The need for reliable software solutions and services has been rising due to increased digitization initiatives across various sectors and the growing popularity of cloud-based services. The demand for sophisticated software tools and services is expanding due to the need for automation, efficiency, streamlining of operations, etc.
Given the industry’s promising growth prospects, investors could consider adding fundamentally sound software stocks Trend Micro Incorporated (TMICY), RingCentral, Inc. (RNG), and Karooooo Ltd. (KARO) to one’s portfolio.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s driving the software industry’s growth.
Software remains an essential part of the life of individuals and businesses alike, as it helps make critical business decisions, meet customer demands, drive operational efficiency, etc. Gartner predicts global IT spending to grow 8% year-over-year to reach $5.07 trillion in 2024. Additionally, spending on software is projected to rise 13.8% year-over-year to $1.04 trillion in 2024.
The software industry is thriving due to the rapid increase in enterprise data volume and the automation of business processes in sectors like retail, manufacturing, healthcare, and transportation. The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.
Moreover, every organization now faces the growing risk of cyberattacks. Risks of cyberattacks have kept businesses on their toes as there is an increasing risk of data breaches, ransomware attacks, etc. Global cybercrime damage costs are expected to grow by 15% annually over the next two years to reach $10.50 trillion annually by 2025.
These cyber threats are expected to boost the prospects of the software security industry. The cybersecurity market’s revenues are projected to reach $183.10 billion this year, with security services amounting to $92.91 billion in 2024. Revenues are projected to grow at a CAGR of 10.6% to reach $273.60 billion by 2028.
Furthermore, the popularity of public cloud services has meant that cloud-based software applications have replaced traditional software applications. These cloud-based software applications provide advantages like data ownership, flexibility, scalability, accessibility, security and privacy. Spending on cloud application services (SaaS) is expected to increase by 18.9% over the prior year to $243.99 billion this year.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 52.4% returns over the past year.
Considering these conducive trends, let’s take a look at the fundamentals of the featured software stocks.
Trend Micro Incorporated (TMICY)
Headquartered in Tokyo, Japan, TMICY develops and sells security-related software for computers and related services worldwide. The company offers platforms, such as vision one platform, attack surface management, extended detection and response (XDR), cloud security, endpoint security, network security, threat intelligence. It also provides service packages, managed XDR, incident response, and support services.
In terms of the trailing-12-month EBIT margin TMICY’s 14.30% is 195.4% higher than the 4.84% industry average. Its trailing-12-month EBITDA margin, TMICY’s 25.30% is 173.5% higher than the 9.25% industry average. Likewise, its 5.77% trailing-12-month net income margin is 197.6% higher than the industry average of 1.94%.
For the nine months, which ended September 30, 2023, TMICY’s net sales increased 13.3% year-over-year to ¥183.73 billion ($1.24 billion). Its gross profit increased 12.9% year-over-year to ¥138.29 billion ($935.24 million). The company’s operating income rose 14.5% over the prior-year period to ¥29.61 billion ($200.25 million).
Additionally, its net income attributable to owners of the parent and EPS amounted to ¥12.81 billion ($86.61 million) and ¥93.26 per share, respectively.
Street expects TMICY’s revenue and EPS for the quarter ended December 31, 2023, to increase 1.5% and 419.2% year-over-year to $467.61 million and $0.38, respectively. Over the past three months, the stock has gained 46.3% to close the last trading session at $55.01.
TMICY’s strong fundamentals are reflected in its POWR Ratings. 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 has an A grade for Stability and a B for Growth and Quality. Within the Software-Security industry, it is ranked #2 out of 23 stocks. Beyond what we have stated above, we have also rated TMICY for Value, Momentum, and Sentiment. Get all the TMICY ratings here.
RingCentral, Inc. (RNG)
RNG provides cloud communications, video meetings, collaboration, and contact center Software-as-a-Service (SaaS) solutions worldwide. Its portfolio comprises RingCentral Message Video Phone (MVP), RingCentral Contract Center, RingCentral Engage Digital, RingCentral Engage Voice, RingCentral Video and RingCentral professional services.
On November 14, 2023, RNG announced the general availability of RingCX™, a native AI-first contact center with native new capabilities powered by its RingSense AI platform. It is integrated with RingCentral MVP™, offering a combination of product, packaging, and pricing.
