Software stocks continue to outperform the broader market so far this year as recurring subscription fees and cloud-based applications underpin earnings growth. The reliance on remote working throughout the coronavirus pandemic has provided steady demand for Software-as-a-Service (Saas) solutions that allow companies and employees to communicate seamlessly through voice, chat, email, and web applications. Moreover, this trend looks like it will be continuing, given the resurgence of COVID-19 infections across many parts of the world in recent weeks.
Additionally, the group stands to benefit from a need for security software amid a growing number of hacking incidents and cyber-attacks targeting individuals and corporations. Market research portal Statista expects the global cybersecurity market to reach $248 billion in 2023, up from $184 billion in 2020.
Below, we take a more detailed look at three leading software stocks and explore several trading ideas using technical analysis.
F5 Networks, Inc. (FFIV)
Seattle-based F5 Networks, Inc. (FFIV) sells multi-cloud software products for networking traffic, security, and policy management. Morgan Stanley analyst Meta Marshall upgraded the stock Thursday to "Overweight" from "Equal Weight," saying that she believes the firm can grow its core software business between 10% and 15%, even though this division has already grown by 80% over the past 12 months. The analyst also raised Goldman's price target on F5 shares from $135 to $175, implying a 21% increase from Thursday's $144.81 close. As of July 10, 2020, F5 Networks shares have gained 3.69% year to date and 15% over the past three months.
After plunging below $90 per share during the March selloff, the stock staged a remarkable recovery rally to reach a new 52-week high in just over a month of trading. However, since then, the price has traded mostly sideways in a consolidation pattern that finds significant support from a multi-year downtrend line and the 200-day simple moving average (SMA). The Morgan Stanley upgrade prompted a breakout yesterday that may see momentum-based buyers test major overhead resistance around $170. Those who take a trade should protect capital with a stop beneath this month's low at $132.94.
Fortinet, Inc. (FTNT)
Fortinet, Inc. (FTNT) provides automated cybersecurity solutions globally, targeting midsize businesses and government entities. The $24.18 billion company generates the lion's share of its subscription services revenue from its FortiGuard security software and FortiCare technical support. Sales from this segment rose 24.1% year over year in the first quarter to $384.6 million. Trading at $149.60, the stock has risen 40% on the year, outperforming the software infrastructure industry average over the same period by 8% as of July 10, 2020.
Fortinet shares have formed a two-month symmetrical triangle on top of crucial support around $120. Thursday's breakout above the pattern provides a swing trading opportunity for those who want to position for upside continuation. Consider booking profits using a trailing stop to stay in the uptrend while it remains intact. For example, traders could exit the position on the first close below the 20-day SMA.
Oracle Corporation (ORCL)
Oracle Corporation (ORCL) offers a range of enterprise software solutions. Although about 70% of its revenue comes from software licenses, support, and maintenance, the company has increased its focus on generating sales from cloud-based subscriptions to help grow its top line. CEO Larry Ellison said that subscription revenue should see minimal impact from the pandemic, given much of it is already contracted. As of July 10, 2020, Oracle stock has a market capitalization of $176.54 billion, offers a 1.69% dividend yield, and is trading 9.49% higher so far this year.
The software giant's share price has remained mostly range bound for the past year, apart from the steep pandemic-induced decline and subsequent recovery between February and April. Last week, price broke out above the neckline of what now looks like an inverse head and shoulders pattern. Furthermore, the 50-day SMA crossed above the 200-day SMA in mid-June to indicate the emergence of a new uptrend. Think about using a trailing stop here as well to let profits run. Manage risk by placing a stop-loss order beneath the neckline and amending it to the breakeven point if price takes out the all-time high at $59.44.