Rising tech dependence in businesses and advancements in emerging technologies, such as artificial intelligence (AI) and cloud technology, are expected to drive growth in the software industry. Given the rosy prospects, investors could consider quality software stocks Fortinet, Inc. (FTNT), Akamai Technologies, Inc. (AKAM), and Zedge, Inc. (ZDGE).
The software market is primarily driven by the rapid development of technologies like blockchain, artificial intelligence, cloud computing, machine learning, & Internet of Things. These technologies provide new avenues for the creation and use of software, which is expected to boost the development of cutting-edge solutions and applications.
As per the recent Market Research Future report, the global software market is expected to reach $1.59 trillion at a 11.9% CAGR by 2032.
Moreover, the deployment of 5G services in various sectors amplifies the need for robust security measures to safeguard data and mitigate cyber threats. This trend is projected to fuel the growth of the network security market.
The security software revenue is projected to reach $51.46 billion by 2029, growing at a CAGR of 13.9%.
In addition, the demand for business software and services is expected to be driven by the rapid increase in enterprise data volume and the automation of business processes across end-use industries such as retail, manufacturing, healthcare, and transportation.
The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.
Considering these conducive trends, let's take a look at the fundamentals of the three best software stocks.
Fortinet, Inc. (FTNT)
FTNT provides cybersecurity and networking solutions worldwide. It offers FortiGate hardware and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network acceleration.
On November 2, 2023, FTNT announced that it was sharpening its business focus to prioritize high-growth, differentiated markets. The company expects to focus on Secure Networking, Universal SASE, and Security Operations markets. This strategic shift should help FTNT to accelerate its global business expansion and improve its market position.
On October 16, FTNT announced the expansion of its SASE Points-of-Presence (POPs) to new locations through a partnership with Google Cloud. This partnership is expected to enable FTNT to deliver better global coverage and improved user experience for its Universal SASE solution.
FTNT’s trailing-12-month EBIT margin of 23.37% is 398.3% higher than the 4.69% industry average. Its trailing-12-month EBITDA margin of 25.51% is 178.7% higher than the 9.15% industry average.
In the fiscal third quarter that ended September 30, 2023, FTNT’s total revenue increased 16.1% year-over-year to $1.33 billion, while its total gross profit increased 17.4% from the prior-year period to $1.02 billion. Its non-GAAP operating income grew 14.3% from the year-ago value to $371.40 million.
The company’s non-GAAP net income attributable to FTNT and its per share value came in at $323.50 million and $0.41, representing increases of 23.1% and 24.2%, respectively, from the prior-year quarter.
The consensus revenue of $5.30 billion indicates a 20% increase year-over-year for the fiscal year (ending December 2023). The consensus EPS estimate of $1.56 for the same year indicates a 31% increase year-over-year. Also, the company has surpassed EPS estimates in each of the trailing four quarters, which is impressive.
FTNT’s shares have gained 3.5% over the past month to close the last trading session at $52.25.
FTNT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
FTNT has an A grade for Quality and B in Sentiment. It is ranked #5 out of 22 stocks in the B-rated Software - Security industry.
Click here to see the additional POWR Ratings for FTNT (Momentum, Growth, Value, and Stability).
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 November 10, 2023, AKAM and Deloitte, a leader in global security services, announced a strategic alliance to provide Zero Trust microsegmentation and incident response services to Deloitte customers worldwide.
This alliance would combine Deloitte's expertise in cybersecurity, network forensics, and security with the Akamai Guardicore Segmentation solution.
On October 25, 2023, AKAM announced the launch of its latest Akamai Prolexic scrubbing centers in Toronto and Montreal. The new centers offer world-class distributed denial-of-service (DDoS) protection to regional and global organizations, government institutions, and critical public infrastructure.
AKAM’s trailing-12-month gross profit margin of 60.71% is 24.7% higher than the 48.67% industry average. Its trailing-12-month levered FCF margin of 14.16% is 72.7% higher than the 8.20% industry average.
AKAM’s revenue increased 9.5% year-over-year to $965.48 million in the fiscal third quarter (ended September 30, 2023), while its adjusted non-GAAP income from operations rose 22% from the year-ago quarter to $295.97 million. The company’s non-GAAP net income amounted to $251.07 million and $1.63 per share, representing 25.5% and 29.4% year-over-year increases, respectively.
Analysts expect AKAM’s EPS and revenue for the current quarter (ending December 30, 2023) to increase 16.2% and 7.5% year-over-year to be $1.59 and $997.53 million, respectively. The company has surpassed the EPS and revenue estimates in each of the trailing four quarters.
AKAM’s shares have gained 23.6% over the past year to close the last trading session at $115.90.
AKAM’s POWR Ratings reflect its positive outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock is ranked #16 out of 44 stocks in the B-rated Software - Business industry.
Beyond what is stated above, we’ve also rated for Growth, Sentiment, Quality, Value, Stability, and Momentum. Get all AKAM ratings here.
Zedge, Inc. (ZDGE)
ZDGE builds digital marketplaces and games around content that people use to express themselves. The Company monetizes its user base through advertising, subscriptions, and a virtual token-based economy.
ZDGE’s trailing-12-month gross profit margin of 91.77% is 87.7% higher than the 48.90% industry average. Its trailing-12-month asset turnover ratio of 0.54x is 4.2% higher than the 0.52x industry average.
During the fiscal year that ended July 31, 2023, ZDGE’s revenue increased 2.6% year-over-year to $27.20 million. The company reported adjusted EBITDA of $5.70 million.
Its total current assets came in at $21.58 million for the year, compared to $19.89 million in the previous year. Also, its total current liabilities came in at $5.76 million, compared to $8.66 million in the previous year.
Street expects ZDGE’s revenue to rise 5.1% year-over-year to 28.63 million for the year ending July 2024. Its EPS is expected to come in at $0.05 for the current year. It surpassed revenue estimates in three of four trailing quarters.
The stock surged 13.6% year-to-date to close the last trading session at $2.
ZDGE’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
The stock has an A grade for Value and Sentiment and a B in Quality. It is ranked #31 in the 134-stock in the Software - Application industry.
To access ZDGE’s additional ratings for Growth, Stability, and Momentum, Click here.
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FTNT shares were trading at $52.62 per share on Tuesday morning, up $0.37 (+0.71%). Year-to-date, FTNT has gained 7.63%, versus a 20.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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