The software industry is experiencing remarkable growth driven by rapid technological advancements. This expansion encompasses emerging technologies such as Artificial Intelligence (AI), blockchain, cybersecurity, the Internet of Things (IoT), AR&VR, and cloud computing.
Therefore, I present quality software stocks New Relic, Inc. (NEWR), Splunk Inc. (SPLK), and DocuSign, Inc. (DOCU), which are poised for growth in the coming month.
In recent years, the widespread adoption of software products and solutions has been spurred by the expansion of e-commerce, the rise of e-health, the surge in online services, the shift toward remote work, and the proliferation of connected devices.
Enterprises are increasingly adopting hybrid and public cloud solutions to enhance their operations. Hence, Software as a Service (SaaS) is becoming the preferred delivery model for enterprise applications within the vast cloud computing landscape.
Moreover, the business application layer in the cloud is becoming more diverse, with providers focused on enhancing productivity through cloud-native capabilities, AI, and composability. As a result, SaaS spending is expected to grow by 17.9% to reach $197 billion this year.
In addition, Artificial Intelligence (AI) has changed the landscape for many industries across the globe. Increasing demand for enhanced business IoT solutions, autonomous vehicles, and robotics is poised to fuel the expansion of the artificial intelligence software market.
The AI software market is expected to reach approximately $1.09 trillion by 2032, at a projected CAGR of 23%.
Furthermore, the software market is being propelled by an increase in enterprise data, the automation of business processes, and the expanding scope of digitization. The market's growth is bolstered by heightened concerns surrounding network security and privacy.
Thus, the global software market is expected to grow at a CAGR of 11.5% from 2023 to 2030.
Given the industry tailwinds, it's time to examine the fundamentals of the top three stocks to consider in the B-rated Software – SAAS industry, starting with the third in line.
New Relic, Inc. (NEWR)
NEWR delivers a software platform for customers to collect telemetry data and derive insights from that data in a unified front-end application. It offers a suite of products on its open and extensible cloud-based platform, which enables users to collect, store, and analyze telemetry data.
NEWR’s revenue and levered cash flow have grown at a CAGR of 15.3% and 7% over the past three years.
NEWR’s trailing-12-month gross profit margin of 75.42% is 57.5% higher than the 47.89% industry average. Its 11.57% trailing-12-month levered FCF margin is 66% higher than the 6.97% industry average.
On August 23, 2023, NEWR announced that it had further enhanced its AIOps capabilities with recommended alerts. This provides the ability to quickly detect and efficiently resolve alert coverage gaps by using AI to identify anomalous behavior, determine areas of the technology stack that aren’t being monitored, and recommend new alerts to engineers.
During the first quarter that ended June 30, 2023, NEWR’s revenue rose 12.1% year-over-year to $242.63 million. Its non-GAAP gross profit increased 22.7% year-over-year to $192.57 million. The company’s non-GAAP net income came in at $30.43 million, compared to a non-GAAP net loss of $17.16 million in the year-ago quarter.
Additionally, its non-GAAP income per share came in at $0.43, compared to a non-GAAP loss per share of $0.26 in the prior-year quarter.
NEWR’s EPS and revenue are expected to increase 205.6% and 10.5% year-over-year to $0.40 and $250.65 million, respectively, in the second quarter ending September 30, 2023. The company has an incredible earning surprise history, exceeding the EPS and revenue estimates in each of the trailing four quarters.
Over the past nine months, the stock has gained 61.3% to close the last trading session at $84.86.
NEWR’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates 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.
It has a B grade for Growth and Quality. It is ranked #5 out of 26 stocks in the Software – SAAS industry.
To see NEWR’s Value, Momentum, Stability, and Sentiment ratings, click here.
Splunk Inc. (SPLK)
SPLK develops and markets cloud services and licensed software solutions in the United States and internationally.
SPLK’s revenue and levered cash flow have grown at a CAGR of 17.9% and 114.8% over the past three years.
SPLK’s trailing-12-month gross profit margin of 78.53% is 64% higher than the 47.89% industry average. Its 24.28% trailing-12-month levered FCF margin is 248.4% higher than the 6.97% industry average.
On July 18, 2023, SPLK announced that Carnival Corporation & plc (CCL) had started using Splunk software to help provide a secure and seamless customer experience to 300,000+ guests and crew every day worldwide.
On the same day, SPLK announced the launch of Splunk AI, a collection of new AI-powered offerings to enhance its unified security and observability platform. Launched at .conf23, Splunk AI combines automation with human-in-the-loop experiences so organizations can drive faster detection, investigation, and response while controlling how AI is applied to their data.
Leaning into its lineage of data visibility and years of innovation in AI and machine learning (ML), SPLK continues to enrich the customer experience by delivering domain-specific insights through its AI capabilities for security and observability.
SPLK’s total revenue increased 14% year-over-year to $910.59 million in the fiscal second quarter, which ended July 31, 2023. Its gross profit increased 18% year-over-year to $698.68 million and total operating expenses declined 1.9% year-over-year to $767.20 million.
SPLK’s revenue is expected to increase 10.7% year-over-year to $1.03 billion for the fiscal third quarter ending October 2023. The company’s EPS for the same quarter is expected to increase 37.6% year-over-year to $1.14. Moreover, SPLK topped consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 49.6% over the past nine months to close the last trading session at $117.15.
SPLK’s sound fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
SPLK also has an A grade for Growth and a B for Quality. It is ranked #4 in the same industry.
In addition to the POWR Ratings highlighted above, one can access SPLK’s additional ratings for Value, Momentum, Stability, and Sentiment here.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers DocuSign e-signature solution that enables sending and signing of agreements on various devices.
DOCU’s revenue and levered cash flow have grown at a CAGR of 34.8% and 51.3% over the past three years.
DOCU’s trailing-12-month 79.27% trailing-12-month gross profit margin is 65.5% higher than the 47.89% industry average. Its levered FCF margin of 30.55% is 338.2% higher than the 6.97% industry average.
On July 25, 2023, DOCU launched a new feature called Liveness Detection for ID Verification as part of its identity verification offerings. This feature employs AI-based biometric checks to confirm the identity of signers, their physical presence during signing, and the validity of their IDs.
Developed in partnership with Onfido, this feature integrates seamlessly with DocuSign's eSignature workflow, making secure agreements easier without the need for multiple platforms
DOCU’s total revenues rose 12.3% year-over-year to $661.39 million in the first quarter that ended April 30, 2023. 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 EPS came in at $0.72, representing an increase of 89.5% year-over-year.
Analysts expect DOCU’s EPS and revenues to increase 49% and 8.9% year-over-year to $0.66 and $677.32 million, respectively, in the fiscal second quarter that ended July 31, 2023. It surpassed the EPS and revenue estimates in each of the trailing four quarters.
Over the past nine months, the stock has gained 3.7% to close the last trading session at $47.74.
DOCU’s POWR Ratings reflect robust prospects. The stock has an overall rating of B, which translates to a Buy in our proprietary system.
It has an A grade for Growth and a B for Value and Quality. DOCU is ranked #3 in the same industry.
Click here to access DOCU’s Momentum, Stability, and Sentiment ratings.
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SPLK shares were trading at $118.16 per share on Tuesday morning, up $1.01 (+0.86%). Year-to-date, SPLK has gained 37.25%, versus a 16.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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