With earnings reports winding down for software growth stocks, the big question is whether big guns like Salesforce.com (CRM), Palo Alto Networks (PANW) and Workday (WDAY) can still stoke a sector rally.
Software growth stocks suddenly perked up in June and early July after a slow start this year. But as earnings reports came in over the past month, software stocks lost some momentum.
The iShares Expanded Tech-Software Sector ETF (IGV) rose 3.4% in July and 8.7% in June. The index is flat in August. Meanwhile, the index is up over 16% for full-year 2021.
The IBD Computer-Software Enterprise group ranks No. 78 out of 197 industry groups tracked.
But some well-known software growth stocks, such as Salesforce and Snowflake (SNOW), have yet to report earnings.
Software Stocks: Valuations Still High
Some analysts say 10-year U.S. Treasury yields remain a key factor in where software stocks are heading. Software stocks sold off when rates climbed in early 2021.
Then, there’s the impact of the delta coronavirus variant on office re-openings and in-person conferences. That’s a wild card for remote work stocks like Zoom Video Communications (ZM) and DocuSign (DOCU).
Heading into the summer’s earnings reports, the valuation of software growth stocks was an issue, RBC Capital analyst Matthew Hedberg said in a report to clients. Stocks trading at historically high multiples needed to post large beats, for example.
“Stock reactions remain mixed as in some cases stocks that had appreciated into the quarter and had good results/guides have been flat to down while some stocks with negative sentiment moved higher on better results,” said Hedberg.
At Wolfe Research, analyst Alex Zukin says software stocks catering to large companies, also called the enterprise market, have done better than those serving small and midsize companies. With federal government spending expected to pick up in the September quarter, that trend could continue.
Software Stocks: Big-Cap Earnings Still To Come
Aside from Salesforce.com, big-cap software stocks yet to report earnings include Workday and VMware (VMW).
Amid a jump in ransomware attacks in 2021, cybersecurity stocks have disappointed. The IBD Computer-Software Security group ranks No. 75 out of 197 industry groups tracked, according to IBD MarketSmith analysis.
Salesforce Stock, Zoom Video Earnings Due
Here’s a chronological scorecard heading into the last few weeks of earnings reports:
Cybersecurity firm Palo Alto reports after the market close on Aug. 23. Palo Alto has been on an acquisition spree to build a cloud computing platform. On its first-quarter earnings call, Palo Alto said it is no longer exploring a new equity structure.
Two software stocks report late on Aug. 25: Salesforce and Snowflake. It’s the first earnings report for Salesforce since it closed the acquisition of Slack Technologies.
Salesforce pioneered selling software under a subscription model. Its software helps businesses organize and handle sales operations and customer relationships. The company has expanded into marketing, customer services and e-commerce.
Snowflake stock, meanwhile, has climbed 18% since the company reported first-quarter earnings on May 26. But shares are still well off their all-time high.
Workday reports earnings late on Aug. 26, as does VMware (VMW). Workday stock has underperformed the broad software sector since mid-May. The company sells software for human capital management, or HCM, such as payroll tools.
Amid the economy reopening, some analysts prefer front-office software stocks that focus on digital transformation as opposed to back-office stocks like Workday.
Zoom Video reports earnings late on Aug. 30. Zoom Video in July announced the acquisition of Five9 (FIVN) for $14.7 billion.
Among cybersecurity software stocks, CrowdStrike reports earnings on Aug. 31, followed by Okta on Sept. 1 and Zscaler on Sept. 9.
CrowdStrike uses machine learning and a specialized database to detect malware on laptops, mobile phones and other devices that access corporate networks. Okta’s software monitors and manages privileged accounts. Okta in March announced the acquisition of Auth0 in a $6.5 billion deal.
In addition, Zscaler is the biggest provider of cloud-based web security gateways that inspect customers’ data traffic for malware.
DocuSign reports earnings late on Sept. 2. San Francisco-based DocuSign is the biggest provider of software that certifies electronic signatures and digitizes contract paperwork. DocuSign has set a roadmap to $5 billion in revenue.
Follow Reinhardt Krause on Twitter @reinhardtk_tech for updates on 5G wireless, artificial intelligence, cybersecurity and cloud computing.