What are the Best Performing Software Stocks?

Exploring the returns of the best of 73 software stocks

In our last post, we explored the risk-adjusted returns of a portfolio of software stocks. Here we delve into the performance of individual stocks to identify the outliers.

Below are the five best returning software stocks from April 2015–2020 compared to a portfolio of all software stocks.

The top 5 returning software stocks from April 2015–2020 were Shopify, Five9, RingCentral, Coupa, and Everbridge. Were these the stocks you would have guessed?

Shopify is the runaway winner, with an unfathomable 2178% return since its IPO in May 2015. Even if you exclude the run-up in recent weeks, it would still be the best performer of the pack.

Interestingly, Five9, RingCentral, and Everbridge are three of the highest returning stocks. This may come as a surprise as they are less sexy than the high-flying SaaS names that dominate headlines and capture retail investor interest.

Even adjusting for beta (using the Nasdaq as the benchmark), the same stocks make up the top five (Coupa and Everbridge swap places). In fact, all five had a beta below that of the software portfolio, which returned a meager beta-adjusted 140% in comparison. These five stocks produced superior returns over the past five years and were less volatile than the equal-weight basket of 73 software stocks. This is a remarkable result, contradicting the commonly held view that higher returning stocks are usually more volatile (i.e. higher beta or riskier).

On a beta-adjusted basis, the same stocks make up the top 5. Interestingly, all have a lower beta than the software average of 1.5.

There are also several software stocks that IPO’d more recently, putting them at a disadvantage when evaluating on a 5-year horizon. To normalize, we adjusted the beta-adjusted return by the number of trading days each stock was public for. Now, Zoom becomes the best performing software stock, returning 2366% on an apples-to-apples basis. Shopify, Five9, RingCentral, and Everbridge remain the next best performers.

Normalizing for the number of trading days, Zoom jumps to the top as the software company with the highest beta-adjusted return.

This is a direct result of Zoom’s beta, which is just 0.28 — the lowest of any software company. Its strong returns coupled with a low correlation with the market makes it a uniquely valuable asset from a portfolio construction perspective.

These prolific and low-beta returns of the top software stocks confirm the value in maintaining conviction in the best assets and (sometimes counter-intuitively) buying your winners in turbulent times. A stock that feels expensive because it’s trading up 30% in recent weeks or months may actually be incredibly cheap on a long enough horizon.

Note: We used publicly available data from Investors Exchange from April 22 2015-April 21 2020 for all calculations.

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