Since last year, the software industry has witnessed unprecedented growth driven by surging demand for state-of-the-art software and cloud computing services amid COVID-19-compelled remote lifestyles. Investor optimism in this space is evidenced by the SPDR S&P Software & Services ETF’s (XSW) 46.3% gains over the past year versus the broader S&P 500 Trust ETF’s (SPY) 32.9% returns.
Amid rising concerns regarding the COVID-19 Delta variant’s spread in several countries, the remote working culture is expected to remain the norm at least over the next several months. Furthermore, the rapid digital transformation of virtually every industry is likely to drive the demand for software services higher in the coming months and beyond.
While rising concerns regarding decelerating economic growth caused the tech-heavy Nasdaq composite to decline yesterday, established software stocks Microsoft Corporation (MSFT), Adobe Inc. (ADBE), and Garmin Ltd. (GRMN) witnessed modest gains. These fundamentally sound stocks, with immense growth potential, are currently trading near their all-time highs and are expected to continue advancing in the coming months.
Click here to check out our Software Industry Report for 2021
Microsoft Corporation (MSFT)
MSFT is the second-largest company in the United States (in terms of market capitalization) and is ranked #15 on the Fortune 500 list. Known for its Windows operating systems, MSFT has been strengthening its foothold in the cloud computing business. It operates through three segments--Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
MSFT’s revenues increased 19% year-over-year to $41.70 billion in the fiscal third quarter ended March 31. Its operating income came in at $17 billion, up 31% from the same period last year. Its non-GAAP net income rose 38% from its year-ago value to $14.80 billion, while its non-GAAP EPS improved 39% from the prior-year quarter to $1.95.
On July 14, MSFT unveiled cloud service software Windows 365. This cloud-based operating system provides higher flexibility and secure connections, ensuring higher productivity in a remote setup.
Also this month, the company announced its plans to redeem its outstanding Eurobond senior notes worth €1.75 billion ($2.06 billion) on September 6. This should reduce MSFT’s debt and interest burden significantly, thereby boosting its net income and EPS.
MSFT is currently gearing up to launch Windows 11, its first major software update since 2015. Scheduled to be launched by year’s end, this product should boost MSFT’s software sales significantly in the coming months.
MSFT is scheduled to release its fiscal fourth quarter (ended June 2021) results on July 27. Analysts expect the company’s revenues to increase 16% year-over-year to $44.10 billion in the about-to-be-reported quarter. MSFT’s EPS is expected to be $1.90 in the fiscal fourth quarter, indicating a 30.1% rise from the prior year quarter. The company has an impressive earnings surprise history as well; it beat the Street’s EPS estimates in each of the trailing four quarters.
Shares of MSFT have gained 25.6% year-to-date to close yesterday’s trading session at $279.32. The stock is currently trading 1.7% below its all-time high of $284.10, which it hit on July 16.
It’s no surprise that MSFT has an overall B rating, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
MSFT has an A grade for Sentiment, and a B for Stability and Quality. Of the 132 stocks in the Software – Application industry, it is ranked #15.
Click here to view additional MSFT ratings for Momentum, Value, and Growth.
Adobe Inc. (ADBE)
Diversified software company ADBE is known for its digital media content and cloud service offerings. It operates through three segments: Digital Media, Digital Experience, and Publishing. ADBE’s products and software offerings are highly demanded among enterprise customers, original equipment manufacturers, and developers with an international presence.
For its fiscal second quarter, ended June 4, ADBE’s revenues increased 23% year-over-year to $3.84 billion. This can be attributed to a 25% rise in its Digital Media segment revenue, a 30% improvement in its Document Cloud revenue, and a 24% increase in its creative revenue. Its gross profit stood at $3.39 billion, up 25% from the same period last year. Its net income and EPS increased slightly from the year-ago values to $1.12 billion and $2.32, respectively.
On July 8, ADBE launched the next generation of its Real-time Customer Data Platform (CDP). As the only enterprise application designed solely for first-party data-driven customer acquisition and engagement, this platform personalized brand experiences and data privacy. With expectations for personalized brand experiences at all-time highs, its next-generation CDP platform is expected to be a big hit in the market.
In April, ADBE partnered with seven of the top 10 health care providers, eight of the top 10 healthcare payers, and nine of the top 10 pharmaceutical companies to digitize the healthcare sector and deliver personalized digital healthcare services. Also in April, , ADBE partnered with FedEx Corporation (FDX) to facilitate e-commerce innovation.
A $15.68 billion consensus revenue estimate for its fiscal year 2021 indicates a 21.9% improvement year-over-year. The Street expects ADBE’s EPS to rise 21.4% from the same period last year to $12.26 in the current year. Furthermore, the company surpassed the consensus EPS estimates in each of the trailing four quarters.
ADBE has gained 45.6% since hitting its 52-week low of $420.78 to hit its $612.75 all-time high yesterday. The stock has gained 21.7% year-to-date.
ADBE has an overall B rating, which translates to Buy in our proprietary rating system. In addition, it has an A grade for Quality, and B for Stability and Sentiment. The stock is ranked #23 in the Software – Application industry.
Beyond what we’ve stated above, we have also rated ADBE for Momentum, Growth, and Value. Get all ADBE ratings here.
Garmin Ltd. (GRMN)
Based in Switzerland, GRMN develops GPS navigation and wireless devices and applications. The company’s operations can be classified into five segments--Fitness, Outdoor, Aviation, Marine, and Auto. It sells its products to customers worldwide through independent and online retailers, distributors, and its website.
GRMN’s net sales came in at $1.07 billion in its fiscal first quarter, ended March 27, indicating a 25% rise year-over-year. This can be attributed to a 41% rise in its Outdoor segment revenue and a 38% rise in its Fitness segment revenue. Its net income improved 36.5% from the year-ago value to $220.03 million. And its pro forma EPS increased 30% from the prior-year quarter to $1.18.
On May 25, GRMN acquired industry-leading aircraft performance software and services provider, AeroData, Inc. The acquisition is expected to broaden GRMN’s market presence in the commercial aviation space while expanding its digital services portfolio. Moreover, over the past couple of months the company has been launching several top-notch aviation and navigation-related accessories to expand its product portfolio.
The Street expects GRMN’s revenues to rise 27.7% year-over-year to $1.11 billion in its fiscal second quarter ended June 2021. Its EPS is expected to come in at $1.26 in the about-to-be-reported quarter, representing a 38.5% improvement from the year-ago value. In addition, GRMN has an impressive earnings surprise history; it beat the Street’s EPS estimates in each of the trailing four quarters.
GRMN has gained 63.5% since hitting its 52-week low of $ 91.84 on September 24 to hit its $150.17 all-time high yesterday. Shares of GRMN have gained 25.2% year-to-date.
GRMN’s POWR Ratings reflect this promising outlook. It has an overall B rating, which equates to Buy in our POWR Ratings system. In addition, GRMN has a B grade for Sentiment, Stability, and Quality. It is ranked #17 of 45 stocks in the B-rated Technology – Hardware industry.
In addition to the grades I’ve highlighted, you can view GRMN ratings for Value, Momentum, and Growth here.
Click here to check out our Software Industry Report for 2021
MSFT shares were trading at $279.98 per share on Wednesday afternoon, up $0.66 (+0.24%). Year-to-date, MSFT has gained 26.46%, versus a 16.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.
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