3 Business Software Stocks to Watch

Damian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As the business world becomes more complex, those software companies that offer services that simplify everyday tasks hold bright growth prospects. J2 Global (NASDAQ: JCOM), Citrix (NASDAQ: CTXS), and Amdocs (NYSE: DOX) are three of these firms, and thus deserve a closer look from investors. Should we dig in?

Fax not dead

J2 Global provides cloud-based communications and messaging services worldwide. Trading close to a 5-year high at about $42, or 16.8 times its earnings, is this stock a buy? I’d say it is. Offering a 2.27% dividend yield, strong profitability and solid growth prospects, this is a stock to add to your long-term portfolio. Upside potential looks significant.

J2’s digital faxing services are increasingly attractive to enterprises looking to reduce costs while ameliorating the security of its information transfers. Holding about 30% of the global market share, the company seems advantageously positioned to benefit from the increasing demand.

Acquisitions will also help expand the company’s footprint and contribute to revenue growth over the years to come. The recent purchase of New Zealand-based Zintel Communications is living proof of this, having augmented the firm’s cloud voice service’s penetration across the Asia-Pacific region. Furthermore, a strong liquidity and cash generation capabilities will help pursue the acquisitions without acquiring significant debt. Apart from operating in the cloud segment, the company recently entered the media sector through the acquisitions of Ziff Davis and IGN, which are expected to continue to grow at double-digits for a few quarters yet.

It's all about customer care

Amdocs provides customer care, billing and order management systems for communications and Internet companies worldwide. Its scale and wide product offering have differentiated it from its peers and positioned it in an industry leading position. Servicing many major providers around the world while enjoying of high clients stickiness due to elevated switching costs, this moated company looks like a buy and hold case.

In terms of valuation, Amdocs’ stock trades at 15 times its earnings, about a 10% discount to the industry average. Meanwhile, the company offers a 1.39% dividend yield, supported by almost $1 billion in cash and marketable securities and a debt-free balance sheet. Moreover, long-term service contracts assure the firm a steady cash inflow.

Going forward, Amdocs´ strong focus on R&D will help it keep ahead of the competition and capture larger market shares. Acquisitions will also help drive growth, both by expanding the (already) widest portfolio in the industry and by increasing exposure to underpenetrated markets or segments. Emerging markets, particularly those in the Asia-Pacific region, are also expected to deliver double-digit growth figures in the years to come. Finally, as competition amongst major carriers increases, corporate spending on customer care and billing software will also rise; with the largest customer base amongst its peers, Amdocs is particularly well positioned to benefit from the situation.

Apples and oranges

Citrix is one of the world’s leading developers and suppliers of application delivery and management software and services. Although financial performance hasn't been very good lately, the future looks brighter, mainly because further downside would require very bad managerial decisions. With its stock trading close to a 2 year low at $63, an attractive entry point is open for investors. Bullish projections estimate average annual EPS growth rates around 23% over the next five years for Citrix.

However, trading at double the industry average valuation in relation to its earnings, is this stock a buy? I´d say it could be one for the long-term, especially.

Going forward, the company will benefit from the ongoing trend towards desktop virtualization, one of its core products. Analysts calculate that this process could impact 600 million desktop users in corporate environments alone. Continuous innovation in this and other fields should keep the company ahead of the competition as demand rises.

Cloud infrastructure and networking is another sector on which Citrix continues to focus. The NetScaler product suite, in particular, remains the most important growth driver for the Cloud Infrastructure and networking segment, while several acquisitions (like that of ShareFile) will help increase exposure to a wider client base and broaden the product offering. In the years to come, constant innovation and increasing demand should work as additional catalysts.

Bottom line

After a succinct analysis, my conclusion is that all three of the companies above, J2 Global, Citrix, and Amdocs, comprise good investments for long-term stockholders. However, if I had to choose one, J2 Global would be my pick, mainly due to its combination of strong growth prospects, a solid business model and a reasonable valuation.

 

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Damian Illia has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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