Despite the macroeconomic challenges keeping technology stocks under pressure, the industry’s long-term prospects look bright due to increased investments in digitization initiatives and data usage across various industries to make improved business decisions. The widespread adoption of cloud-based software applications should drive the industry’s growth.
Given this backdrop, it could be wise to buy fundamentally strong software stocks Atlassian Corporation (TEAM), Intuit Inc. (INTU), and Adobe Inc. (ADBE).
Before delving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
The global software market is growing at a healthy pace due to expanding digitization initiatives across enterprises, the sustainability of remote work, the adoption of the cloud, and the growing need for cybersecurity.
Cloud-based software applications are a big hit with enterprises due to their scalability, affordability, and accessibility. These software applications help enterprises streamline their processes and improve efficiency. The global Software as a Service (SaaS) market is projected to grow at a CAGR of 25.9% to reach $720.44 billion by 2028.
The software industry’s growth is expected to be further enhanced by integrating generative AI into software applications. According to a Goldman Sachs report, as software companies integrate generative AI tools into products, their customers will spend more on software.
Goldman Sachs expects generative AI to add an incremental $150 billion to the current global software market of $685 billion. Gartner expects overall software spending to increase 13.7% year-over-year to $922.75 billion this year. Software spending is projected to grow to $1.05 trillion, representing a 14.1% increase year-over-year.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software – Application industry picks, beginning with the third choice.
Stock #3: Atlassian Corporation (TEAM)
Headquartered in Sydney, Australia, TEAM designs, develops, licenses, and maintains various software products globally. The company’s offerings include Jira Software, Jira Work Management, and Confluence.
On October 12, 2023, TEAM agreed to acquire Loom, a video messaging platform with over 25 million users. This acquisition aims to enhance team collaboration and productivity, leveraging asynchronous video and integrating it into Atlassian's existing software offerings, such as Jira and Confluence.
Mike Cannon-Brookes, co-founder and co-CEO at TEAM, said, “Async video is the next evolution of team collaboration, and teaming up with Loom helps distributed teams communicate in deeply human ways.”
In terms of the trailing-12-month gross profit margin, TEAM’s 82.33% is 67.7% higher than the 49.10% industry average. Its 29.73% trailing-12-month levered FCF margin is 293.6% higher than the 7.55% industry average. Likewise, the stock’s 0.95x trailing-12-month asset turnover ratio is 54.2% higher than the 0.62x industry average.
TEAM’s total revenue for the fourth quarter that ended June 30, 2023, increased 23.6% year-over-year to $939.10 million. Its non-GAAP operating income rose 88.4% year-over-year to $202.76 million. The company’s non-GAAP net income rose 114.8% year-over-year to $147.02 million. Additionally, its non-GAAP net income per share increased 111.1% year-over-year to $0.57.
For the quarter ended September 30, 2023, TEAM’s EPS and revenue are expected to increase 49.1% and 19.6% year-over-year to $0.54 and $965.33 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 52.5% year-to-date to close the last trading session at $196.27.
TEAM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Growth and a B for Sentiment and Quality. It is ranked #37 out of 134 stocks in the Software – Application industry. In total, we rate TEAM on eight different levels. Beyond what we stated above, we also have given TEAM grades for Value, Momentum, and Stability. Get all the TEAM ratings here.
Stock #2: Intuit Inc. (INTU)
INTU provides financial management and compliance products and services for consumers, small businesses, self-employed, and accounting professionals in the United States, Canada, and internationally. The company operates in four segments: Small Business and self-employed, Consumer, Credit Karma, and ProTax.
On October 16, 2023, INTU introduced QuickBooks Bill Pay, an integrated solution within Intuit QuickBooks. It streamlines bill payments, automates accounts payable, and reduces manual entry by 48%. The service offers automated bill creation, role assignment for team members, digital record-keeping, payment options, and 1099 management.
David Talach, Senior VP of QuickBooks Money Platform at INTU, predicted that QuickBooks Bill Pay would revolutionize money movement and address the primary issue small businesses face - cash flow, aiming to provide an all-encompassing financial solution for small businesses to enhance automation and financial visibility.
