Infrastructure Software Companies Buck Trend, Achieve 5.6% to 7.2% Revenue Growth

Morgan Stanley's data reveals that the U.S. software industry experienced a decline in performance during the fourth quarter. However, infrastructure software companies such as Palantir Technologies (PLTR.US) and MongoDB (MDB.US) defied the trend, achieving their strongest revenue growth in two consecutive quarters. This performance underscores the resilience and growth potential of certain segments within the software sector, despite broader market challenges.

The strong performance of Palantir and MongoDB can be attributed to their strategic focus on infrastructure software, which has seen increased demand due to the growing need for robust data management and analytics solutions. These companies have been able to capitalize on the rising trend of digital transformation, where businesses are investing heavily in technologies that enhance their operational efficiency and data security.

Keith Weiss, the lead analyst at Morgan Stanley, noted that the overall software industry saw a decline in revenue, operating profit margins, and earnings per share. The proportion of companies exceeding market expectations by 1% decreased, and the median excess over expectations turned negative after improving for two consecutive quarters. This trend is below the historical average.

For instance, 64% of companies exceeded market revenue expectations by more than 1% in the fourth quarter, down from 71% in the previous quarter. In terms of earnings per share, 69% of companies exceeded market expectations by at least $0.02, compared to 71% in the previous quarter.

However, infrastructure software companies managed to avoid this downward trend, achieving the strongest revenue growth for the second consecutive quarter. SolarWinds (SWI.US) exceeded market expectations by 7.2%, Palantir by 6.6%, MongoDB by 5.6%, and Elastic (ESTC.US) by 4.5%.

In contrast to the broader software industry, 80% of infrastructure software companies exceeded revenue expectations by more than 1%, and 85% exceeded earnings per share expectations by at least $0.02. Weiss highlighted that Palantir is the second-best performing stock in the infrastructure software sector, despite high expectations. The company has achieved accelerated revenue growth for the sixth consecutive quarter, indicating sustained growth potential.

Palantir's stock has risen by 22% year-to-date, while the Nasdaq index has declined by more than 7% over the same period. This performance reflects the broader trend of increased investment in technology infrastructure as businesses continue to digitize their operations. The demand for reliable and scalable software solutions is expected to remain strong, benefiting other companies in the infrastructure software space.

In conclusion, while the U.S. software industry faced challenges in the fourth quarter, the strong performance of infrastructure software companies like Palantir and MongoDB highlights the potential for growth in this segment. As businesses continue to invest in digital transformation, companies that specialize in critical infrastructure solutions are well-positioned to thrive in the current market environment.