An exponential rise in the volume of enterprise data, coupled with increased automation of business processes across several end-use industries and enhanced budgets for IT spending by both government and corporate players, are the major tailwinds driving the growth and expansion of the business software industry.
Considering the industry’s bright growth prospects, fundamentally strong software stocks Akamai Technologies, Inc. (AKAM), SolarWinds Corporation (SWI), and CSG Systems International, Inc. (CSGS) could be solid additions to your portfolio for solid returns.
Despite a challenging macroeconomic environment, the software industry is poised for significant growth in the long term, driven by soaring demand for software-based tools and solutions among enterprises. Growing automation across end-use industries, including retail, manufacturing, healthcare, telecom, etc., propels the need for business software.
According to Capterra’s 2023 State of Manufacturing Software Adoption Report, nearly 71% of manufacturers plan to increase their tech budgets by at least 10% this year. Moreover, 61% prefer at least somewhat customized software tools and systems.
Growing adoption of new, advanced technologies among organizations, including artificial intelligence (AI), blockchain, machine learning (ML), extended reality, metaverse, and the Internet of Things (IoT), should create ample growth opportunities for the software industry.
According to Gartner Digital Markets’ 2023 SMB Software Buying Trends Survey, emerging technology plays an integral part in the IT strategy of 57% of businesses, with most being comfortable early adopters of new technology.
Further, as per Statista, US businesses would generate a whopping 224.08 billion gigabytes of data in 2023, up from 178.21 billion gigabytes in 2022. Such massive amounts of data will inevitably lead to the adoption of advanced software by businesses to generate insights from this massive amount of data to improve decision-making and enhance profitability.
The worldwide software spending is projected to grow by 12.3% year-over-year to a staggering $891.39 billion in 2023, according to the forecast by Gartner.
Apart from the solid corporate spending, the US government has increased its spending on IT infrastructure for civilian federal agencies. The President’s budget for IT spending is estimated to be $65 billion this year, up 11% from the previous estimate reported for 2022.
According to a report by Vantage Market Research, the global business software market is projected to reach $1.11 trillion in 2030, growing at a CAGR of 11.30%.
Against this backdrop, fundamentally sound business software stocks AKAM, SWI, and CSGS could be worth adding to your investment portfolio.
Let’s delve deeper into the fundamentals of these stocks:
Akamai Technologies, Inc. (AKAM)
AKAM is a cloud company that secures, delivers, and computes content, applications, and software over the internet internationally. The company’s security solutions encompass web application protection, bot management, and DDoS mitigation. Also, it offers web and mobile performance solutions, media delivery solutions, and cloud computing services.
On August 8, AKAM and a global technology solutions provider, World Wide Technology (WWT) announced a strategic partnership to provide Akamai’s security solutions to WWT’s customers.
This collaboration includes integrating AKAM’s API Security and Guardicore Segmentation solutions within the WWT’s Advanced Technology Center (ATC), streamlining the process of conducting proofs of concept, labs, demos, and testing. This partnership would open up newer markets for AKAM’s products, driving future revenue growth.
On August 2, AKAM introduced API Security to prevent application programming interface (API) attacks and identify misuse of APIs. This product employs behavioral analytics to detect and respond swiftly to threats and improper API activity. With the growing necessity of API security solutions, this new launch is expected to boost the company’s profitability.
For the second quarter that ended June 30, 2023, AKAM’s revenues rose 3.6% year-over-year to $935.72 million. Its non-GAAP income from operations was $273.04 million, an increase of 3.5% from the prior year’s corresponding period. The company’s adjusted EBITDA grew 3.3% from the year-ago value to $388.25 million.
Furthermore, the company’s non-GAAP net income rose 4.4% over the prior year’s corresponding quarter to $227.99 million, and its non-GAAP net income per share came in at $1.49, up 6.4% year-over-year.
The consensus revenue estimate of $3.78 billion for the fiscal year (ending December 2023) represents a 4.5% increase year-over-year The consensus EPS estimate of $5.92 for the current year indicates a 10.2% improvement year-over-year. In addition, the company has surpassed the consensus EPS estimates in all of the trailing four quarters.
Over the six months, the stock has gained 32.1% and 18.8% year-to-date to close the last trading session at $100.90.
