#Deep Dive: 10 software stocks with sales expected to increase up to 174% through 2023

At first glance, software stocks as a group appear to be expensive. Here’s a comparison of the movement of forward price-to-earnings ratios (based on rolling 12-month consensus earnings estimates among analysts polled by FactSet) for the S&P 500 software industry group and the full S&P 500 Index
SPX
over the past five years:

But you get what you pay for. Before looking at sales, earnings and cash flow comparisons, check out how well the S&P 500 software industry group has performed against the full index over the past five years, with dividends reinvested:

The S&P 500 Index has done well. The software industry group is almost literally off the chart.

Looking back and looking ahead

Sales

Here’s a comparison of sales growth figures for the S&P 500 software industry group and the full S&P 500 over the past five full calendar years:

	2020	2019	2018	2017	2016
S&P 500 Software	11.3%	11.3%	17.4%	9.6%	-2.8%
S&P 500	-2.1%	4.9%	10.2%	5.9%	0.0%
Source: FactSet

Now let’s look ahead at aggregate sales-growth projections for 2021 and the next two years, based on consensus sales-per-share estimates:

	2021	2022	2023
S&P 500 Software	14.6%	12.8%	9.8%
S&P 500	13.0%	6.5%	4.8%
Source: FactSet

Earnings

Here’s a look at the growth of earnings per share for the S&P 500 software industry group and the full index over the past five years.

	2020	2019	2018	2017	2016
S&P 500 Software	21.9%	102.5%	-21.1%	35.4%	-9.8%
S&P 500	-17.5%	3.8%	19.4%	11.1%	-1.3%
Source: FactSet

Here are aggregate EPS estimates for 2021 and the following two years, based on consensus estimates:

	2021	2022	2023
S&P 500 Software	16.8%	12.1%	8.8%
S&P 500	38.7%	10.8%	8.9%
Source: FactSet

Free cash flow

A company’s free cash flow is its remaining cash flow after planned capital expenditures. It is money that can be used for business expansion, acquisitions, share buybacks, dividend increases or other corporate purposes.

Here are comparisons of increases in aggregate free cash flow per share for the two groups over the past five years, based on consensus estimates:

	2020	2019	2018	2017	2016
S&P 500 Software	17.9%	14.8%	8.6%	20.1%	12.0%
S&P 500	9.2%	6.6%	14.5%	7.3%	15.2%
Source: FactSet

And here are projections for increases in annual free cash flow per share through 2023:

	2021	2022	2023
S&P 500 Software	18.0%	12.3%	12.3%
S&P 500	27.0%	15.7%	8.8%
Source: FactSet

There are vagaries in the data — a very large company’s earnings results can be distorted for any one year because of one-time items, and those can skew results for an industry group.

You can also see higher expectations for the recovery year of 2021 for the full index. Then again, the S&P 500’s sales and earnings declined during 2020, while those items were positive for the software industry. The trend is clear. The software industry has been on a rapid growth path for a long time and is expected to stay the course.

Software stock screens

The Jefferies report on July 19 included a list of 13 software companies, with seven unrated by the firm, a “hold” rating on Oracle Corp.
ORCL
and “buy” ratings for five companies (in alphabetical order): Adobe Inc.
ADBE,
Citrix Systems Inc.
CTXS,
Intuit Inc.
INTU,
Microsoft Corp.
MSFT
and Salesforce.com Inc.
CRM.

There are only 13 software companies in the S&P 500, according to FactSet. The group excludes internet software and services companies, such as Facebook Inc.
FB,
Alphabet Inc.
GOOG
and Netflix Inc.
NFLX.

In order to broaden the list and make sure it included the 13 companies in the Jefferies list, we began our screen with the S&P Composite 1500 Index
XX:SP1500
(made up of the S&P 500, the S&P 400 Mid Cap Index
MID
and the S&P Small Cap 600 Index
SML
) and the Nasdaq-100 index (which is tracked by the Invesco QQQ Trust
QQQ
). This yielded a list of 42 software companies.

Sales growth projections

Starting with our list of 43 software companies, here are the 10 expected to show the best sales growth over the next three years (among the 33 companies for which the consensus estimates are available).

Company	Estimated increase in sales from 2020 through 2023	Estimated sales – 2023	Estimated sales – 2022	Estimated sales – 2021	Sales – 2020
Sabre Corp. SABR	174%	$3,657	$2,911	$1,808	$1,334
Okta Inc. Class A OKTA	163%	$2,134	$1,642	$1,189	$813
DocuSign Inc. DOCU	141%	$3,372	$2,603	$1,999	$1,401
Zoom Video Communications Inc. Class A ZM	129%	$5,546	$4,717	$3,879	$2,420
Paycom Software Inc. PAYC	85%	$1,555	$1,269	$1,018	$841
Paylocity Holding Corp. PCTY	73%	$1,011	$853	$703	$584
NetEase Inc. ADR NTES	72%	$18,394	$16,085	$13,642	$10,673
Salesforce.com Inc. CRM	70%	$35,679	$30,614	$25,567	$20,930
Ceridian HCM Holding Inc. CDAY	70%	$1,433	$1,170	$1,003	$843
Baidu Inc ADR Class A BIDU	68%	$26,112	$22,853	$19,788	$15,513
Source: FactSet

All estimates are in millions and are for calendar years (as many companies have fiscal years that don’t match the calendar).

