Top 10 Software Performers of 2010

It's been a pretty kind year to stock investors, with the S&P showing a 12.7% gain in 2010. Of course, kindness might still feel relative after a lost decade of negative returns that included the nauseating depths and panic of the financial crisis.

However, while the general market might have edged up at a low double-digit pace last year, quite a few stocks brought in monster performances either by riding new trends or by rebounding much stronger than investors expected.

Here's a list of this year's top 10 performers in the software industry.

Source: Capital IQ, a division of Standard & Poor's. Only includes companies listed on US exchanges that contain a market capitalization greater than $500 million.

In the fast-moving software world, several trends shaped 2010. One of the most powerful was data analysis, as companies look for new ways to mine massive amounts of information for more meaningful ways to target customers and operate more efficiently.

The key trend this year in software was cloud computing, once again. Salesforce.com has ridden a wave of customers switching from Oracle's powerful, but complex, CRM tools over to its cloud-based solution. Similarly, Ariba is moving commerce applications to the web; its products enable contract management, expenses, and procurement in a cloud-based environment. As the idea of cloud computing continues moving forward, new industries are embracing the idea of decreasing their IT infrastructure and buying cloud-based tools. Despite persistent security fears, the trend shows few signs of slowing down in 2011.

So naturally, with companies wanting to adopt more cloud computing in their IT infrastructure, but concerned over security, firms with an expertise in that field stand to benefit. Increasing security needs helped propel VirnetX to the top of the list. The company owns a patent portfolio that includes the "Secure Domain Name Initiative," which is integral enough to communications technologies that Microsoft agreed to a $200 million settlement with the company. Investors in the company expect more settlements to follow.

Another trend shaping the software industry is powerful data analysis tools that help companies analyze the massive amounts of data they're taking in. One of the companies leading the charge that makes the top performers list is Tibco Software. The company touts its "Information-Bus" architecture, which offers a slight speed advantage by analyzing results seconds faster than competitors. While that might not sound like much, in today's world where companies are looking to increasingly use location-based advertisements to target consumers, that kind of split-second advantage could prove to be a compelling one.

What else should investors expect from software in 2011? For one thing, virtualization could become a more heated battleground. On the list of top performers, we had VMware, but rival Citrix (Nasdaq: CTXS) didn't trail far behind; the stock soared more than 60% as well.

However, the largest predator of all in the field might be Microsoft. The company has been aggressively moving into virtualization and has rapidly cut into VMware's technology lead. With virtualization being the glue behind the cloud computing revolution, the outsized returns from the industry are leading to more heated competition. If that competition continues to intensify and companies are able to switch between vendors with relative ease, the sky high multiples on these firms will quickly come back down to Earth.

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