Technological advancements are providing innovative solutions to business challenges and coming up with transformational trends like Artificial Intelligence (AI), Machine Learning (ML), and Internet of Things (IoT). Moreover, with the proliferation of technology, businesses and consumers are adopting software solutions at an unprecedented scale.
Against this backdrop, robust software stocks Atlassian Corporation (TEAM) and Cadence Design Systems, Inc. (CDNS) could be solid buys now, while Duolingo, Inc. (DUOL) could be watched for a better entry point.
Before we delve into the fundamentals of the stocks, let’s look at the prospects of the software sector.
Businesses are increasingly adopting software solutions to accelerate digital transformation. Gartner predicts software spending to grow 13.7% from 2022 to reach $922.75 billion this year. It is also expected to increase 14.1% year-over-year to $1.05 trillion in 2024.
The prospects for software solutions are also evident from the rising demand for software developers. According to the U.S. Bureau of Labor Statistics, jobs in software development are expected to increase by 25% between 2021 and 2031.
With new technologies opening up new growth avenues, the Market Research Future (MRFR) forecasted the global software market to reach $1.59 trillion by 2032, expanding at an 11.9% CAGR, with application software expected to lead the market.
With these factors in mind, let’s look into the fundamentals of the featured Software - Application stocks, beginning with the third stock.
Stock to Hold:
Stock #3: Duolingo, Inc. (DUOL)
DUOL is a popular global mobile learning platform operator. The company provides courses in 40 languages through its Duolingo platform and offers assessment exams.
In October, DUOL announced its aim to expand beyond languages to teach music and math, using its proven and gamified teaching methods. The company also highlighted developments to its existing platform. This should benefit the company.
For the second quarter (ended June 30), DUOL’s revenues increased 43.5% year-over-year to $126.84 million. Its net income and comprehensive income stood at $3.73 million, up significantly from a net loss and comprehensive loss of $15.05 million in the prior-year period.
Net income per share attributable to Class A and Class B common stockholders came in at $0.08, increasing considerably from a loss of $0.38 in the prior-year quarter. However, its loss from operations stood at $4.87 million for the period.
The consensus EPS estimate for the third quarter (ended September 2023) indicates a 70.2% year-over-year improvement but stands at negative $0.14. On the other hand, the consensus revenue estimate of $132.03 million reflects a 37.4% rise from the year-ago value.
The stock has gained 79.6% over the past year and 146.2% year-to-date to close the last trading session at $175.12.
DUOL’s mixed fundamentals are reflected in its POWR Ratings. It has an overall rating of C, equating to Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has a B grade for Growth and Sentiment. It is ranked #72 out of the 134 stocks in the Software - Application industry. Click here to see the additional POWR Ratings of DUOL (Value, Momentum, Stability, and Quality).
Stocks to Buy:
Stock #2: Atlassian Corporation (TEAM)
Headquartered in Sydney, Australia, TEAM engages in the design, development, licensing, and maintenance of various software products globally. The company’s offerings include Jira Software and Jira Work Management, a project management system, and Confluence, a connected workspace.
On October 12, TEAM announced that it had entered into a definitive agreement to acquire Loom, the video messaging platform. Loom’s Asynchronous (async) video offering is expected to benefit TEAM by helping distributed teams communicate.
TEAM’s total revenue increased 23.6% year-over-year to $939.10 million in the fiscal fourth quarter (ended June 30). Its non-GAAP operating income rose 88.4% from the prior-year quarter to $202.76 million. Its non-GAAP net income and non-GAAP net income per share came in at $147.02 million and $0.57, up 114.8% and 111.1% year-over-year, respectively.
Street expects TEAM’s EPS and revenue for the fiscal first quarter (ended September 2023) to increase 49% and 19.6% year-over-year to $0.54 and $965.20 million, respectively. The company has an impressive surprise earnings history, as it surpassed consensus EPS estimates in three out of the trailing four quarters.
TEAM’s shares have gained 44.9% year-to-date and 17.6% over the past six months to close the last trading session at $186.40.
TEAM’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
TEAM also has an A grade for Growth and a B for Sentiment and Quality. It is ranked #37 out of the 134 stocks in the Software - Application industry. In addition to the POWR Ratings we have stated above, one can see TEAM’s ratings for Value, Momentum, and Stability here.
Stock #1: Cadence Design Systems, Inc. (CDNS)
CDNS offers software, hardware, services, and reusable Integrated Circuit (IC) design blocks internationally, serving 5G communications, aerospace and defense, automotive, industrial, and computing markets.
On October 2, CDNS announced that it had completed the acquisition of Intrinsix Corporation. This is expected to scale the company’s reach in high-growth verticals such as aerospace and defense.
In addition, in September, CDNS declared the acquisition of the SerDes and memory interface PHY IP business, which is anticipated to bolster CDNS’ IP portfolio and Intelligent System Design™ strategy.
For the fiscal second quarter that ended June 30, CDNS’ total revenue came in at $976.58 million, registering an improvement of 13.9% year-over-year. Its income from operations increased 5.8% from the prior-year period to $299.33 million. Its non-GAAP net income and non-GAAP net income per share rose 12.1% and 13% year-over-year to $333.75 million and $1.22, respectively.
Street revenue and EPS estimates of $1.07 billion and $1.37 for the fiscal fourth quarter (ending December 2023), indicating a 19.1% and 42.5% increase from the same period last year, respectively. CDNS surpassed consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 57% year-to-date and 70.4% over the past year to close the last trading session at $252.20.
It’s no surprise that CDNS has an overall B rating, translating to Buy in our POWR Ratings system.
The stock has an A grade for Quality and a B for Sentiment. It is ranked #34 in the same industry.
In addition, we have rated CDNS for Growth, Value, Momentum, and Stability. Get all CDNS ratings here.
What To Do Next?
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CDNS shares were trading at $249.59 per share on Friday afternoon, down $2.61 (-1.03%). Year-to-date, CDNS has gained 55.37%, versus a 14.04% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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