4 Software Stocks with Tremendous Growth Potential The demand for software solutions from several industries has been increasing at a rapid rate thanks to businesses' ongoing digital transformation and...

The demand for software solutions from several industries has been increasing at a rapid rate thanks to businesses' ongoing digital transformation and new-age services. As such, we think it could be wise to bet on software companies International Business Machines (IBM), Gartner (IT), PTC (PTC), and Tenable (TENB). They each possess solid growth attributes and favorable analyst sentiment. Read on.

The accelerating pace of digitalization and increasing dependency on software solutions across several industries have been driving investor interest in the software industry. This is evident in the iShares Expanded Tech-Software Sector ETF's (IGV) 9.4% returns over the past month versus the SPDR S&P 500 Trust ETF's (SPY) 3.3% gains.

The increasing automation of business processes and growing application of software solutions in the areas of remote working and cybersecurity, among others, are expected to help the industry keep growing in the coming months. According to Grand View Research, the global business software and services market is expected to grow at a 11.3% CAGR over the next seven years.

So, we think it could be wise to bet on quality software stocks, specifically International Business Machines Corporation (IBM), Gartner, Inc. (IT), PTC Inc. (PTC), and Tenable Holdings, Inc. (TENB). In addition to their fundamental strength, consistent product and services innovations should help these companies continue attracting investors.

Click here to check out our Software Industry Report for 2021

International Business Machines Corporation (IBM)

IBM consists of three business areas: cognitive applications, cloud & data platforms, and transaction processing platforms. It operates through five segments: Cloud and Cognitive Software, Global Business Services, Global Technology Services, Systems, and Global Financing. IBM is based in Armonk, N.Y.

The company's revenue from its Cloud and Cognitive Software segment surged 3.8% year-over-year to $5.44 billion for its fiscal first quarter, ended March 31, 2021, while revenues from its Global Business Services segment increased 2.4% year-over-year to $4.23 billion. IBM's non-GAAP gross profit came in at $8.38 billion, up 3.4% from the prior-year period. Its adjusted FCF increased 58.5% year-over-year to $2.15 billion.

Analysts expect IBM's EPS to increase 25.8% year-over-year to $10.91 in its fiscal year 2021. It surpassed the Street's EPS estimates in three of the trailing four quarters. Its revenue is expected to be $18.29 billion for the quarter ended June 30, 2021, which represents a 3.2% year-over-year increase.

On July 8, 2021, Atos and IBM announced their plans to collaborate to build a new, highly advanced digital infrastructure for the Dutch Ministry of Defense. This is expected to expand IBM's consumer base. The stock has rallied 22.3% over the past year to close Friday's trading session at $141.52.

IBM's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

The stock has a B grade for Value, Momentum, and Quality. We have also graded IBM for Stability, Growth, and Sentiment. Click here to access all of IBM's ratings. IBM is ranked #13 of 45 stocks in the B-rated Technology – Hardware industry.

Gartner, Inc. (IT)

Stamford, Conn.-based research and advisory company IT creates and distributes its research content through published reports, interactive tools, consulting and advisory services, and conferences, among outlets. It operates through three segments: Research, Conferences, and Consulting.

The company's total revenues increased 8.4% year-over-year to $1.10 billion for its fiscal first quarter, ended March 31, 2021. IT's net income for the quarter came in at $164.10 million, up 118.5% year-over-year. The company's adjusted EBITDA increased 49.5% year-over-year to $320 million, and its adjusted EPS came in at $2, up 66.7% year-over-year.

IT's EPS is expected to be $6.42 in its fiscal year 2021, which represents a 31.3% year-over-year rise. It surpassed consensus EPS estimates in each of the trailing four quarters. The company's revenue is expected to increase 10.5% year-over-year to $1.10 billion for the quarter ending September 30, 2021.

On June 16, the company priced an upsized offering of $600 million 3.625% senior notes due 2029. IT plans to use the net proceeds to repay a portion of its outstanding borrowings under an existing term loan facility, among other uses. The stock has gained 117.4% over the past year to close Friday's trading session at $256.87.

IT's POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary ratings system. It has an A grade for Growth, and a B grade for Sentiment and Quality.

In addition to the POWR Ratings grades I've just highlighted, one can see IT's ratings for Momentum, Value, and Stability here. IT is ranked #1 of 13 stocks in the A-rated Outsourcing - Tech Services industry.

PTC Inc. (PTC)

PTC is a global software and services that offers a suite of Internet of Things (IoT) solutions that enable its customers to connect, manage and analyze data, and create applications. It operates through two segments: Software Products and Professional Services. PTC is based in Needham, Mass.

PTC's total revenue came in at $461.79 million for its fiscal second quarter, ended March 31, 2021, which represents a 28.4% year-over year rise. The company's non-GAAP net income for the quarter came in at $127.85 million, up 86.8% year-over-year. Its non-GAAP EPS increased 83.1% year-over-year to $1.08.

For its fiscal year 2021, analysts expect PTC's EPS to increase 29.6% year-over-year to $3.33. It surpassed the consensus EPS estimates in each of the trailing four quarters. The company's revenue is expected to be $1.73 billion in its fiscal year 2021, up 18.7% year-over-year.

PTC announced on June 22, 2021, that it is piloting a private cellular network in the corporate experience center (CXC) at its global headquarters in Massachusetts in collaboration with KPMG. Iain Michel, PTC's General Manager, Connected Products said, "Our collaboration with KPMG to build private 5G networks for clients will enable our customers to adopt new and emerging technologies, enabling the transformation of their operations and an improved user experience." The stock has rallied 70.8% over the past year to close Friday's trading session at $145.14.

It's no surprise that PTC has an overall B rating, which equates to Buy in our POWR Ratings system. The stock has a B grade for Sentiment and Quality. Click here to see the additional POWR Ratings for PTC (Stability, Momentum, Growth, and Value). PTC is ranked #23 of 131 stocks in the Software - Application industry.

Tenable Holdings, Inc. (TENB)

Cybersecurity solutions provider TENB's enterprise platform offerings include Tenable.io and SecurityCenter. The Columbia, Md.-based company also provides software-as-a-service and is focused on building on its deep technology expertise in the vulnerability assessment and management market to provide analytics.

TENB's $123.19 million in revenue for the first quarter, ended March 31, 2021, represents a 20% year-over year rise. Its non-GAAP net income came in at $14.75 million compared to an $8.83 million loss in the prior-year quarter. Its non-GAAP EPS came in at $0.13 compared to a $0.09 loss per share in the year-ago period.

Analysts expect TENB's EPS and revenue to increase 42.1% and 18.7%, respectively, year-over-year to $0.27 and $522.68 million in its fiscal year 2021. It surpassed the Street's EPS estimates in each of the trailing four quarters.

In mid-June TENB became the first vulnerability management vendor to partner with CyberNB's Critical Infrastructure Security Operations Center (CI-SOC) to increase the resilience and security of Canada's critical infrastructure. This outcome is expected to expand the company's market reach in the cyber solutions space. The stock has gained 33.5% over the past year to close Friday's trading session at $41.94.

TENB's strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The stock has a B grade for Growth, Sentiment, and Quality. We have also graded TENB for Stability, Value, and Momentum. Click here to access all the TENB ratings. TENB is ranked #5 of 25 stocks in the Software – Security industry.

Click here to check out our Software Industry Report for 2021

IBM shares were trading at $141.82 per share on Monday morning, up $0.30 (+0.21%). Year-to-date, IBM has gained 15.44%, versus a 17.51% rise in the benchmark S&P 500 index during the same period.

About the Author: Ananyo Guha Niyogi

Ananyo's ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand.

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