The software industry is thriving thanks to the ever-expanding demand for digital transformation and the widespread adoption of cloud solutions. The growing demand for various software products and services and the integration of generative AI into software applications are expected to boost the industry’s long-term growth.
Amid this backdrop, it could be wise to buy fundamentally strong software stocks F5, Inc. (FFIV), Karooooo Ltd. (KARO), and IBEX Limited (IBEX). These stocks are rated - A (Strong Buy) in our proprietary POWR Ratings system.
Before delving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
Global enterprises are prioritizing enhancing digital capabilities with smart software solutions for streamlined operations. Enterprises are shifting from traditional software applications to cloud-based software solutions as they provide enhanced flexibility and scalability.
The U.S. software market is expanding due to increased demand from the banking, retail, and healthcare sectors. Software usage has increased due to advancements in AI and cloud computing. Moreover, the integration of generative AI into cloud-based software applications is expected to boost the software industry’s growth.
Goldman Sachs estimates that the total addressable market (TAM) of the generative AI software is approximately $150 billion. Global IT spending is forecasted to reach $5.07 trillion in 2024, marking an 8% increase from 2023. Spending on software will rise 12.9% year-over-year to $916.24 billion this year and increase 13.8% year-over-year to $1.04 trillion in 2024.
Furthermore, Statista anticipates that the worldwide software market revenue will reach $659 billion this year, with an anticipated 5.4% CAGR leading to $858.10 billion by 2028. Notably, investors’ interest in software stocks is evident from the iShares Expanded Tech – Software Sector ETF’s (IGV) 59.1% returns year-to-date.
Considering these conducive trends, let’s analyze the fundamental aspects of the stocks mentioned above.
F5, Inc. (FFIV)
FFIV provides multi-cloud application security and delivery solutions in the United States, Europe, the Middle East, Africa, and the Asia Pacific region. The company's multi-cloud application security and delivery solutions enable its customers to develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud.
On April 4, 2023, FFIV announced new security features, including machine learning enhancements, for advanced API protection and control across on-premises, cloud, and edge locations. The update improves security, minimizes false positives, and introduces managed services for enterprises and service providers.
In terms of the trailing-12-month Return on Common Equity margin, FFIV’s 14.99% is significantly higher than the 1.11% industry average. Likewise, its 21.23% trailing-12-month levered FCF margin is 148.9% higher than the 8.53% industry average. Additionally, its 14.04% trailing-12-month net income margin is 498.5% higher than the 2.35% industry average.
For the fiscal fourth quarter that ended September 30, 2023, FFIV’s total revenue increased 1% year-over-year to $706.97 million. Its gross profit rose 2.4% over the prior-year quarter to $566.01 million. Additionally, the company’s net income and net income per share increased 70.3% and 71.1% from the year-ago quarter to $152.13 million and $2.55, respectively.
Street expects FFIV’s EPS for the quarter ending December 31, 2023, to increase 23.1% year-over-year to $3.04. Likewise, its revenue for the fiscal year 2025 is expected to increase 4.4% year-over-year to $2.89 billion. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 27.2% to close the last trading session at $178.94.
FFIV’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #2 out of 43 stocks in the B-rated Software - Business industry. It has an A grade for Quality and a B for Value. To see FFIV’s Growth, Momentum, Stability, and Sentiment ratings, click here.
Karooooo Ltd. (KARO)
Headquartered in Singapore, KARO provides mobility software-as-a-service (SaaS) platforms for connected vehicles in South Africa, the rest of Africa, Europe, the Asia-Pacific, the Middle East, and the United States. The company offers Fleet Telematics, LiveVision, MiFleet, and Karooooo Logistics.
In terms of the trailing-12-month EBITDA margin, KARO’s 35.73% is 279.5% higher than the 9.42% industry average. Likewise, its 63.36% trailing-12-month gross profit margin is 30.3% higher than the 48.61% industry average. Furthermore, its 1.06x trailing-12-month asset turnover ratio is 71.3% higher than the 0.62x industry average.
KARO’s revenue for the second quarter ended August 31, 2023, rose 21.1% year-over-year to ZAR1.04 billion ($56.31 million). Its gross profit rose 16% year-over-year to ZAR660.54 million ($35.76 million). The company’s profit for the period increased 14.6% over the prior-year quarter to ZAR178.21 million ($9.65 million).
Its EPS came in at ZAR5.61, representing an increase of 13.8% year-over-year. Additionally, its adjusted EBITDA rose 9.5% year-over-year to ZAR413.26 million ($22.38 million).
Analysts expect KARO’s EPS for the quarter ended November 30, 2023, to increase 5.5% year-over-year to $0.29, and its revenue for the quarter ending February 28, 2024, is expected to increase 5.1% year-over-year to $52.57 million. Over the past three months, the stock has gained 14.1% to close the last trading session at $25.55.
It’s no surprise that KARO has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It is ranked #7 out of 131 stocks in the Software - Application industry. It has an A grade for Quality and a B for Value, Stability, and Sentiment. Click here to see KARO’s ratings for Growth and Momentum.
IBEX Limited (IBEX)
IBEX provides end-to-end technology-enabled customer lifecycle experience solutions. The company’s products and services portfolio includes offers of customer service, technical support, revenue generation, and other value-added outsourced back-office services. As well as customer acquisition solutions that comprise digital marketing, e-commerce technology, and platform solutions.
On December 5, 2023, IBEX announced a partnership with Sapling.ai to leverage Sapling.ai’s AI-powered messaging assistant technology into its Wave X platform. The collaboration aims to enhance agent capabilities and deliver a superior customer experience across various use cases.
Jim Ferrato, CIO at IBEX, said, “We are committed to delivering industry-leading CX, and this partnership is another step toward building and refining our AI-enabled Wave X platform with the latest technology available today. Integrating Sapling’s AI assistant as part of Wave X will enable us to enhance agent performance, optimize customer interactions, and deliver greater customer satisfaction.”
In terms of the trailing-12-month net income margin, IBEX's 6.25% is 2.6% higher than the 6.09% industry average. Likewise, its 10.99% trailing-12-month Return on Total Assets is 120.3% higher than the 4.99% industry average. Additionally, its 1.81x trailing-12-month asset turnover ratio is 126.2% higher than the industry average of 0.80x.
For the first quarter, which ended September 30, 2023, IBEX's total revenues came in at $124.61 million. Its income from operations rose 8.6% year-over-year to $8.33 million. The company’s net cash inflow from operating activities increased 56.1% over the prior year quarter to $8.68 million.
Also, its adjusted net income increased 11.4% year-over-year to $7.57 million. Additionally, its adjusted EPS came in at $0.40, representing an increase of 11.1% year-over-year.
For the quarter ending March 31, 2024, IBEX's revenue is expected to increase 1.3% year-over-year to $133.31 million. Its EPS for the quarter ending June 30, 2024, is expected to increase 81.9% year-over-year to $0.60. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 30.7% to close the last trading session at $18.97.
IBEX's positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Value, Stability, Sentiment, and Quality. It is ranked #8 in the Software – Application industry. To see IBEX's ratings for Growth and Momentum, click here.
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FFIV shares were trading at $178.82 per share on Wednesday morning, down $0.12 (-0.07%). Year-to-date, FFIV has gained 24.60%, versus a 26.17% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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