If you’re looking to spice up your portfolio, the software sector is one place to search for potential big winners. I’ve been casting an eye over three stocks in the sector: Aveva (LSE: AVV), Idox (LSE: IDOX) and Cloudbuy (LSE: CBUY).
FTSE 250 firm Aveva describes itself as “the world’s leading engineering software provider to the plant, power and marine industries for over 45 years”. Aveva’s technology helps its customers work with less risk, shorter lead times and greater business efficiency.
The company announced its annual results today, for the year ended 31 March. Revenue was down 12% and profit before tax slumped 20% — in line with revised expectations. Business was hit by the low oil price through the period and subsequent reduction in customer activity. The strength of sterling also had a pronounced negative effect, accounting for half of the fall in revenue.
Analysts expect earnings to bounce back by a modest 3% this year followed by 10% next year. However, this rate of growth doesn’t appear to merit the price-to-earnings (P/E) ratio on which Aveva currently trades: 25 this year, falling to 22 next year.
AIM-listed Idox has a market capitalisation of around £140m, and describes itself as “a leading supplier of specialist information management solutions and services”. The company has two divisions: Public Sector Software and Engineering Information Management.
In a trading update today, ahead of half-year results in June, Idox said public sector sales (which account for three-quarters of group revenues) were up 14%, helped by outsourced service delivery for the UK General Election. However, total group revenue was flat, due to engineering sales being down 28% — the company suffering here, like Aveva, from the knock-on effects of the low oil price.
Analysts aren’t expecting earnings growth for the company’s current financial year (ending 31 October) but have pencilled in a 13% increase for next year. Idox’s earnings prospects, then, are similar to Aveva’s. However, Idox is more attractively rated on a current-year P/E of 12, falling to 10.6 next year. Still, Idox is more of a reasonable-growth-at-a-reasonable-price proposition than a sexy-sky’s-the-limit-growth-story.
For out-and-out growth, Cloudbuy, an AIM-listed company, valued by the market at £30m, appears to have more potential than either Aveva or Idox — although, as you might expect, risk is higher. Cloudbuy describes itself as a “global provider of cloud-based e-commerce marketplaces and B2B buyer and supplier solutions”.
The company has been loss-making to date but its technology and international expansion appear to be gaining traction. Cloudbuy has an exclusive agreement with Visa (Asia Pacific), is working with 14 banks across the US, Europe, India, Singapore, Hong Kong and Australia, and has been announcing a steady stream of contract wins — the latest today, alongside an upbeat statement at the company’s AGM.
Cloudbuy’s house broker — which seems to be the only broker currently covering the stock — reckons the company will turn a profit for the first time next year. The forecast P/E is around 90, but earnings could grow rapidly from the low base of a maiden profit. Certainly, though, the potential high reward comes with high risk, and it could be prudent to watch the company’s progress a little longer.
G A Chester has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.