Investing in technology sector: III – Software segment (a)

HTML is used in Web Development, Email Programming, etc. Ruby is typically used in Web App Development, Robotics, Networking, System …

Parts I and II of this series dealt with the hardware category of the technology sector. In Part III we take a look at the software category and its sub-segments.

The combined sales of the four big tech companies (Alphabet, a.k.a. Google; Amazon, Apple; Facebook) leapt 18 per cent year on year in the latest quarter, to $227bn, … while their after-tax profits jumped by 31 per cent, to $39bn. The surge comes in a quarter when companies in the S&P 500 are expected to suffer an overall revenue decline of more than 2 per cent, with earnings down 17 per cent.

  • Financial Times, October 30, 2020

Three out of the four above mentioned companies can be said to be driven by software as their core operating driver. And even Apple’s performance is driven by its propriety operating system software, iOS and MacOS. Add to this Microsoft Corporation’s (the biggest software play) US$ 35 billion in third quarter 2020 revenue (up 15% YoY) and net profit of 10.8 billion (up 22% YoY). The combined market capitalisation of these five companies was US$ 6.8 trillion as on October 30, 2020. To put this in some perspective, the combined market cap of these five companies is greater than the world’s third largest economy, Japan which has a GDP of US$ 5.75 trillion.

Consider also the latest news that Ant Financial is set to raise over US$37 billion this week, in the world’s biggest IPO offering in history. Ant Financial is the fintech electronic payments company, previously a subsidiary of Alibaba, with its ‘app’ (software) Alipay, having over 900 million active monthly users.

These few facts show why information and communication technology is the leading driver of change for humanity going forward. The Covid-19 pandemic has greatly accelerated adoption of the digital way of life as lockdowns and social distancing have become routine affairs. According to Microsoft CEO, Satya Nadella, “we’ve seen two years’ of digital transformation in two months”. The ultimate market size of software is effectively unlimited, constrained only by the human imagination. It is worthwhile therefore, to know and understand what is happening in the tech world and if possible, benefit from investing in the companies in this sector.

It is in the above context that we now turn to the software category of the technology sector. Here we just scratch the surface of a huge and diverse industry to provide a summary bird’s eye view of this market segment for the ‘non-techi’ reader or potential investor.

The global software market size in 2020 is estimated at US$ 1.2 trillion (Statista) and includes both signed deals that remain under contract, and the annual revenues associated with new contracts signed. Software is defined as any computer program or data that is written in computer code and can be electronically stored. It is utilized by computer processors to perform various tasks in order to provide some kind of experience for an end user (computer games, playing music, mobile applications, electronic payments, streaming video, tax and accounting calculation, etc.) or some tool that can be used in business I.T. systems and processes. The software market covers all computer programmes, websites, apps and operating systems.

Major programming languages include:

  • Java used in Enterprise Architecture, Cloud Computing, Internet of Things (IoT). Also used extensively in Android applications in smartphones, smart TVs, tablets, etc.

  • Python is typically used for Web and Internet development, scientific and numeric computing and desktop graphical user interfaces (GUIs)

  • JavaScript is used in Front End Website Development and Gaming Development

  • C Language is used in Embedded Systems, Systems Programming, Artificial Intelligence, Industrial Automation, Computer Graphics, Image Processing and Game Programming

  • C++ is used in System/Application Software, Drivers, Client-Server Applications and Embedded Firmware

  • Objective C is used primarily in software development and is commonly used by developers to create apps for Apple’s iOS and OS X operating system.

  • SQL is used in Data Analysis and Big Data Mining

  • HTML is used in Web Development, Email Programming, etc.

  • Ruby is typically used in Web App Development, Robotics, Networking, System Administration and Security

The software category can be viewed from several different perspectives because of its large spectrum and diverse usage. One way to categorise it is as follows, which itself is not all encompassing:

SOFTWARE CATEGORY

  • Operating System Software and Firmware

  • Infrastructure Systems Software

  • Application Software including Enterprise Software

  • Database and Analytics Software

  • Cloud Computing, Software as a Service (SaaS & IaaS)

  • Artificial Intelligence (ML and DL)

The biggest sub-segment is Application software which accounts for 52% of global software sales of US$ 1.2 trillion, followed by Infrastructure Systems software (17.7%), Software as a Service [Saas] (11.9%) and Operating System & Firmware (6.6%), according to estimates by Statista. There are sometimes overlaps in the above sub-segments but we shall discuss them separately for ease of initial understanding. Some of the biggest companies in the global software space are well known brands such as Microsoft, Oracle, IBM, SAP, Symantec, EMC, VMWare, HP, Salesforce.com, Inuit, Adobe, among others. We look at each of the sub-segments of the software category in summary fashion below.

