Software is a high profit-margin business. Companies embracing a recurring revenue model can do even better. But with tech shares looking volatile lately, these companies have been out of favor with the market as part of the tech space.
However, strong earnings by software companies point to further profits ahead. These companies will be able to pass on higher costs, and investors who target successful software companies will come out ahead in time.
One such name is Adobe (ADBE). The software company just reported better-than-expected earnings. The company also raised guidance for its fiscal year 20201.
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The software giant, which has embraced the recurring revenue model, has seen its earnings rise 164 percent in the past year, and the company sports a 40 percent profit margin. Yet shares have underperformed the S&P 500 in the past year, and are still down over 10 percent from their recent highs.
Action to take: The strong earnings point to undervalued shares here. Investors may like shares here, although the company doesn’t pay a dividend.
With shares at least starting to move up in recent weeks, the July $490 calls, last going for about $21.50, could offer mid-to-high double-digit returns. Traders can likely nab those profits well before the trade expires.