Last year, the tech industry underperformed as it faced the headwinds of aggressive rate hikes and high inflation. However, the buzz around generative AI is boosting tech stocks this year. The tech-heavy Nasdaq Composite has rallied more than 34% year-to-date.
To that end, it could be wise to buy fundamentally strong software stocks DocuSign, Inc. (DOCU), Smartsheet Inc. (SMAR), and Consensus Cloud Solutions, Inc. (CCSI).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
Enterprises have been investing heavily to digitize their operations and enhance their digital capabilities. Software companies are aiding enterprises by offering cloud-based software services like Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS). Services like SaaS have replaced traditional software applications.
According to Gartner, SaaS spending is expected to rise 17.9% year-over-year to $197.29 billion. In addition, software companies are integrating generative AI tools into their products to boost sales. According to Goldman Sachs, generative AI will add an incremental $150 billion to the current global software market of $685 billion.
Investors’ interest in software stocks is evident from iShares Expanded Tech-Software Sector ETF’s (IGV) 38.5% returns year-to-date.
Let's take a closer look at their fundamentals.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company provides DocuSign e-signature solution that enables sending and signing of agreements on various devices.
On July 25, 2023, DOCU announced that the company in partnership with Onfido introduced Liveness Detection for ID Verification, an AI-powered feature in DocuSign's Identify portfolio. It confirms signers' identities, presence, and valid IDs securely and remotely, preventing fake documents and identity spoofing, thereby providing a comprehensive, single-platform solution for secure agreements.
In terms of the trailing-12-month levered FCF margin, DOCU’s 30.55% is 343.5% higher than the 6.89% industry average. Likewise, its 79.27% trailing-12-month gross profit margin is 62.9% higher than the 48.66% industry average. Furthermore, its 0.91x trailing-12-month asset turnover ratio is 48.9% higher than the 0.61x industry average.
DOCU’s total revenues for the first quarter ended April 30, 2023, rose 12.3% year-over-year to $661.39 million. Its non-GAAP income from operations increased 72% year-over-year to $175.77 million. Additionally, its non-GAAP net income rose 94% year-over-year to $150.21 million.
The company’s non-GAAP net income per share came in at $0.72, representing an increase of 89.5% year-over-year.
Street expects DOCU’s EPS and revenues for the quarter ending July 31, 2023, to increase 49% and 8.9% year-over-year to $0.66 and $677.32 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 7.8% to close the last trading session at $52.01.
DOCU’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #5 out of 26 stocks in the B-rated Software - SAAS industry. It has an A grade for Growth and a B for Value and Quality. Click here to see DOCU’s Momentum, Stability, and Sentiment ratings.
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations.
In terms of the trailing-12-month gross profit margin, SMAR’s 78.74% is 61.8% higher than the 48.66% industry average. Likewise, its 22.53% trailing-12-month levered FCF margin is 227.2% higher than the 6.89% industry average. Additionally, its 0.78x trailing-12-month asset turnover ratio is 28.4% higher than the industry average of 0.61x.
For the first quarter ended April 30, 2023, SMAR’s total revenues rose 30.6% year-over-year to $219.89 million. Its non-GAAP operating income came in at $22.80 million, compared to a non-GAAP operating loss of $23.09 million.
The company’s non-GAAP net income came in at $25.05 million, compared to a non-GAAP net loss of $23.75 million. Additionally, its non-GAAP EPS came in at $0.18, compared to a non-GAAP loss per share of $0.18 in the prior-year quarter.
For the quarter ending July 31, 2023, SMAR’s revenue is expected to increase 23% year-over-year to $229.55 million. Its EPS for the quarter ending January 31, 2024, is expected to increase 29.3% year-over-year to $0.09. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 39.2% to close the last trading session at $41.70.
SMAR’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. It is ranked #9 in the same industry. To see SMAR’s Value, Momentum, and Stability ratings, click here.
Consensus Cloud Solutions, Inc. (CCSI)
Consensus Cloud Solutions, Inc. and its subsidiaries provide information delivery services with a software-as-a-service platform worldwide.
On May 18, 2023, CCSI partnered with Hyland Software Inc. to integrate patient data using a secure eFax corporate cloud fax solution within Hyland's OnBase app. Streamlining EHR workflows with end-to-end encryption.
John Nebergall, Chief Operating Officer at CCSI, said, "We're able to leverage our digital cloud fax solution with Hyland's OnBase to provide the most integrated and connected means for patient data exchange. This is vital for improving processes and increasing care coordination, ultimately leading to better and safer patient care."
In terms of the trailing-12-month EBITDA margin, CCSI’s 44.76% is 402.1% higher than the 8.92% industry average. Likewise, its 82.35% trailing-12-month gross profit margin is 69.2% higher than the 48.66% industry average. Additionally, its 19.10% trailing-12-month net income margin is 850% higher than the industry average of 2.01%.
CCSI’s revenues for the fiscal first quarter ended March 31, 2023, increased 2.4% year-over-year to $91.45 million. Its non-GAAP net income came in at $21.99 million. In addition, its adjusted EPS came in at $1.10. Also, its adjusted EBITDA came in at $44.24 million.
For the quarter ended June 30, 2023, CCSI’s revenue is expected to increase 1% year-over-year to $94.10 million. Its EPS for the quarter ending December 31, 2023, is expected to increase 18.3% year-over-year to $1.34. Over the past month, the stock has gained 6.2% to close the last trading session at $32.24.
CCSI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Value and Quality. Within the Software – SAAS industry, it is ranked #11. For CCSI’s Growth, Momentum, Stability, and Sentiment ratings, click here.
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DOCU shares were trading at $52.98 per share on Friday afternoon, up $0.97 (+1.87%). Year-to-date, DOCU has declined -4.40%, versus a 20.51% 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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