The software business is a rapidly changing industry, driven by innovation, creativity and technological advances. PricewaterhouseCoopers, one of top five auditing companies in the world, published a report on global software providers that discusses recent industry trends and ranks top 100 software companies around the world by relative software revenues. PwC predicts that the future of the software business will essentially be shaped by three current industry trends: Cloud computing, mobile devices and consumerization of technology.
Here is a list of top 10 U.S.-headquartered global software producers based on their software revenues along with their market-beating potential [data from finviz]:
Microsoft (MSFT) is the largest software service provider in the world, with $45 billion worldwide in software revenue in 2010. Microsoft announced that its largest buy ever was completed with the acquisition of Skype, VoIP software, for $8.56 billion in cash. Although the primary motive was to keep Skype out of the hands of Facebook and Google (NASDAQ:GOOG), the telephone infrastructure of Skype could be used to improve Windows Live Messenger and Windows Phone 7. Microsoft is an extremely profitable company with a gross margin of 78% and operating margin of 39.23%. As of May 31, the stocks trade with a quite low P/E ratio of 9.94, with an ever lower forward P/E ratio of 8.97. Based on 12% EPS growth estimate, Microsoft has a T-Metrix grade of 7, which is one of the best on the list. The current yield of 2.59% is surely sustainable, which makes Microsoft a solid dividend pick for the next five years.
IBM (IBM), the 100-year-old software and hardware giant, is the second-largest software service provider in the world with $20 billion in worldwide software revenue. Its market cap of $204 billion as of May 31 is close to Microsoft's market cap. However, as a stock, IBM’s fundamentals do not look as good as Microsoft’s figures: The dividend yield is 1.79%, P/E ratio is 14.18, and the forward P/E ratio is expected to be as low as 11.52. Moreover, gross and operating margins of 46.15% and 18.50% are lower than Microsoft’s gross and operating margin values. Based on a five-year EPS growth estimate of 10.70%, IBM has a T-Metrix score of 4.
Oracle (ORCL), renowned for its flagship product the Oracle Database, is the largest database management systems provider in the world. Oracle was driven by software products until 2009. However, the acquisition of Sun Microsystems led Oracle to include hardware products in its product portfolio as well. In terms of worldwide software revenue, Oracle is third with $19.2 billion. It has $173.17 billion market value as of May 31. Its P/E ratio is 22.68, and it is the highest among the top three, while its forward P/E ratio is 14.04. Dividend yield is 0.73%, the lowest among the top three. Oracle has gross and operating margins of 75.34% and 31.94% relatively. Based on a five-year EPS growth estimate of 15, Oracle has a T-Metrix score of 4.44.
EMC (EMC) is the primary producer of corporate data storage equipment. In other words, it provides cloud computing solutions to businesses in transforming their operations. In addition to hardware-driven cloud computing, EMC provides software to its customers. It had $6 billion in worldwide software revenue which constituted 42% of its total revenues in 2010. EMC has a current market cap of $58.58 billion as of May 31. It has a relatively high P/E ratio of 31.34 while the forward P/E ratio is much lower as 16.63. In spite of not having a dividend policy, EMC has been an outperformer thanks to its ever-increasing stock performance since 2009. It has an outstanding EPS growth, this year at 66.61%. BofA Merrill Lynch shifted its position from neutral to buy for EMC on May 3. Based on 15% EPS growth estimates, EMS has a T-Metrix score of 4.12.
Symantec (SYMC) is the largest producer of security software in the world. It is best known for its Norton Antivirus software series. Furthermore, SYMC is a pure software company whose revenues almost fully come from software products. In 2010, company had $5.6 billion in revenue, which constituted 94% of total revenues. Recently, it was announced that Symantec will acquire database expertise Clearwell for $390 million to enhance its cloud computing capacity. SYMC has a market value of $14.77 billion as of May 31. It does not have dividend policy. Despite a high P/E ratio of 25.29, experts predict a much lower future; its forward P/E ratio is 10.68. Its past five-year EPS growth rate has been a whopping 37.79%. EPS' growth expectation for next year and the next five years are 13.92% and 9.5% respectively. SYMC has an average T-Metrix score of 3.
HP (HPQ) is one of the largest computer manufacturers in the world. Even though software revenues cover a small proportion of total revenues, HP is the sixth-largest software provider in the US and the seventh-largest software provider in the world. Software revenues are $4.2 billion in total and 4% of total revenues. HP has a market cap of $80.37 billion as of May 31. It has the lowest P/E and forward P/E ratios, 9.06 and 6.91, respectively. It also pays a 1.30% yield. Nevertheless, expected EPS growth rates are low for next year and the next five years, 6.76% and 9.07%. Gross and operating margins are 24.41% and 7.21%. HPQ is another cheap stock in the market with a T-Metrix score of 6.
CA Technologies (CA) is the seventh-largest software provider in the U.S. with $4 billion worldwide software revenue in 2010. CA develops and delivers software and services that help organizations to manage and secure their IT infrastructures. However, experts predict that 2012 will be a tough year due to increased competition in the IT Solutions market. Today’s stock figures, on the other hand, are quite positive. CA has a current market value of $11.84 billion as of May 31. P/E ratio is 14.55, as the forward P/E ratio is 9.91. Current dividend yield is 0.87%. The EPS growth in this year is 10.58%, but it is expected to decline next year to 7.44%. CA has good profit figures; gross and operating profits are 86.88% and 28.31%, respectively. Based on a five-year EPS growth estimate of 11%, CA has a T-Metrix score of 4.62.
Intuit (INTU) is the eight-largest U.S. software company providing financial management and tax preparation software for small- and middle-scaled businesses. INTU has a $3.1 billion worldwide software revenue and a $16.35 billion market cap. It has no dividend. Current P/E ratio is quite high, 26.88 as of May 31. However, forward P/E ratio declines to 18.93. The EPS growth in 2011 is 22.44%, and EPS growth predicted for 2012 is 13.25%. INTU has gross and operating margins of 82.64% and 26.46%, respectively. Based on a five-year EPS growth estimate of 14%, INTU has a T-Metrix score of 3.18.
Adobe (ADBE) designs and delivers multimedia creation software packages. The company had $2.85 billion in worldwide software revenue in 2010. Adobe has some troubles with its Flash Player which is widely used to play videos, playing many online games and viewing Flash-based websites on browsers. With the spread of HTML5, Flash might gradually lose its popularity but it is still an important issue to keep an eye on. Adobe has a total market value $17.47 billion and P/E ratio of 20.48. It does not have a dividend policy; it has an outstanding EPS growth for this year; 102.26%. Furthermore, it has good profit figures; gross and operating profits are 89.37% and 28.18%, respectively. Based on a five-year EPS growth estimate of 14%, Adobe has a T-Metrix score of 4.12.
Apple (AAPL): While one might expect Apple to be at the top of this list, only 6% of Apple's revenues come from its software business. Apple develops and delivers a wide range of products from computers and products like the iPad, iPhone, iPod and software related to all its products. Apple enjoys dominance in the tablet and mobile devices market. I expect Apple to be a dominant power in these areas for at least five to 10 more years. The company has a total market value of $321.66 billion as of May 31. P/E and forward P/E ratios are 16.57 and 11.95, respectively. Despite no dividend policy, investors enjoyed quite high EPS growth rate of 60% over the last five years. Gross and operating profits are 39.07% and 29.02%. Based on a five-year EPS growth estimate of 20%, Apple has a T-Metrix score of 7.04 out of 10.
Disclosure: I am long MSFT.