NEW YORK (CNN/Money) -
The software industry is likely to be left out of the third-quarter tech profit party, but that doesn't mean the stocks will be.
Siebel Systems is on tap to report results Wednesday and analysts expect zero earnings growth. The expectation for PeopleSoft results, due later this month, is a more than 20 percent drop, though the company did say recently that it expects to beat that estimate.
The best-positioned large software company, SAP, is expected to post an 11 percent increase in earnings Thursday morning. Good, but not great.
"Where the heck is the good news?," said Richard Williams, strategist with research firm Summit Analytic Partners, which focuses on software companies. "So far, there have not been concrete signs of a recovery."
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But none of that has slowed down the stocks. Shares of PeopleSoft (PSFT: Research, Estimates) are up 15 percent this month, SAP (SAP: Research, Estimates) has surged nearly 25 percent, and Siebel (SEBL: Research, Estimates) has gained almost 30 percent.
What gives? David Hilal, an analyst with Friedman Billings Ramsey, notes that the fourth quarter is traditionally the strongest of the year for software spending, and so there isn't much risk that the companies will cut guidance.
"Investors feel they are not going to step in a land mine -- that's brought money back to the sector," said Hilal.
Another reason for the jump in software stocks: the return of merger mania. The trend toward consolidation is picking up steam as customers seek to work with fewer suppliers that offer a wider range of products.
PeopleSoft is one beneficiary of this trend, as it continues to fight the hostile takeover efforts of rival Oracle (ORCL: Research, Estimates). Shares of PeopleSoft are up nearly 40 percent since Oracle first announced its interest in the company in June. And PeopleSoft is also taking part in consolidation as an acquirer, having agreed to buy rival J.D. Edwards a few days before Oracle launched its bid.
Since the PeopleSoft-Oracle saga began, Mercury Interactive (MERQ: Research, Estimates) agreed to buy privately held Kintana for $225 million, Business Objects (BOBJ: Research, Estimates) agreed to buy privately held Crystal Decisions, a hot firm that was preparing to go public, for $820 million, and Hyperion Solutions (HYSL: Research, Estimates) purchased Brio Software (BRIO: Research, Estimates) for $140 million.
This week, storage company EMC (EMC: Research, Estimates) announced its second big software acquisition in recent months, agreeing Tuesday to acquire content management software firm Documentum (DCTM: Research, Estimates) in a deal originally valued at $1.7 billion. (In July, EMC said it was purchasing storage software firm Legato Systems (LGTO: Research, Estimates) for $1.3 billion.)
The Documentum deal raised a lot of eyebrows on Wall Street because EMC is paying a rich premium for the company. Based on the $1.7 billion price tag (the deal value fell to about $1.4 billion due to the drop in EMC's stock price Tuesday) EMC was valuing Documentum at about 5 times 2004 sales estimates and more than 70 times 2004 earnings estimates.
As investors bet on who will be next to get scooped up, this will probably lift stock prices further. "We're going to see more software acquisitions at higher valuations. Stocks naturally will trade higher when you raise the bar," said Patrick Mason, an analyst with Pacific Growth Equities.
Let the software shakeout begin.
Analysts quoted in this story do not own shares of any of the companies mentioned and their firms have no investment banking relationships with the companies.
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