31,  compared to a $9.70 million operating loss in the prior-year period. Its net loss for the quarter came in at $26.70 million compared to a $8.30 million net loss in the year-ago period. Also, its loss per share increased 190.9% year-over-year to $0.32.

Analysts expect BILL’s EPS to remain negative in fiscal 2021 and fiscal 2022. The stock has lost 23.8% over the past three months to close yesterday’s trading session at $140.30.

BILL’s poor prospects are apparent in its POWR Ratings. The company has an overall D rating, which translates to Sell in our proprietary rating system. It also has an F grade for Value, and a D grade for Momentum, Stability and Quality.

Click here to see the additional POWR ratings for BILL (Sentiment and Growth). It is ranked #109 in the D-rated Software – Application industry.

Five9, Inc. (FIVN)

FIVN provides cloud software for contact centers internationally. The company offers a virtual contact center cloud platform that delivers a suite of applications, which enables the breadth of contact center-related customer service, sales, and marketing functions. It has an alliance agreement with Deloitte Digital.

On May 11,  FIVN announced a partnership with Neustar to provide support for the implementation of the FCC-mandated STIR/SHAKEN call authentication for its consumers through Neustar’s Certified Caller. However, it’s uncertain if this partnership will have a positive impact on the company’s financials in the near-term.

FIVN’s loss from operations was $11.09 million for the first quarter, ended March 31, 2021, compared to a $4.96 million operating loss in the prior-year period. Its net loss for the quarter increased 65.7% year-over-year to $12.33 million. Also, its loss per share came in at $0.18 compared to a loss of $0.12 in the year-ago period.

For the current quarter ending June 30,  analysts expect FIVN’s EPS to decrease 33.3% year-over-year to $0.14. The stock has lost nearly 13% over the past three months to close yesterday’s trading session at $165.74.

It’s no surprise that FIVN has an overall D rating, which equates to Sell in our POWR Ratings system. The stock has a D grade for Value, Momentum and Quality also.

Click here to see FIVN’s ratings for Growth, Sentiment and Stability. FIVN is ranked #89 in the Software – Application industry.

Click here to check out our Software Industry Report for 2021

SAP shares were trading at $140.70 per share on Thursday morning, up $3.60 (+2.63%). Year-to-date, SAP has gained 9.18%, versus a 11.57% rise in the benchmark S&P 500 index during the same period.

About the Author: Nimesh Jaiswal

Nimesh Jaiswal's fervent interest in analyzing and interpreting financial data led him to a career as a financial analyst and journalist. The importance of financial statements in driving a stock’s price is the key approach that he follows while advising investors in his articles. More...

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