The constant evolution in the technology sector can be highly rewarding for investors if they select the right industry with the greatest growth potential. However, the selection process can be unnerving given the sector’s wide diversity and high risk profile.
Per Deloitte, “Technology is the backbone of the digital economy. The rate of change and the level of disruption driven by modern technology are exponential. Advancements in computer processing power, data storage, and chip design; the ubiquity of bandwidth; enterprise mobility; and many other developments that have unfolded in recent years are enabling myriad opportunities that were once impossible, both technologically and economically.”
Emerging technologies – cloud computing, big data analytics, cognitive computing and Internet of Things (IoT) – are game changers. These added a new dimension to business operation, marketing and customer handling. Rapid adoption of disruptive technologies is also creating value for stakeholders and investors.
Emerging Technologies Lure Investors
Huge growth prospects of emerging technologies continue to lure investors. Per IDC, worldwide spending on public cloud services will grow at a 19.4% compound annual growth rate (CAGR) from nearly $70 billion in 2015 to more than $141 billion in 2019.
Software as a Service (SaaS) is expected to capture more than two thirds of all public cloud spending. Worldwide spending on Infrastructure as a Service (IaaS) and Platform as a Service (PaaS) will grow at a faster rate than SaaS at five-year CAGRs of 27.0% and 30.6%, respectively.
Per Gartner, by 2020, over 50% of all new applications developed on PaaS will be IoT-centric, which will significantly disrupt conventional architecture practices. Moreover, Gartner forecasts that 6.4 billion connected things will be in use worldwide in 2016, up 30% from 2015, and will reach 20.8 billion by 2020. In 2016, 5.5 million new things will get connected every day.
Oracle Falters Despite Cloud Growth
In spite of this tremendous growth prospect, not all companies in the domain are thriving at present. Oracle Corp. (ORCL – Analyst Report) is one such stock. In the recently concluded fiscal first-quarter 2017, the company reported earnings of 49 cents, which missed the Zacks Consensus Estimate by 4 cents.
Moreover, Oracle’s revenue growth of 2% was unimpressive, reflecting the impact of the ongoing business transition from on-premise to cloud. Unfavorable currency exchange rate also hurt its results.
We note that Oracle has been taking initiatives to strengthen its cloud capabilities. Total cloud revenues (11.4% of total revenues) were up 61.1% to $986 million in the reported quarter. However, since revenues from a cloud subscription model are realized over a period of several years, top-line growth is expected to remain subdued in the near term.
Year to date, shares of this software provider has increased almost 12% as compared with the S&P 500’s return of 5.1% over the same time. However, following unimpressive fiscal first-quarter results, sustaining the momentum may be difficult in our view. Moreover, this Zacks Rank #3 (Hold) stock has lately been witnessing negative estimate revisions.
Our Picks
Here, we have picked four software stocks in the technology sector that are likely to ride the growth momentum while beating the odds. Each of the four stocks sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Avid Technology Inc. (AVID – Snapshot Report) : The company is a leading provider of audio/visual production software. Avid recently moved its business over to the Amazon Web Services platform and increased its cloud-based collaboration features. The EPS estimate for the current year increased by a massive 108% ($1.08) to $2.08 per share over the last 60 days.
- Last EPS Surprise: 600%
- Average 4-quarter Surprise: 123.96%
Infoblox Inc. (BLOX – Snapshot Report) : Headquartered in Santa Clara, CA, Infoblox Inc. operates as an automated network controller and provides an appliance-based solution that enables dynamic networks and next-generation data centers. Current year EPS estimate reversed to a profit of 9 cents per share from a loss of 31 cents per share over the last 60 days.
- Last EPS Surprise: 33.3%
- Average 4-quarter Surprise: 69.05%
Exa Corporation (EXA – Snapshot Report) : Burlington, MA-based Exa Corp. develops, markets, sells and supports software products, and provides professional services for simulation-driven design. Over the last 60 days, its fiscal 2017 EPS estimates have narrowed from loss of 25 cents to 23 cents per share.
- Last EPS Surprise: 55.6%
- Average 4-quarter Surprise: 52.43%
ServiceSource International, Inc. (SREV – Snapshot Report) : Headquartered in San Francisco, the company provides a suite of cloud applications for service revenue management. Over the last 60 days, current year EPS estimate has narrowed from loss of 10 cents to 6 cents per share.
- Last EPS Surprise: 66.7%
- Average 4-quarter Surprise: 49.17%
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