3 Stocks to Watch in Software

These companies are shaping the software world at the OS-level and beyond.

Keith Noonan
Keith Noonan
Jul 21, 2015 at 9:20AM
Technology and Telecom

There's no shortage of stocks to watch in software. From mobile games to music streaming services to business management suites, today's consumers and companies have access to a wider selection of software than ever before. Yet, as varied as the selection of software has become, the vast majority of it relies on an operating system created by one of three companies.

Strong positions in software have enabled Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG) (NASDAQ:GOOGL), and Apple (NASDAQ:AAPL) to become some of the most valuable and influential companies in the world. Here's how these companies dominate the software world and why the stocks should be on your watch list.

For decades, Microsoft enjoyed a monopoly in the realm of operating systems, and leveraged its dominance to create additional business advantages and incredible wealth. The Windows operating system helped Microsoft achieve a present day market cap of roughly $370 billion, along with holdings of approximately $95 billion in cash and short term assets.

The company's dominance in the OS arena lessened considerably with the rise of mobile devices and their associated operating systems, but Windows is still a big deal, and the latest version could prove to be a pivotal product. In order to encourage adoption for Windows 10, Microsoft has offered the software as a free upgrade to users of Windows 7 and 8. The move looks to being off in the enterprise segment, with a report from Spiceworks indicating that 73% of those polled planned to switch to the new Windows within a two-year timeframe.

This is especially good news, as businesses had largely shunned Windows 8, and Microsoft is starting to face more competition in PC operating systems, in addition to the threat posed by mobile devices and the BYOD movement. A strong Windows platform in the enterprise market creates favorable environment for the company's Office suite. Commercial licensing of its software accounted for roughly 46% of Microsoft's revenues in the last quarter and roughly 64% of operating income.

Apple's sleek and intuitive iOS mobile operating system worked in tandem with deft hardware decisions to make the iCompany the largest public traded entity on the market, currently sitting with a market cap of roughly $720 billion.

The appeal of the company's software has helped Apple to dominate the competition for mobile download and ad revenues, even though more devices run on Google's Android operating system, by attracting a customer base that is more likely to spend, and thus more valuable. According to a study from Opera Media Works, iOS devices accounted for roughly 27% of mobile Internet traffic in 2014, but roughly 52% of ad revenues. iOS users are also a much more lucrative market for app downloads. 

The company has already built successful online marketplaces in iTunes and the App Store on top of its operating systems, and now aims to make its hardware and software even more central to users lives with apps such as Apple Music, Apple Pay, and CarPlay. The appeal of Apple's software has helped the company create a premium-friendly mobile environment that also encompasses hardware sales. According to a recent report from Canaccord Genuity, Apple claimed 92% of the operating income generated by the top-8 smartphone makers.

While Apple controls most advertising and download revenues from mobile devices. Google's Android operating system is in significantly more devices. In the first quarter of 2015, IDC estimated that 78% of mobile devices ran on Android, while roughly 18% used iOS. Google's dominance in mobile operating system usage has been achieved by allowing device-makers to use the OS free of charge.

In turn, this has helped speed along the mobile revolution by making mobile device ownership more affordable, thus significantly increasing the number of devices connecting to the Net. And with more phones and tablets getting online, Google's core search business sees greater use.

The company's Chrome web browser also works to this end, making users more likely to use the market-leading search engine. Chrome is gaining share in the browser arena, reportedly accounting for more than 25% of total web traffic according to Net Applications. With Mozilla's Firefox losing ground and the replacement for Microsoft's recently discontinued Internet Explorer still a ways off, Google's browser looks to have room for further growth.

In addition to its operating system and web browser, Google is also working on ambitious projects including self-driving car and translation software. With such a wide user base and the promise of its moonshot technologies, Google is definitely one of the key companies and stocks to watch in software.