Operating System Software &Firmware

All computers need operating systems. An operating system (OS) is the software that manages all other software and hardware on a computer, providing common services for programmes to allow a computer to operate. Other programs, generally referred to as application programs, need an operating system in order to function. This includes firmware, which handles how the hardware functions on a basic level, but it also encompasses the operating system (OS) which includes the likes of Android, Windows, iOS and OSX. It is this software that then goes on to determine how other programs must be written and which programming languages must be used. OS manages a computer’s resources, controlling the flow of information into and from a main processor and performs other tasks such as memory management, control of displays, input/output peripheral devices, networking and file management, and other resource allocation functions between software and system components. In this way, OS provides the foundation on which applications, middleware and other infrastructure components function.

The Global OS software market is quite concentrated with relatively few players dominating different segments of the OS market. Major Operating Systems include Microsoft’s MS-Windows, Google’s Android and Chrome OS Apple’s Mac OS, Linux, Solaris, Free BSD amongst several others. For desktop PCs, Windows holds the greatest share of the PC operating system market around the world. Apple’s macOS runs on most of Apple’s personal and enterprise computers. On the other hand, Google’s Android and Apple’s iOS are the leading mobile operating systems in the world. Android’s share is estimated at about 75 percent of the market, while iOS’s share sits at around 24 percent. Linux, while having a tiny share of the overall market, has 80% share of the Internet of Things (IoT) OS.

Overall, the market shares of OS software are as follows: Android – 40%, Windows – 35%, Apple iOS & MacOS – 20.7%, Linux – 1%. At the big corporate/organization server end of the scale, Windows accounts for 72% of the market, followed by Linux at 13.6%, Unix at 5.6% and OS/390 2.1%, according to Statista estimates.

Infrastructure Systems Software

This segment includes IT operations management and security software, application development and application integration and middleware (AIM) software, information management software, storage management software, network management software, Virtualization and other infrastructure management aspects.

IT operations management (ITOM) software covers the tools needed to manage the provisioning, capacity, performance and availability of the computing, networking and application environment. These also include application integrations, load balancing, centralized monitoring/ management, server management, application monitoring, infrastructure firewall, i.e. security software to control and monitor access to internal and external IT resources. It includes Application Security, Endpoint Security Platforms, Fraud Prevention and Transactional Security, Identity Management, Messaging Security, Data Protection, Security Intelligence and Management, Network Security, Server Security and Web Security.

Application development (AD) and AIM software are tools that relate to application life cycle management [ALM], design, construction, automated software quality and other AD software). Application Infrastructure and Middleware (AIM) includes business process management (BPM)-enabling technologies, platform middleware, portals and Web 2.0 infrastructure. Integration-enabling middleware is software that enables independently designed applications, software components or services to work together, by supporting data consistency, composite application and multi-step process styles of integration.

Information management software includes Data Management and Integration software such as Data Integration Tools, Data Quality Tools and Database Management Systems. Database management system (DBMS) is used for the storage and organization of data that has defined formats and structures. Storage management software runs on a server, storage network device or storage device to aid in managing the device or managing and protecting the data. Storage management software represents the tools needed to manage capacity, performance and availability of data stored on disks, tapes and optical devices, as well as the networking devices.

Other infrastructure software includes clustering and remote control software, directory servers, OS tools, mainframe infrastructure management, mobile and wireless infrastructure management. Key functions of Network Management software includes fault identification, performance management, network provisioning and maintaining QoS.

Major publicly listed companies in this segment include, but are not limited to, Broadcom Inc., CISCO, Citrix, Dell-EMC, HP, IBM, Juniper Networks, Micro Focus International, Microsoft, Oracle, PROGRESS, Red Hat, SAP and VMWare.

(The writer is the former Managing Director of Pakistan Stock Exchange. The views expressed in this article are not necessarily those of the newspaper. The companies noted in this article, according to the writer, are for information purposes only and used simply as examples. This is not a solicitation to buy or sell any security or company mentioned herein. Except for a small investment (US$4,000/=) in an ETF (IYW), the writer claims he does not own stock in companies noted herein. Forward-looking statements should not be considered as guarantees or predictions of future events. Data provided in the article is from publicly available third-party sources, however its accuracy is not guaranteed and the data should be treated merely as indicative. Anyone interested in finding about investment opportunities should conduct their own research and due diligence within the guidelines of their respective jurisdictions and through authorised investment professionals. Potential interested readers should note that past performance is no assurance of future performance of an investment and the value of any investment may become worth more or less than the original invested amount.

Copyright Business Recorder, 2020