Continued digital transformation across sectors, increasing use of data-oriented solutions, and hefty investments in cloud-based technologies have helped the software industry grow by leaps and bounds over the past years. “Investment in cloud to modernize legacy applications will drive strong software sales momentum in front- and back-office applications,” according to a Forrester report.
The global software market revenue is expected to grow at a 6.5% CAGR and reach $812.90 billion by 2027. Emphasis on innovative technologies like blockchain, artificial intelligence, and machine learning should boost the industry’s growth.
Given this backdrop, we think investors should buy quality software stocks Fortinet, Inc. (FTNT) and NortonLifeLock Inc. (NLOK). However, as the industry struggles with rising borrowing costs due to the rising interest rates, it could be wise to avoid Okta, Inc. (OKTA) due to its weak fundamentals.
Stocks to Buy:
Fortinet, Inc. (FTNT)
FTNT provides broad, integrated, and automated cybersecurity solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
On August 23, FTNT and NEC Corporation (NEC), a leader in the integration of IT and network technologies, entered into a global agreement to jointly build secure 5G networks for communication service providers (CSPs). Through the partnership, Fortinet expects to provide its comprehensive, best-in-class security solutions, including FortiGate, the world’s most deployed next-generation and highest-performing hyperscale firewall.
In the same month, the company introduced FortiGate 4800F, the industry’s fastest compact hyper-scale firewall for hyper-scale data centers and 5G networks, with 2.4 Tbps capacity and varied 400GbE, 200GbE, and 50GbE ports. It enables enterprises and MNOs to concurrently run more applications while reducing their physical footprint and effectively securing their networks.
These new advanced offerings should boost the company’s growth and profitability.
FTNT’s total revenue increased 28.6% year-over-year to $1.03 billion, and its total gross profit grew 26.9% year-over-year to $779.30 million in the fiscal second quarter ended June 30, 2022. The company’s non-GAAP operating income amounted to $255.40 million, up 25.6% year-over-year.
Street expects FTNT’s revenue for the current fiscal quarter ending September 2022 to come in at $1.12 billion, indicating an increase of 29.6% year-over-year. The $0.27 consensus EPS estimate for the same period represents a 38.1% year-over-year increase. The company also surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 2.5% intraday to close its last trading session at $51.71.
FTNT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
FTNT has an A grade for Quality and a B for Sentiment. It is ranked #3 out of 27 stocks in the Software-Security industry.
Beyond what is stated above, we have also rated FTNT for Momentum, Value, Growth, and Stability. Get all the FTNT ratings here.
NortonLifeLock Inc. (NLOK)
NLOK provides cyber safety solutions for consumers worldwide. It offers Norton 360, an integrated platform that provides extensive cyber safety coverage and a subscription service providing protection for PCs, Macs, and mobile devices against malware, viruses, adware, ransomware, and other online threats.
On September 2, the company announced that its merger with Avast plc, a provider of cybersecurity services in the U.S. and internationally, is expected to close on September 12, 2022. This merger is expected to be strategically beneficial for the company.
NLOK’s net revenues increased 3.1% year-over-year to $707 million in the fiscal quarter ended July 1, 2022. Its gross profit grew 3.6% from its year-ago value to $605 million, while its net income improved 10.5% from its prior-year quarter to $200 million. The company’s EPS increased 6.1% year-over-year to $0.33.
Analysts expect NLOK’s revenue to increase 3.8% year-over-year to $718.49 million in the ongoing fiscal quarter. The company’s EPS is expected to grow 5.4% year-over-year to $0.45 in the same period. It also has an impressive earnings surprise history as it surpassed the consensus EPS estimates in three of the trailing four quarters.
NLOK’s stock declined marginally intraday to close the last trading session at $23.40.
NLOK’s fundamentals are reflected in its POWR Ratings. The stock has an A grade for Quality. Within the same industry, it is ranked #5.
Click here to see additional POWR Ratings for Growth, Value, Stability, Sentiment, and Momentum for NLOK.
Stock to Avoid:
Okta, Inc. (OKTA)
OKTA is a leading provider of identity solutions. Its Okta Identity Cloud is an independent and neutral cloud-based identity solution that can be integrated with any application, service, or cloud.
For the fiscal second quarter ended July 31, 2022, OKTA’s operating loss came in at $208.06 million. In the same period, its net loss and net loss per share stood at $210.47 million and $1.34, respectively.
The consensus EPS estimate of negative $0.24 for the fiscal quarter ending October 2022 represents a 236.9% year-over-year decline. Also, its loss per share of $0.71 for the current fiscal year reflects a year-over-year decline of 54.6%.
The stock has slumped 72% year-to-date to close the last trading session at $63.02.
OKTA’s POWR Ratings reflect this bleak outlook. The stock's overall D rating translates to Sell in our proprietary rating system.
It also has a D grade for Momentum, Stability, and Quality. It is ranked #23 in the same industry.
To see the additional POWR Ratings for Value, Growth, and Sentiment for OKTA, click here.
FTNT shares were trading at $53.56 per share on Friday afternoon, up $1.85 (+3.58%). Year-to-date, FTNT has declined -25.49%, versus a -13.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Komal Bhattar
Komal's passion for the stock market and financial analysis led her to pursue investment research as a career. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
2 Software Stocks to Buy and 1 to Sell This Week StockNews.com
