The software industry continues to be a cornerstone of the modern economy. With the increasing adoption of cloud services, big data, and artificial intelligence, software companies are poised for substantial growth. The COVID-19 pandemic accelerated digital transformation, pushing organizations to adopt remote work solutions facilitated by software companies.
These trends suggest a positive long-term outlook for the sector. For investors seeking exposure to software stocks without the risk of individual companies, Exchange-Traded Funds (ETFs) offer a diversified way to invest. Three ETFs to consider are:
1.
iShares Expanded Tech-Software Sector ETF (IGV): This ETF focuses on software companies within the broader tech sector, including Microsoft, Adobe, and Salesforce. It aims to capture the broad performance of the software industry. 2.
SPDR S&P Software & Services ETF (XSW): The XSW ETF provides exposure to software and services companies listed on the S&P Total Market Index, including traditional software firms and IT services and consulting companies. 3. Invesco Dynamic Software ETF (PSJ): The PSJ ETF takes a dynamic approach, selecting companies based on factors like fundamental growth, stock valuation, investment timeliness, and risk.
It may be suitable for those wanting a more actively managed fund focused on the software sector. Investing in software stocks through ETFs can be a smart strategy to capitalize on the technology sector’s growth. Steady demand for software and continuous innovations suggest software stocks will likely remain a compelling investment for the foreseeable future.
Before investing, consider your investment goals, risk tolerance, and conduct thorough research or consult a financial advisor. The right ETF could help achieve diversified exposure to this dynamic and growing industry. The outlook for the Internet-Software & Services industry reflects a slowing economy.
Industry revenue and EBIT have shown little growth, with available cash under pressure. However, certain companies stand out due to their adoption of subscription models that enhance predictability and stability, and their leverage of AI to counter economic weaknesses. This industry remains crucial as the backbone of the digital economy.
The adoption of technology by businesses is a primary growth driver.
investment through software-focused ETFs
Companies are racing to build and utilize platforms that incorporate artificial intelligence, driving demand for software and services delivered through the Internet.
The sector faces challenges from geopolitical tensions in Europe, fluctuating oil prices, and supply chain issues which contribute to volatility in the economic outlook for 2024. Despite these challenges, players in the industry prefer subscription-based models, bringing stability. However, profitability concerns remain as new infrastructure costs and debt servicing impact financial results.
The Zacks Internet – Software & Services industry is part of the broader Zacks Computer and Technology sector and holds a Zacks Industry Rank of #159, placing it in the bottom 36% of all Zacks-classified industries. This rank reflects tough times and a deteriorating earnings outlook, with significant downward revisions for 2024 and 2025. The industry’s stock market performance has lagged behind the broader Zacks Computer and Technology Sector and the S&P 500.
Over the past year, the industry’s stock prices fell 4.6%, compared to a 38.6% increase in the broader technology sector and a 32.4% increase in the S&P 500. Despite individual players posting losses, the industry as a whole generates profits. The current forward 12-month price-to-earnings (P/E) ratio is at 22.6X, a slight premium to the S&P 500 and a significant discount to the technology sector.
This valuation ranges between 20.6X and 23.2X over the past year. Okta Inc. provides identity, access, and authentication solutions for various sectors including small and medium-sized businesses, universities, non-profits, and government agencies.
Headquartered in San Francisco, CA, Okta has maintained momentum with its recurring revenue model, showing particular strength among large customers. The company has been successful in developing a compelling product line and building significant customer relationships. Okta’s bundling of products as platforms enhances customer retention and revenue visibility, with a notable growth in million-dollar-plus deals.
Despite the broader economic softness, Okta’s revenue and earnings are expected to see significant growth in the coming years. Globant S.A. is a technology services provider with a global presence, offering a wide range of solutions including digital, enterprise technology, e-commerce, AI, and collaborations with major tech companies like AWS, Google Cloud, Microsoft, Oracle, Salesforce, SAP, and ServiceNow. Globant serves various industries such as media, professional services, technology and telecommunications, travel and hospitality, financial services, consumer retail, manufacturing, and healthcare.
Headquartered in Luxembourg, Globant has reported strong revenue growth across all regions and verticals, especially in media, sports, and entertainment. The Internet-Software & Services sector faces a mixed outlook amidst economic slowdowns and geopolitical tensions. However, companies like Okta and Globant exhibit resilient growth potential through strong business models and strategic technological integration.
Investors may find promising opportunities by considering the unique strengths and growth trajectories of these companies.
Cameron is a highly regarded contributor in the rapidly evolving fields of artificial intelligence (AI) and machine learning. His articles delve into the theoretical underpinnings of AI, the practical applications of machine learning across industries, ethical considerations of autonomous systems, and the societal impacts of these disruptive technologies.
