These 3 Software Laggards Could Be Primed for a Q2 Bounceback

During the first three months of 2021, a lot of tech stocks fell, or were stagnant, as investors looked to other sectors that they believed could outpace tech investments.

That short-term thinking by some investors has opened up buying opportunities for others. If you're looking for a few software stocks to add to your portfolio right now, here's why Zoom Video Communications (ZM -0.82%), Datadog (DDOG -3.94%), and Apple (AAPL -1.22%) look like good buys right now.

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Repeat after me: Zoom is not just a coronavirus stock

Brian Withers (Zoom): It seems funny calling Zoom stock a laggard after its incredible run over the past year. But so far this year it's trailing the S&P 500 and down over 40% off its October 2020 high. The stock may have stalled, but there's still lots to love about this video conference call specialist. 

Even as we enter the fourth quarter that the coronavirus has accelerated Zoom's growth, it is still putting up massive numbers all around.

Data source: Company earnings presentation. Note: Q4 FY2021 ended on Jan. 31, 2021. QOQ = quarter over quarter. YOY = year over year. 

Large customer growth and top-line revenue are still hitting triple-digit year-over-year comps, and because of the company's ability to scale, its bottom line has skyrocketed. And yet, the stock is actually valued lower than it was before the coronavirus started. Today, the video conferencing specialist's price-to-sales ratio of 37 is more than 10% below where it was on March 1, 2020.

Investors may be worried about Zoom's ability to continue to put up solid growth numbers, but I'm not. Management has projected 42% year-over-year gains for the coming year and it has the growth levers to make it happen. Zoom Phones are flying off the shelves and are expected to be a $23 billion market by 2024. Zoom Rooms, which is the company's software solution for conference rooms using inexpensive commodity hardware, will enable companies to transition back to the workplace while allowing employees to continue to work from home. Lastly, its international business is still only a third of all revenue, growing at more than two times the rate of the Americas region.

Is Zoom set up to bounce back after its Q1, Q2, or second half of the year? No one can tell the future, but this company is executing at a high level and investors who get in today will be happy over the long run.

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Take this dog for a walk

Danny Vena (Datadog): The digital transformation was underway long before the pandemic, but the events of the past year have given things a big push forward. With more companies adopting the cloud than ever before, the strategic importance of keeping these systems up and running can't be overstated. Monitoring and maintaining both employee- and customer-facing systems to ensure they continue running smoothly and avoiding costly downtime is critical. That's where Datadog comes in.

The cloud-native service provider keeps a digital eye on cloud systems, assembling vital data into a single dashboard. It not only provides early warnings for developers if a problem could take down vital systems, but it also looks for anomalies that might foreshadow future issues.

Datadog has been cited for its application performance monitoring by research company Gartner, which named it a "Leader" for 2021 in its vaunted Magic Quadrant. The company was recognized for its "ability to execute" and "completeness of vision." Datadog was also cited by Forrester Research as a strong performer.

These industry accolades would be meaningless without strong financials to back them up -- and Datadog has that covered as well. Revenue grew 66% in 2020, while its adjusted earnings per share of $0.22 improved significantly from a $0.01 loss in 2019. The company is on the verge of consistent profitability, but Datadog generated free cash flow of $83 million during the year, illustrating the impact of non-cash charges.

At the same time, Datadog's client metrics are equally compelling. The company closed out the year with 1,253 customers with annual recurring revenue (ARR) of $100,000, an increase of 46% year over year, while customers with ARR of $1 million grew 94% to 97.

While Datadog has performed admirably over the past year, the stock was recently caught up in the downturn that hit high-growth and tech stocks, with no change in the thesis or opportunity. This means investors can get Datadog shares at a 20% discount to recent highs and the stock could come roaring back in the coming quarter.

Image source: Getty Images.

Don't overlook Apple's services opportunity 

Chris Neiger (Apple): Apple has traditionally been known as a hardware company because it still makes a significant amount of its revenue (66% in the first quarter) from sales of its iPhones. 

But the company's software, including Apple Fitness+, Apple Music, Apple TV+, Apple News+, and the App Store, is powering the company's fast-growing services segment. Apple's services are one of the company's next big areas of growth and the tech giant is already experiencing phenomenal results from the segment. 

Services revenue grew 24% in the first quarter to $15.8 billion. This figure is even more impressive when you consider that in just three years Apple has increased its services revenue by 88%. 

Investors can likely expect more year-over-year growth from the company's services segment in the upcoming second quarter, but it's the company's long-term prospects in the services market that investors should be focused on.

For example, Apple is reportedly working on a premium podcast subscription service that could launch later this year. The service could not only generate more revenue for Apple, but the company could potentially bundle a premium podcast subscription with other services to keep users further entwined into its ecosystem. 

Additionally, a research note released by Loup Ventures earlier this year said that Apple could also release premium versions of its popular apps, including Maps, Health (an expanded version of Fitness+), Stocks, and even Mail. 

While all of these ideas may not see the light of day, the fact is that Apple's services segment is already growing at a healthy clip, and any new services that Apple introduces will likely help accelerate that growth. In fact, some estimates put the value of Apple's services at around $1 trillion.

With Apple's stock making only modest gains in the first few months of this year, right now could be a good time to pick up some Apple shares as the company continues to expand its services footprint.