On September 27, 2023, INTU announced the launch of two new QuickBooks Payroll plans in Canada – Payroll Premium and Payroll Elite – to assist small and medium-sized businesses in streamlining payroll management, enhancing efficiency, and addressing payroll and financial management challenges.
In terms of the trailing-12-month levered FCF margin, INTU’s 31.95% is 323% higher than the 7.55% industry average. Its 16.59% trailing-12-month net income margin is 715.8% higher than the 2.03% industry average. Likewise, the stock’s 21.86% trailing-12-month EBIT margin is 369.3% higher than the 4.66% industry average.
INTU’s net revenues for the fourth quarter ended July 31, 2023, increased 12% year-over-year to $2.71 billion. Its non-GAAP operating income rose 45% year-over-year to $627 million. The company’s non-GAAP net income rose 50.2% year-over-year to $467 million. Also, its non-GAAP net income per share came in at $1.65, representing an increase of 50% year-over-year.
Analysts expect INTU’s EPS and revenues for the quarter ending October 31, 2023, to increase 19.2% and 10.9% year-over-year to $1.98 and $2.88 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 42.3% to close the last trading session at $540.90.
It’s no surprise that INTU has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has a B grade for Growth, Sentiment and Quality. Within the same industry, it is ranked #26. To see INTU’s Value, Momentum, and Stability ratings, click here.
Stock #1: Adobe Inc. (ADBE)
ADBE provides professionals, communicators, businesses, and consumers with various products and services to create, manage, deliver, measure, optimize, engage, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media; Digital Experience; and Publishing and Advertising.
On July 12, 2023, ADBE announced the global expansion of Firefly to support text prompts in over 100 languages. The expansion allows users worldwide to create images and text effects in their native languages.
They also introduced Firefly for Enterprise, enabling custom training and IP indemnity, and introduced Content Credentials for transparency in AI-generated or edited digital content. This announcement will help reach millions of new users across different geographies and experience levels.
On June 8, 2023, ADBE launched new generative AI innovations in Adobe Experience Cloud, powered by Adobe Sensei GenAI, offering enhanced customer experiences and productivity for enterprise businesses. Key features include natural language queries, intelligent captions, dynamic chat, marketing copy generation, and an AI Assistant for the Adobe Experience Platform.
Anil Chakravarthy, President of Digital Experience Business at ADBE, said, “Generative AI is the great unlock in this equation, and with our latest Sensei GenAI innovations, we are delivering organizations a true co-pilot to accelerate and enhance their efforts.”
In terms of the trailing-12-month Return on Common Equity margin, ADBE’s 33.97% is significantly higher than the 1.01% industry average. Likewise, its 38.75% trailing-12-month levered FCF margin is 413% higher than the 7.55% industry average. Additionally, its 27.12% trailing-12-month net income margin is significantly higher than the 2.03% industry average.
ADBE’s total revenue for the fiscal third quarter that ended September 1, 2023, increased 10.3% year-over-year to $4.89 billion. Its non-GAAP operating income increased 15.8% year-over-year to $2.26 billion. The company’s non-GAAP net income increased 17.7% year-over-year to $1.88 billion. In addition, its non-GAAP net income per share came in at $4.09, representing an increase of 20.3% year-over-year.
Street expects ADBE’s EPS and revenue for the quarter ending November 30, 2023, to increase 14.9% and 10.9% year-over-year to $4.14 and $5.02 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 91.3% to close the last trading session at $550.74.
ADBE’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #19 in the Software - Application industry. It has an A grade for Quality and a B for Sentiment. To see ADBE’s Growth, Value, Momentum, and Stability ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
ADBE shares were trading at $557.99 per share on Tuesday afternoon, up $7.25 (+1.32%). Year-to-date, ADBE has gained 65.81%, versus a 15.04% 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.
3 Big Software Data Stocks Leveraging Information for Profit StockNews.com
