The reliance on computer systems in business makes software one of the most important investments a company can make. During the recession, software sales dried up as companies made do with what they had. Costly updates could wait. But investors now expect demand to return in a big way as the economy improves.
Heavy hitters such as Germany's SAP haven't responded as well to the downturn as some of the smaller players have. After less than a year on the job, Chief Executive Officer Leo Apotheker resigned, raising questions about the continuity of the business during a difficult period. SAP's stock has risen about 33% over the past year as more nimble companies like Sybase has gained 56%, while SAP's chief rival, Oracle, has increased 47%.
Oracle has used the recession to scoop up
at a discount, diversifying its offerings in the process. Now the company can offer complete services to customers, integrating the hardware and software into one seamless system, effectively making one-stop shopping possible.
Much the same as with home computers, one of the biggest selling points for business systems is hassle-free use. Anyone who has dealt with computer systems in a large business setting will tell you that the Holy Grail in computer systems is a "set it and forget it" system that requires no triage. While that may be a pipe dream, the less maintenance a computer system requires, the better. That's where sales will be won and lost as companies once again ramp up spending.
Software providers that offer complete packages, along with support, should see the best opportunities to gain market share. They also hold a slightly underhanded method of juicing sales numbers. While their customers may be perfectly content with the current systems, the company can roll out a new version of the software and push the servicing for the older versions off on to a third party, effectively making maintenance more costly in the long run than upgrading to the new version.
For businesses that can't function without servers humming along and connecting employees all over the world, stable operating environments are invaluable. For that reason, regardless of the company, most should see a healthy flow of new business as companies seek to upgrade their systems after holding off during the depths of the recession.
SAP, Oracle, Sybase and
are all rated as "buy" by
model, with Oracle and Sybase earning A-minuses, the highest of the group. All of the companies will report double-digit earnings growth in 2011, analysts say. Oracle's revenue will soar 30%, helped by the acquisition of Sun.
Computer systems aren't cheap, and just about every company in the world needs something to power its operations. And innovation in computing never stops. Due to those two factors alone, business-software vendors should see a strong rebound as growth resumes. Look for some of the smaller names to perform better since they have more room for growth in a tight market.
-- Reported by David MacDougall in Boston.
Prior to joining TheStreet.com Ratings, David MacDougall was an analyst at Cambridge Associates, an investment consulting firm, where he worked with private equity and venture capital funds. He graduated cum laude from Northeastern University with a bachelor's degree in finance and is a Level III CFA candidate.