The software industry has seen amazing growth and is anticipated to sustain its acceleration curve in 2020 and beyond.
Software industry is gaining from an increasingly strong digital transformation environment. The last few years have seen a sequence of breakthroughs in cloud computing, predictive analysis, artificial intelligence (AI), digital personal assistants and Internet-of-Things (IoT), which set the platform for robust growth in the software industry.
Additionally, a continuous enterprise investment in Big Data and analytics coupled with the ongoing implementation of Software-as-a-Service (SaaS) poses a substantial growth opportunity. Markedly, the cloud provides a flexible and cost-effective platform to build and test brand-new applications and the implementation time is also much lesser in contrast with legacy systems. SaaS companies are likely to register a top-line expansion due to a greater percentage of recurring revenues, subscription gross margin and a softer churn rate.
Rising adoption of software among various industries including retail, manufacturing, academia, financial services, banking, insurance, enterprises, government organisations, telecommunication and healthcare is a key catalyst.
Huge Growth Opportunity
As per media findings, public cloud revenues are predicted to increase 17% in 2020, mainly propelled by SaaS, which is expected to lead as the largest market segment due to the scalability of subscription-based software.
The growth prospects also appear to be optimistic given an improved spending by enterprises on software procurement. According to media sources, after a slow 2019, worldwide IT spending is expected to bounce back in 2020 with prediction growth of 3.7%, attributable to enterprise software spending, which is expected to beat a record high growth rate of 10.9%.
Moreover, an escalating focus on delivering a better customer experience is enhancing growth of customer relationship management (CRM) software. In Addition, the ever-increasing demand for obtaining cloud platforms amid widespread incidents of cyber-attacks, cyber-thefts and hacking, drives demand for cyber security software.
Notably, enterprises are seeking to rapidly migrate to cloud and DevOps technologies for attaining scalability and responsiveness in favour of software development and IT operations, which eventually help providing an impeccable digital experience to clients.
4 Top Picks
We have chosen four software stocks that are well-poised for remarkable returns in 2020.
Xero Limited (ASX: XRO)
Xero Limited proposes an online business platform to small and medium businesses. Xero incorporates with more than 400 add-on applications letting customers to modify Xero to their needs and requirements. The company has a total subscriber base of >2 million globally.
Xero reported its half-year ended 30th September 2019 financial results with strong revenue growth along with improving gross margin and free cash flow. The company reported operating revenue of NZ$338.7 million, up 32% year over year. Total subscribers increased 30% year over year and stood at NZ$2.057 million. EBITDA during the period stood at $65.9 million (excluding impairments), almost twice compared to the corresponding previous year.
Xero has a market cap of $11.85 billion with ~141.53 million outstanding shares. The Xero stock price closed at $83.98 as on 14th January 2020, up by 0.311% relative to the previous close.
WiseTech Global Limited (ASX: WTC)
WiseTech Global is engaged in providing cloud software solutions to the logistics industry both abroad and domestically. The company’s top product, “CargoWise One”, offers end-to-end logistics solution, and forms an essential part of the supply chain globally.
WiseTech provided the financial report for financial year 2019, for the period ended 30 June 2019. Revenue for the period came in at $348.3 million, soaring 57% year over year. NPAT increased 32.65% on a year over year basis and stood at $54.1million. The rise was supported by strong growth across business, coupled with development of CargoWise One product platform. Synergies from acquisition also optimistically impacted the results. EBITDA came in at $108.1 million, soaring 39% year over year.
FY19 revenue, Source: Company’s Report
WTC restated its outlook for FY2020. WiseTech continues to anticipate revenues in the band of $440 million – $460 million, representing a growth of 26% -32%. EBITDA is likely to be between $145 million – $153 million, representing a growth of 34% – 42%.
WiseTech has a market cap of $7.84 billion with ~ 318.19 million outstanding shares. The WiseTech stock closed at $24.57 as on 14th January 2020, down by 0.325% relative to the previous close.
Altium Limited (ASX: ALU)
Altium Limited is one of the foremost providers of PCB design tools and components coupled with data administration software. The company’s leading product is best acknowledged for its skill in 3D Printed Circuit Board (PCB) Computer. The company has also assisted several companies in creating next-generation electronic products and systems.
The company provided the financial results for FY19 for the period ended 30 June 2019. It reported revenue of $171.8 million, soaring 23% on a yearly basis. NPAT in FY19 stood at $52.9 million, up from $37.5 million reported prior year. Earnings per share stood at 40.57 cents, an increase of 41% year over year. Th company exited FY19 with cash balance of $80.5 million. The total number of subscribers in FY19 stood at 43,698, soaring 13% year over year.
For FY2020, the company anticipates revenue to be approximately US$200 million and expects EBITDA margin to be in the band of 37% to 38%. The company expects to attain subscribers of 100,000 in the long run.
Altium has a market cap of $4.68 billion with ~ 130.97 million outstanding shares. Altium stock closed at $35.9 as on 13th January 2020, up by 0.391% relative to the previous close.
Afterpay Touch Group Limited (ASX: APT)
Afterpay Touch Group is a technology-based payment company throughout Australia, United States, New Zealand and United Kingdom.
The company provided the financial report for FY 2019, for the period ended 30 June 2019. The company’s revenue of $17.1 billion, decreased 18% on a yearly basis. Underlying revenue increased 140%, bolstered by 99% increased sales in Australia and New Zealand. Active merchants in FY19 climbed 101% year over year and stood at 32,300. EBITDA came in at $35.5 million in FY19. Operating cash flow in FY19 stood at $71.4, an increase from $42.5 million reported in the previous year. Free cash flow (underlying) stood at $33.3 million as compared to 22.9 million in the year-ago period.
Afterpay has a market cap of $8.48 billion with ~60.66 million outstanding shares. The company stock price closed at $32.2 as on 14 January 2019, up by 2.06% relative to the previous close.
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