The software sector is anticipated to continue to grow amid growing investments in digital transformation. Moreover, the transition to the cloud and the integration of emerging technologies such as generative AI are boosting the industry’s long-term prospects.
To that end, it could be prudent to buy fundamentally strong software stocks Check Point Software Technologies Ltd. (CHKP), Blackbaud, Inc. (BLKB) and OppFi Inc. (OPFI).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
A soft landing for the economy, the hype around generative AI, and the possibility of rate cuts by the Fed next year have contributed to the Nasdaq Composite's impressive performance this year. The tech-heavy index has returned 36.7% year-to-date.
Strong digitalization initiatives, the rise of hybrid work, and the growing popularity of the cloud are some factors spurring the demand for software. The rapid adoption of the cloud has contributed significantly to the sector’s growth. Worldwide spending on public cloud services will reach $1.35 trillion in 2027.
According to Gartner, global software spending is projected to rise 12.9% year-over-year to $916.24 billion this year and 13.8% year-over-year to $1.04 trillion in 2024. Growing investments in public cloud services, cybersecurity, and business application software will boost the software industry.
Additionally, the shift from traditional software applications to cloud-based software applications is boosting the industry’s growth. Integrating generative AI into these cloud-based software applications will further enhance this growth.
In the 2024 Gartner CIO and Technology Executive Survey, 80% of CIOs planned to increase cyber/information security spending in 2024. CIOs also focus on investing in Business Intelligence/data analytics and cloud platforms, with 78% and 73% of CIOs expressing interest in increasing spending on these technologies, respectively.
In light of these encouraging trends, let’s dive deeper into the fundamentals of the three Software stock picks mentioned above.
Check Point Software Technologies Ltd. (CHKP)
Headquartered in Tel Aviv, Israel, CHKP develops, markets, and supports a range of products and services for IT security worldwide. The company offers a multilevel security architecture, cloud, network, mobile devices, endpoint information, and IOT solutions. It offers security gateways and software platforms. It also provides cloud network security, security and posture management, cloud workload protection, etc.
On September 13, CHKP successfully acquired Perimeter 81, a Security Service Edge (SSE) company focusing on fast and secure access for remote users, sites, data centers, and the Internet. The acquisition strengthens CHKP's position in the Secure Access Service Edge (SASE) market, aligning with its vision of delivering the industry's fastest and most secure SASE solution.
The acquisition complements CHKP's recent purchase of Atmosec, reinforcing its commitment to enhancing SaaS security and offering a complete SASE solution across internet access, Zero-Trust private access, SaaS security, and SD-WAN.
In terms of forward non-GAAP P/E, CHKP’s 17.57x is 22.1% lower than the 22.54x industry average. Its 12.86x forward EV/EBITDA is 13.1% lower than the 14.80x industry average. Likewise, its 13.20x forward EV/EBIT is 32.1% lower than the 19.44x industry average.
For the third quarter ended September 30, 2023, CHKP’s non-GAAP total revenues increased 3.2% year-over-year to $596.30 million. Its non-GAAP operating income increased 2.4% over the prior-year quarter to $269 million. The company’s non-GAAP net income rose 9.7% year-over-year to $242.40 million. Also, its adjusted EPS increased 16.9% year-over-year to $2.07.
For the fiscal fourth quarter ending December 31, 2023, CHKP’s EPS and revenue are expected to increase 1.1% and 3.7% year-over-year to $2.48 and $662.39 million, respectively. The company surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive. Over the past nine months, the stock has gained 17.8% to close the last trading session at $145.83.
CHKP’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 #3 out of 22 stocks in the B-rated Software – Security industry. It has an A grade for Quality. Click here to see CHKP’s Growth, Value, Momentum, Stability, and Sentiment ratings.
Blackbaud, Inc. (BLKB)
BLKB. provides cloud software solutions to higher education institutions, K12 schools, healthcare organizations, faith communities, arts and cultural organizations, foundations, companies, and individual change agents in the United States and internationally. The company offers fundraising and engagement solutions, and financial management solutions.
On October 3, BLKB unveiled Impact Edge™, an AI-powered social impact reporting and storytelling solution for corporate social responsibility (CSR) teams.
BLKB’s Corporate Impact Solutions’ executive vice president, Tom Davidson said, “Impact Edge will bolster resource-constrained corporate impact teams. Leaders will feel the exponential scale it provides as it takes on the numerous and varied data requests they field each day from stakeholders across their organization.”
In terms of forward non-GAAP P/E, BLKB’s 19.93x is 11.6% lower than the 22.54x industry average. Its 0.85x forward non-GAAP PEG is 55.9% lower than the 1.93x industry average. Likewise, its 16.70x forward EV/EBIT is 14.1% lower than the 19.44x industry average.
BLKB’s total revenue for the fiscal third quarter ended September 30, 2023, increased 6.2% year-over-year to $277.63 million. Its non-GAAP gross profit increased 11.2% over the prior-year quarter to $173.12 million. The company’s non-GAAP income from operations increased 59.7% year-over-year to $79.59 million.
The company’s non-GAAP net income grew 68.2% year-over-year to $60.50 million. Also, its non-GAAP EPS came in at $1.12, representing an increase of 62.3% year-over-year.
Analysts expect BLKB’s EPS and revenue for the quarter that ended December 31, 2023, to increase 54.4% and 8.7% year-over-year to $1.05 and $298.71 million, respectively. It topped the Street EPS estimates in each of the four trailing quarters, which is remarkable.
Over the past nine months, the stock has gained 38.5% to close the last trading session at $77.47.
It’s no surprise that BLKB has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Stability and Sentiment. It is ranked #8 out of the 44 stocks in the B-rated Software – Business industry. Click here to see BLKB’s Value, Momentum, and Quality ratings.
OppFi Inc. (OPFI)
OPFI operates a financial technology platform that allows banks to offer lending products. Its platform facilitates OppLoans, an installment loan product; SalaryTap, a payroll deduction secured installment loan product; and OppFi Card, a credit card product.
In terms of forward non-GAAP P/E, OPFI’s 7.59x is 21.5% lower than the 9.67x industry average. Likewise, its 0.13x forward Price / Sales is 94.7% lower than the 2.41x industry average.
OPFI’s net revenue for the third quarter that ended September 30, 2023, rose 7.2% year-over-year to $133.17 million. Its adjusted EBITDA rose 149.8% over the prior-year quarter to $33.01 million. The company’s adjusted net income and EPS rose significantly over the prior year quarter to $13.78 million and $0.16, respectively.
Street expects OPFI’s revenue for the quarter ending December 31, 2023, to increase 12.5% year-over-year to $135.03 million. Its EPS for the quarter ending March 31, 2024, is expected to increase 126.7% year-over-year to $0.11. It surpassed the consensus EPS estimates in three of the trailing four quarters. The stock has gained 79% year-to-date to close the last trading session at $3.67.
OPFI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, representing a Strong Buy in our proprietary rating system.
In the Software – Application industry, it is ranked #8 out of 132 stocks. It has an A grade for Growth, Momentum, and Sentiment and B for Value and Quality. To see the OPFI’s rating for Stability, click here.
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CHKP shares were trading at $145.47 per share on Monday afternoon, down $0.36 (-0.25%). Year-to-date, CHKP has gained 15.31%, versus a 20.74% 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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