Ring CX leverages generative AI, provides a rich omnichannel experience and is disruptively priced and packaged at $65 per agent per month. During controlled availability, more than 50 customers selected it, including a 1,00 plus seat win from a Fortune 500 company.
“There is a very sizable segment of the contact center market that is resource constrained and does not have overly complex requirements. Lengthy application deployments involving unanticipated professional service costs can prevent these organizations from getting the customer interaction capabilities they need to be competitive and to effectively serve their customers,” said Sheila McGee-Smith, McGee-Smith Analytics’ President and Principal Analyst.
“With a robust feature set, predictable, easily understood pricing, and a simple deployment model, RingCX is well positioned to address the needs of this underserved segment of the market” she added.
On August 2, 2023, RNG announced the acquisition of select assets from Hopin, a provider of online audience engagement technology, including its flagship Events platform and Session product.
The acquisition includes technology assets, customer relationships, and engineering, product, and go-to-market talent from Hopin. This acquisition expands RNG’s video solutions and strengthens the company’s ability to offer customers more choice, including specialized video use cases around interactive events.
“We see an opportunity to redefine how video communication is experienced. This acquisition is a key next step in our journey to deliver more personalized and engaging video meetings and events for customers,” said Vlad Shmunis, Founder, Chairman, and CEO of RNG.
“We expect the technology and outstanding talent from Hopin will accelerate our ability to achieve these goals and help us differentiate our entire video portfolio” he added.
In terms of the trailing-12-month gross profit margin, RNG’s 69.65% is 42.6% higher than the 48.86% industry average. Likewise, its 16.51% trailing-12-month levered FCF margin is 90.8% higher than the industry average of 8.65%. Furthermore, the stock’s 0.96x trailing-12-month asset turnover ratio is 54.9% higher than the industry average of 0.62x.
RNG’s total revenues for the third quarter, which ended September 30, 2023, increased 9.7% year-over-year to $558.16 million. Its non-GAAP income from operations rose 55.6% year-over-year to $106.83 million. The company’s non-GAAP net income increased 43.4% over the prior year quarter to $76.07 million.
Also, its non-GAAP net income per share came in at $0.78, registering an increase of 41.8% year-over-year. In addition, its adjusted EBITDA rose 47% over the prior-year quarter to $127.80 million.
Analysts expect RNG’s revenue and EPS for the quarter ended December 31, 2023, to increase 8.7% and 36.9% year-over-year to $570.53 million and $0.82, respectively. It has topped the Street EPS estimates in each of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 14.6% to close the last trading session at $33.27.
RNG’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 Value and Quality. It is ranked #10 out of 43 stocks in the B-rated Software - Business industry. Click here to see the additional POWR Ratings of RNG for Growth, Momentum, Stability, and Sentiment.
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. It provides Cartrack Field Service, Business Intelligence, asset tracking, asset recovery services, etc.
In terms of the trailing-12-month Return on Common Equity, KARO’s 25.98% is significantly higher than the 1.67% industry average. Likewise, its 21.71% trailing-12-month Return on Total Capital is 697.9% higher than the 2.72% industry average. Furthermore, its 14.29% trailing-12-month CAPEX/Sales is 501.4% higher than the 2.38% industry average.
For the fiscal second quarter ended August 31, 2023, KARO’s revenues increased 21.1% year-over-year to ZAR1.04 billion ($54.57 million). Its gross profit increased 16% year-over-year to ZAR660.54 million ($34.66 million). The company’s profit for the period increased 14.6% over the prior year quarter to ZAR178.21 million ($9.35 million).
Additionally, its adjusted EBITDA rose 9.5% year-over-year to ZAR413.26 million ($21.69 million). Also, its EPS came in at ZAR5.61, representing an increase of 13.8% year-over-year.
For the quarter ended November 30, 2023, KARO’s EPS is expected to increase 5.5% year-over-year to $0.29. Its revenue for the quarter ending February 29, 2024, is expected to increase 5.1% year-over-year to $52.57 million. Over the past nine months, the stock has gained 7% to close the last trading session at $24.38.
It’s no surprise that KARO has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It is ranked #8 out of 133 stocks in the Software-Application industry. It has an A grade for Quality and a B for Value, Stability, and Sentiment. To see KARO’s ratings for Growth and Momentum, click here.
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TMICY shares were trading at $55.11 per share on Thursday afternoon, up $0.10 (+0.18%). Year-to-date, TMICY has gained 3.24%, versus a -0.42% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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