3 Software Stocks to Watch Closely in a Thriving Industry

The software industry is poised for substantial growth, projected to reach $1.397 trillion by 2030 with an 11.3% CAGR, driven by accelerated digital transformation, cloud adoption, and pervasive AI/ML integration. While global macroeconomic uncertainty has led to a downward revision in overall IT spending forecasts for 2025, investment in AI-related infrastructure remains robust. Despite the Zacks Computer Software industry underperforming the broader tech sector and S&P 500 over the past year and trading at a premium forward P/E of 33.11x, companies like Microsoft, PTC, and Manhattan Associates are demonstrating strong performance, particularly in cloud and AI-driven solutions.

Analysis

The software industry is positioned for significant long-term expansion, driven by secular tailwinds including digital transformation, the shift to SaaS models, and particularly the integration of AI and ML. Projections from Grand View Research support this, forecasting an 11.3% CAGR for the global software market from 2025 to 2030, reaching a value of $1,397.31 billion. However, this optimism is tempered by near-term macroeconomic headwinds, which prompted Gartner to revise its 2025 worldwide IT spending growth forecast down to 7.9% from 9.8%. Notably, Gartner expects AI-related infrastructure spending to remain robust, suggesting a bifurcation in investment priorities. This dynamic is reflected in the market, where the Zacks Computer Software industry has underperformed the broader tech sector over the past year with an 18.2% gain versus the sector's 30% increase, despite a favorable Zacks Industry Rank in the top 39%. The industry also trades at a premium forward P/E of 33.11x, well above the S&P 500 and its parent sector, indicating high investor expectations.

The performance of individual companies highlights this divergence. Microsoft (MSFT) exemplifies a leader capitalizing on the AI boom, with its AI business growing 175% year-over-year to a $13 billion run rate and Azure revenue growing 34%. PTC Inc. (PTC) also shows strong execution, leveraging AI in its core CAD/PLM products, which is expected to fuel 31.7% earnings growth in fiscal 2025. In contrast, Manhattan Associates (MANH), despite a 22% increase in cloud revenue and a 26% jump in RPO, reported only 2.7% total revenue growth and has seen its stock plunge 20.1% in the past year, illustrating that strong cloud metrics do not guarantee overall success in the current environment.

Key Decisions for Investors

• Prioritize exposure to structurally dominant companies like Microsoft that are demonstrating hyper-growth in AI and cloud infrastructure, as these segments are expected to see continued investment despite broader IT spending slowdowns.
• Beyond hyperscalers, identify specialized software providers like PTC that are successfully integrating AI into their core offerings, evidenced by strong forward earnings growth projections and positive stock performance.
• Exercise caution with companies showing mixed signals, such as Manhattan Associates, where strong cloud growth is overshadowed by weak total revenue growth and significant stock underperformance, as the industry's high valuation leaves little room for execution missteps.