The NASDAQ Composite has so far reached five record closing highs since the start of June, as the big-tech FANG stocks, which include Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Google parent Alphabet (NASDAQ:GOOGL), have all led the charge higher.
In addition to the much-watched FANGs there has been another segment of the tech sector that has quietly been riding higher in recent months: the Software & Services Group, which is currently trading at an all-time high.
It has rallied roughly 23% on the year, helping contribute to the NASDAQ's gains.
According to a recent report from Fidelity Investments, software stocks have been one of the biggest beneficiaries from the Trump administration's tax cuts which were signed into law at the end of last year. The reasoning behind this claim is that corporations will use the extra cash in their coffers to purchase or upgrade software. "Software tends to benefit from late-cycle economic strength, and I see the industry as a potential beneficiary of tax reform," said Charlie Chai, manager of the Fidelity Select Technology Portfolio, in a research note.
In late 2017, President Donald Trump signed the tax cuts into law, reducing the corporate tax rate to 21% from 35%. That has led many market players to speculate that companies will spend on capital improvements and technology.
That should result in software companies receiving more of the overall amount that companies are spending on technology.
In addition to tax cuts, Chai argued that the strong balance sheets of some of the technology companies around the world could spur mergers and acquisitions of software firms, which could, in turn, lift their valuations.
While household names like Microsoft (NASDAQ:MSFT) (+17% this year), Adobe (NASDAQ:ADBE) (+43%) and Salesforce (NYSE:CRM) (+35%) have been most associated with the sector, some of the smaller, lesser-known names in the group have been outperforming them by a wide margin this year.
Of the 164 stocks in the group, 25 are up at least 50% year-to-date, and three have more than doubled. Below we take a look at the three stocks poised to outperform in the months ahead. The group includes a cloud software provider, an enterprise software company and an application software name.
1. Twilio: +156% YTD
Leading the way higher, shares of Twilio (NYSE:TWLO) are up an impressive 156% since January 1. The bulk of its gains came in May after the cloud communications platform specialist announced blowout quarterly results.
First-quarter revenue increased 48% year-over-year to $129 million, which translated to an adjusted net loss of $0.04 per share. Analysts, on average, were expecting a wider net loss of $0.07 per share on revenue of $116 million.
Twilio's active customer accounts also maintained a torrid pace of growth, climbing nearly 33% year-over-year to 53,985 by the end of the quarter.
"We are honored that a growing list of companies around the world are placing their trust in Twilio," said Twilio co-founder and CEO Jeff Lawson in the company's last earnings statement.
Twilio also sounded bullish on its full-year outlook, telling investors to expect annual revenue in the range of $538 million to $544 million, with an adjusted loss per share of $0.07 to $0.10. Here again, both ranges were comfortably ahead of consensus estimates calling for a wider 2018 loss of $0.12 per share on revenue of $512 million.
Since its most recent low in early February, the stock has more than doubled in less than five months. It's currently trading at $61.61 as of last night's close. It should therefore be no surprise to see it once again flirting with the all-time highs it set shortly after its late-2015 IPO at $70.96.
Twilio next reports earnings on August 6.
2. Coupa Software: +103% YTD
Shares of Coupa Software (NASDAQ:COUP), the procurement software vendor, are up a staggering 103% so far this year. Investors who got in early must be incredibly satisfied— since the company's late 2016 initial public offering (IPO), Coupa's stock has more than tripled from its original price of $18. Indeed, the stock closed yesterday at $63.10.
The company's shares have been hitting a series of fresh all-time highs in the wake of its latest corporate results published on June 4, which revealed a beat on both earnings and revenue growth.
The enterprise software company reported a first quarter loss per share of $0.01 on revenue of $56.4 million, 37% higher from the same period a year earlier. Subscription revenues impressed with an increase of 40% compared to the same period last year to $50 million. “We delivered strong Q1 financial results, including 40% year-over-year subscription revenue growth, positive non-GAAP operating income, and positive free cash flows,” said Rob Bernshteyn, CEO of Coupa.
For the second quarter of fiscal 2019, Coupa forecast a loss per share of $0.08 to $0.10 on revenue of $56 million to $57 million. Both ranges were above consensus estimates calling for a wider loss of $0.11 per share on revenue of $55.5 million. For the full-year, Coupa raised its revenue guidance to a range between $233 million and $236 million, above estimates for annual sales of $230.2 million. It is expected to lose $0.19 to $0.14 per share, comfortably ahead a consensus estimate of a loss of $0.24 per share.
The company's next earnings report is due on September 6.
3. Zendesk: +74% YTD
Shares of Zendesk (NYSE:ZEN) have been on a tear this year, as investors have gotten increasingly bullish on the software-as-a-service company.
Its flagship product is Zendesk Support, a system for tracking, prioritizing, and solving customer support tickets across various channels. The company also offers Zendesk Chat, live chat software to connect with customers on websites, in applications, and on mobile devices.
Like the two companies mentioned above, Zendesk shares, which yesterday closed at $58.83, are up 74% year-to-date. The stock has also been hitting a series of record-highs, signaling that momentum is still strong despite the impressive gains so far.
The company last reported quarterly results on May 1, when the software maker said it earned $0.24 per share on revenue of $129.79 million. That beat analyst expectations for earnings of $0.19 per share and revenue of $126.7 million.
Shares of Zendesk have also benefited from news of recent software firm acquisitions made by Microsoft and Salesforce. The tech giants opened up the coffers for their respective purchases of GitHub, a web-based hosting service for version control via computer code, and MuleSoft, a provider of software integration services for connecting applications, data and devices. Microsoft’s recent deal for GitHub reportedly clocked in at $7.5 billion. That came on the heels of Salesforce’s acquisition of MuleSoft in a $6.8 billion deal that was announced in April.
That's bolstered speculation of more acquisitions to come in the space. Steve Koenig, an analyst covering the software industry at Wedbush Securities, noted that the floodgates may stay open on the deal front, as “there are more waiting to happen.”
Analysts at KeyBanc and Stifel also mentioned Zendesk when they listed a number of companies that could now be in play for an acquisition, making it a good bet going forward.
The company next reports earnings on August 7.