3 Top Software Stocks to Buy During the Market Correction

The stock market is witnessing a significant sell-off this month. The Nasdaq Composite Index has dipped more than 10% to trade below its 50-day moving average. It is too early to say if this is short-term market correction or the beginning of a larger move lower. But this selling spree has created an opportunity to buy legacy software stocks at discounted prices…

The COVID-19 pandemic has accelerated the adoption of digitization. Not all software companies will survive the pandemic, as companies are reducing their IT spend on non-essential software. But they are prioritizing their spending on cloud computing, digital transformation, and artificial intelligence.

The software-as-a-service (SaaS) market is highly competitive with many companies offering similar products. Over time, the market will consolidate, and only the ones with a large customer base will survive. The big players in this space, like Microsoft Corporation (MSFT), Adobe Inc. (ADBE), and SAP SE ADS (SAP), have the advantage. They have been in the software market for over 40 years and created a large installed base that is generating stable recurring cash flow.

Microsoft Corporation (MSFT)

Founded in 1975 by Bill Gates, MSFT made Windows operating systems a household name. Like all legacy software companies, MSFT transitioned from the boxed and licensed software to cloud services. In 2014, Satya Nadella became the CEO and led the company to the cloud revolution, with his “Mobile First, Cloud First” strategy. The software giant has also tried its hands on the hardware with Surface Pro Laptops and Xbox game consoles.

After 45 years, Microsoft Windows is the No. 1 PC operating system, Microsoft Azure is No. 2 cloud service provider, and Microsoft Xbox is No. 2 game console. Its cloud business and Office 365 product suite are leading the remote working trend. In the last five years, MSFT has increased its revenue and EPS at a CAGR of 9.4% and 16%, respectively. This growth was reflected in its stock price that surged 390% over this period.

It’s no surprise that MSFT is rated a “Buy” in our the POWR Ratings system. It also has an “A” for Trade Grade, Peer Grade, and Industry Rank, and a “B” for Buy & Hold Grade. In the 92-stock Software – Application industry, it is ranked #9.

Adobe Inc. (ADBE)

When you say digital, the first name that pops up is Adobe. Its Photoshop and PDF tools have made it a market leader in creative cloud and document productivity. The company’s growth hinges on the technology shift towards ‘all things digital’ and the pandemic has provided it the perfect growth environment. Its product suite of Creative Cloud (Photoshop and Illustrator) and Document Cloud (Acrobat PDF, Scan, and Sign) meets the digital needs of companies.

ADBE has grown with time and changed its products according to the digital needs of its clients. Founded in 1982, it started with boxed and licensed software for Photoshop. It later expanded its offerings to documents. With the advent of the cloud, the company transitioned to cloud services between 2007 and 2012 under the leadership of CEO Shantanu Narayen. Today, it earns 89% of its revenue from subscriptions, which are recurring in nature.

ADBE is now expanding into the emerging market of marketing, e-commerce, engagement, and analytics. It has packaged these offerings under its Digital Experience segment. However, it faces intense competition from giants like…

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