The software industry is fertile ground for investors today. Demand is on a long-term upswing, supported by a steady shift toward online work and entertainment. Many software businesses have more attractive selling models that are becoming increasingly subscription based, in turn stabilizing cash flows. And valuations have declined sharply with the latest bear market.
With those positive factors in mind, let's look at two excellent options for investors seeking exposure to the sector. Read on for a few reasons to like Adobe (ADBE 0.24%) and Electronic Arts (EA -0.18%) stocks right now.
Adobe stock has become cheaper this year, partly thanks to a growth slowdown and partly due to worries about its $20 billion acquisition of Figma. The growth hangover won't last forever, and the buyout will likely reward patient investors.
Adobe creates software products for digital creators ranging from students to huge global brands. Its cloud platforms have attracted many more customers this year, even on top of soaring growth in earlier phases of the pandemic. Sales are up to $13.1 billion through the first nine months of the year compared to $11.7 billion a year earlier .
Operating trends might look weaker over the next nine-month period, and Adobe is taking on some extra risk as it incorporates the new Figma business into its cloud platform. But the volatility from these issues should fade, allowing patient shareholders to generate solid returns by simply holding onto this software-as-a-service stock.
2. Electronic Arts
Electronic Arts is a video game developer boasting one of the industry's most dominant content portfolios. From sports franchises to adventure games, casual titles to battle royale brands, EA covers every industry niche and all of the popular monetization models.
That diversity is paying off. Sales in the most recent quarter were up 22% thanks to popularity across brands like FIFA 22 and Apex Legends. EA is also still boosting its earnings at a time when many other digital entertainment specialists are seeing falling profit margins.
That success is a big reason the stock is outperforming peers like Take-Two Interactive. But EA still looks attractive today at a valuation of less than 5 times sales, one of the cheapest rates investors have seen in the last seven years.
While demand in the video game industry might slow into 2023 as compared to the past few years, the long-term outlook is bright for this business. It is becoming more profitable and steadier, too, thanks to the shift to a subscription-based content model. As a result, investors are likely to see good returns in this software niche over time, especially if they focus on world-class businesses like EA's.
Adding EA and Adobe to your portfolio might add volatility in the short term, given the rocky outlook for many tech specialists right now. In exchange for that bumpiness in returns, though, you'll get exposure to some world-class businesses that are almost certain to be posting stronger sales and earnings in five years than investors are seeing today.