AKAM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
AKAM has a B grade for Value and Quality. Out of the 48 stocks in the Software- Business industry, it is ranked #6.
To see the other ratings of AKAM for Momentum, Sentiment, Growth, and Stability, click here.
SolarWinds Corporation (SWI)
SWI is a company that specializes in IT infrastructure and management software. It provides a suite of network management software, infrastructure management products, and application performance management software. It serves network and systems engineers, database administrators, storage administrators, DevOps, SecOps, and service desk professionals.
On July 18, SWI announced the integration of advanced artificial intelligence (AI) and machine learning (ML) capabilities into its IT service management (ITSM) solutions.
These new features include an AI-powered virtual agent that would assist users in resolving day-to-day IT issues, such as reducing ticket volume, thus allowing professionals to save time and focus solely on more complex issues. Such technological advancements would give SWI a competitive advantage over its peers.
On May 3, SWI introduced a specialized healthcare team to assist players in the healthcare industry. The company’s tools, such as the Hybrid Cloud Observability solution, will streamline IT operations, simplify network management, and ultimately ease the delivery of quality patient care.
Such forays into new markets would undoubtedly drive revenue growth for the company.
For the second quarter that ended June 30, 2023, SWI’s total revenue was $185.03 million, an increase of 5.1% year-over-year. Its non-GAAP gross profit grew 3.7% from the prior-year quarter to $167.05 million. Its non-GAAP operating income was $74.59 million, up 17.7% year-over-year. The company’s adjusted EBITDA grew 18.4% from the year-ago value to $79.14 million.
Analysts expect SWI’s EPS for the next fiscal year (ending December 2024) to increase 17.9% year-over-year to $0.92. Likewise, the consensus revenue estimate of $781.13 million for the same period indicates a 4.9% rise year-over-year. In addition, the company exceeded the consensus revenue and EPS estimates in three of the trailing four quarters.
SWI’s stock gained 20.5% over the past three months and 22.1% over the past six months to close the last trading session at $10.74.
SWI’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
SWI has a B grade for Sentiment, Growth, and Value. Out of the 48 stocks in the Software - Business industry, it is ranked #5.
To see the other ratings of SWI for Momentum, Quality, and Stability, click here.
CSG Systems International, Inc. (CSGS)
CSGS is a software-as-a-service (SaaS) platform company that specializes in providing customer engagement, revenue management, and payments solutions to the communications industry in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. The company serves retail, financial services, healthcare, insurance, and government entities.
On August 2, CSGS partnered with ATN to modernize its wireless business. CSGS’ solutions will enable ATN to automate mediation and wholesale settlement processes, access real-time performance data, and allocate resources to achieve its three-year growth plan more effectively. This deal should bode well for the companies.
On July 19, CSGS announced its collaboration with Airtel Africa, a prominent telecommunications and mobile money services provider spanning 14 African countries.
Through CSGS’ unified revenue management solution, Airtel Africa aims to enhance operational efficiency, reduce expenses, accelerate product launches, and foster customer loyalty, thereby supporting sustainable business expansion in wireless services.
During the second quarter that ended June 30, 2023, CSGS’ revenue increased 9.2% year-over-year to $286.30 million. Its operating income was $28.21 million, an increase of 287.3% year-over-year. Its net income grew 162.4% from the year-ago value to $13.95 million, while its EPS was $0.45, up 164.7% year-over-year.
Analysts expect CSGS’ revenue for the fiscal year (ending December 2024) to increase 4.7% year-over-year to $1.13 billion. The company’s EPS for the next year is expected to grow 10% from the prior year to $3.85. Moreover, the company topped the consensus revenue estimates in all four trailing quarters, which is impressive.
Shares of CSGS have increased 2.2% over the past month and 9.3% over the past three months to close the last trading session at $53.46.
CSGS’ solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
CSGS has a B grade for Growth, Value, Quality, and Sentiment. It is ranked #4 out of 48 stocks in the Software Business industry.
In addition to the POWR Ratings we’ve stated above, we also have CSGS’ ratings for Stability and Momentum. Get all CSGS ratings here.
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AKAM shares were unchanged in premarket trading Monday. Year-to-date, AKAM has gained 19.69%, versus a 15.28% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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