Why Now Is The Time To Buy These 4 Computer Software Stocks

by: Zacks Investment Research

SAP AG (NYSE:SAP), the German multinational software corporation, recently reported preliminary Q4 revenue of € 6.35B, up 16% y/y. It issued upside guidance for FY16, with operating profit coming in at €6.4-6.7B versus €6.35B, and with cloud subscription/support revenue up a whopping 76% y/y. This guidance was a nice surprise to investors, and the stock was rewarded with a 2% move higher.

While SAP has a Zacks Rank #3 (Hold) rating, there may be some better opportunities presenting themselves in the software sector, especially in this beaten-down market. With the market so negative at the moment, earnings season has created value in oversold stocks. A skeptical market will create selling pressure on companies regardless of their earnings potential.

The value created by this negative environment, along with guidance from SAP, has these four stocks on every investor's watch list.

MicroStrategy Inc. (NASDAQ:MSTR) is a Zacks Rank #1 (Strong Buy) company which designs, develops, markets, and sells enterprise-ready analytics, mobile, and security software platforms worldwide.

The stock has started off the year by following the market's lead. On Friday, an announcement of reorganization of the management team caused the stock to plummet to a 52-week low of $141.06. The previous quarter's earnings announcement (in October) was also a disappointment for the stock, as product and license subscription service revenue fell 15%.

The valuation for MSTR is getting attractive, with a $1.78B market cap and a 17.45 Forward P/E. Despite the recent negative news, the Zacks A-rated momentum stock is appealing at these levels.

Over the last 60 days, there have been 8 positive estimate revisions, with the current quarter going from $2.20 per share to $2.31 per share.

In addition to the positive revisions, the chart below shows four straight upside surprises. With the exception of last quarter, the stock price has reacted in a positive manner.

A five-year chart shows significant volatility in the company's earnings and stock price. A good risk-reward scenario presents itself due to the significant drop in price, positive estimate revisions, and SAP's guidance.

Blackbaud (NASDAQ:BLKB) is a Zacks Rank #1 (Strong Buy) company that is a provider of software and services designed for non-profit organizations. The company has many years of experience in this niche market, which separates it from larger competitors.

Blackbaud has a 2.8B market cap, with a Forward P/E around 40. The company will have to grow into this valuation with strong revenue growth over the next year. Last quarter, the company guided for organic revenue growth FY17 at 6-10%. This will be the catalyst, and if achieved or surpassed, the stock price will continue the long-term trend higher.

The chart below shows the long-term trend in price and EPS surprises, with only two negative surprises over the last three years. The recent downturn seems highly correlated to the recent market downturn and could be an opportunity for investors.

Citrix Systems (NASDAQ:CTXS) is a Zacks Rank #1 (Strong Buy) company and one of the leading suppliers of application delivery and management software and services. It powers business mobility through secure, mobile workspaces providing people with access to applications, desktops, data and communications on any device, over any network and cloud.

Last quarter, the company decided to spin off its GoTo business and lay off 1000 workers in a restructuring effort. Interestingly enough, just this week it acquired Comtrade, which will enhance the IT department's ability to ensure high-quality mobility experience for end-users. The two moves show investors the company is not afraid to admit what doesn't work and take action on what does.

Agreement among analyst estimate revisions leans to the upside. Over the last 90 days, 10 out of 13 revisions were heading higher, with next year's estimates moving from $3.31 to $3.63.

The chart below shows that Citrix is loaded with positive earnings surprises over the last five years. More importantly, after earnings the initial move has typically been to the upside. With the recent drag down on the overall markets, the company's next earnings could cause a violent move upwards if they showed another positive surprise.

Intuit (NASDAQ:INTU) is a Zacks Rank #2 (Buy) company and is a financial management solutions whose products include TurboTax, Quicken and QuickBooks. Last quarter's earnings in November were solid, providing both a top and bottom line beat. More importantly, the company raised guidance for Q2 to $0.17-0.20 versus $0.05 expected, and revenue to $880-900M versus $826M expected. It also went onto raise FY16 $3.45-3.50 versus $3.43e (prior $3.40-3.45, R$4.52-4.60B). This is the fifth straight EPS surprise, and momentum has continued, as online payroll subscribers were up 17% y/y, with QuickBooks online subscribers +57% y/y.

CEO Brad Smith, went on to say:

"We started the fiscal year the same way we ended the last, with strong momentum across our businesses as our intense focus on our global cloud strategy takes shape. We exceeded our subscriber and financial targets in the first quarter and have raised our earnings per share guidance for the fiscal year based on these initial strong results and our acceleration of share repurchases in the quarter."

The chart below shows that INTU has held its own in a brutal market and should benefit when money comes back into the market.

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