Software Stocks: Better Times Ahead

The industry is in the doldrums, but the long-term outlook is favorable. Here are S&P's top picks in the group

By Jonathan Rudy

Fueled by corporate money freed from Y2K spending, software companies saw a dramatic revenue increase in 2000. But the industry will experience lower revenue growth rates going forward into 2001 as spending slows.

Long-term, the rapidly evolving Internet, as well as intranets and extranets, are creating strong demand for new software. Many vendors also are creating products for the burgeoning e-commerce market. PC software remains attractive, despite slowing shipments, and sales should accelerate in the second half of 2001, led by Microsoft's Windows products including Windows' XP operating system that will be released in fall of 2001. Mainframe software growth will be slower than in other segments.

The computer services industry is solid, led by difficulties in integrating hardware from different vendors and advances in technology. Computer-services stocks have strong and stable growth characteristics; they have a high level of repeat business and long contract cycles, which leads to revenue and earnings predictability.

Standard & Poor's has a neutral outlook for the software and services industry, but the long-term investment outlook remains positive. S&P has a 5 STARS ranking (buy) on Symantec (SYMC ), and 4 STARS rankings (accumulate) on Check Point Software (CHKP ), Rational Software (RATL ) and RSA Security (RSAS ).

Jonathan Rudy is a software and computer services analyst for Standard & Poor's

Before it's here, it's on the Bloomberg Terminal.