You can click on the tickers for more about each company.

Here’s a summary of price ratios and analyst sentiment for this group of expected rapid sales growers:

Company	Forward P/E	Forward price/ sales	Share “buy” ratings	Closing price – July 19	Consensus price target	Implied 12-month upside potential
Sabre Corp. SABR	N/A	1.7	25%	$10.92	$12.75	17%
Okta Inc. Class A OKTA	N/A	24.5	65%	$241.35	$274.95	14%
DocuSign Inc. DOCU	170.1	26.6	76%	$289.48	$278.28	-4%
Zoom Video Communications Inc. Class A ZM	79.8	25.2	46%	$354.20	$412.63	16%
Paycom Software Inc. PAYC	81.7	20.1	69%	$367.40	$424.86	16%
Paylocity Holding Corp. PCTY	100.8	14.7	59%	$192.34	$205.53	7%
NetEase Inc. ADR NTES	26.8	5.7	86%	$112.25	$134.13	19%
Salesforce.com Inc. CRM	66.4	8.2	81%	$237.55	$279.56	18%
Ceridian HCM Holding Inc. CDAY	264.2	13.8	53%	$95.65	$105.93	11%
Baidu Inc ADR Class A BIDU	19.5	3.1	86%	$176.45	$310.92	76%
Source: FactSet

For Sabre Corp. and Okta Inc., no forward P/E ratios are available because they are expected to post net losses for at least the next four quarters. For comparison, aggregate forward P/E ratios are 34 for the S&P 500 software industry group and 21.1 for the full S&P 500. Aggregate forward price-to-sales ratios are 10.5 for the S&P 500 software group and 2.7 for the full S&P 500.

Keep in mind that Wall Street analysts are really focused on short periods — a 12-month price target may not mean very much when selecting stocks for growth over a period of many years.

Analysts’ favorite software stocks

Here are the 10 software stocks with the highest percentages of “buy” or equivalent ratings among analysts polled by FactSet:

Company	Share “buy” ratings	Closing price – July 19	Consensus price target	Implied 12-month upside potential	Forward P/E	Forward price/ sales
ACI Worldwide Inc. ACIW	100%	$34.86	$45.40	30%	30.7	3.1
Progress Software Corp. PRGS	100%	$44.02	$56.60	29%	13.2	3.7
SailPoint Technologies Holdings Inc. SAIL	92%	$47.60	$64.31	35%	N/A	10.5
Microsoft Corp. MSFT	92%	$277.01	$297.98	8%	34.5	11.6
CommVault Systems Inc. CVLT	88%	$77.11	$81.83	6%	31.7	4.7
Baidu Inc. ADR Class A BIDU	86%	$176.45	$310.92	76%	19.6	3.1
NetEase Inc. ADR NTES	86%	$112.25	$134.13	19%	26.7	5.6
Adobe Inc. ADBE	81%	$602.05	$628.55	4%	47.2	17.3
Synopsys Inc. SNPS	81%	$274.48	$312.00	14%	40.9	10.0
Salesforce.com Inc. CRM	81%	$237.55	$279.56	18%	66.6	8.2
Source: FactSet

Finally, here are sales growth projetions for this group of 10 software stocks favored by analysts:

Company	Estimated increase in sales from 2020 through 2023	Estimated sales – 2023	Estimated sales – 2022	Estimated sales – 2021	Sales – 2020
ACI Worldwide Inc. ACIW	18%	$1,530	$1,397	$1,331	$1,294
Progress Software Corp. PRGS	N/A	N/A	$541	$532	$446
SailPoint Technologies Holdings Inc. SAIL	56%	$571	$473	$409	$365
Microsoft Corp MSFT.	41%	$216,606	$198,789	$176,548	$153,284
CommVault Systems Inc. CVLT	23%	$857	$807	$756	$697
Baidu Inc. ADR Class A BIDU	68%	$26,112	$22,853	$19,788	$15,513
NetEase Inc. ADR NTES	72%	$18,394	$16,085	$13,642	$10,673
Adobe Inc. ADBE	59%	$20,899	$18,302	$15,890	$13,142
Synopsys Inc. SNPS	30%	$4,916	$4,518	$4,140	$3,775
Salesforce.com Inc. CRM	70%	$35,679	$30,614	$25,567	$20,930
Source: FactSet

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