Software companies are constantly developing new products and services and disrupting traditional industries. This makes the U.S. tech industry a very attractive investment proposition. Amid this, let’s look into software stocks, VMware, Inc. (VMW), Sapiens International Corporation N.V. (SPNS), and F5, Inc. (FFIV), which could be solid additions to your portfolio.
The exponential growth in enterprise data volume has created a huge demand for robust software solutions and services to handle and analyze this data effectively. The demand for advanced software tools and services is growing, with automation on the rise in industries like retail, manufacturing, healthcare, and transportation.
Propelled by increased enterprise data volume, greater business process automation, and expanding digitization, the software industry shows robust prospects. According to Statista, revenue in the software market is projected to reach $659 billion in 2023. Further, it is expected to expand at a CAGR of 5.4%, resulting in a market volume of $858.10 billion by 2028.
Additionally, the industry is supported by heightened concerns about network security and privacy. Global tech expenditures are set for a rise in 2023, fueled by emerging technologies like blockchain, Augmented Reality (AR), and the ongoing positive outlook for generative AI.
Gartner projects worldwide IT spending will surge to $4.7 trillion this year, signifying a 4.3% upswing from the prior year. In addition, software spending for 2023 and 2024 is expected to increase 13.7% and 14.1% year-over-year, respectively.
As businesses ramp up their automation across end-use industries such as retail, manufacturing, healthcare, and transportation, the demand for software and related services is anticipated to rise. The global business software and services market is expected to expand at a CAGR of 11.9% from 2023 to 2030.
That said, let’s dive deeper into the fundamentals of the Software – Business picks, starting with number three.
Stock #3: VMware, Inc. (VMW)
VMW provides diverse software solutions globally, spanning modern applications, cloud management, networking, security, and workspaces. Their offerings encompass multi-cloud solutions, networking solutions like NSX, security solutions with Carbon Black, and workspace solutions, including Workspace ONE.
On August 22, VMW and NVIDIA Corporation (NVDA) extended their partnership to prepare enterprises on VMW for the generative AI era. The collaboration introduces VMW with NVDA, allowing customization and deployment of generative AI applications like chatbots and assistants.
The solution integrates NVDA’s accelerated computing with VMW, optimized for AI applications. This collaboration of two tech giants for the scope of Generative AI could prove to be game-changing for the company’s growth.
In the same month, VMW unveiled enhanced offerings in the Tanzu suite, facilitating comprehensive app development and optimization across multiple clouds. Anchored by a shared data platform and open interfaces, Tanzu integrates existing products with fresh innovations to transform application delivery.
Prioritizing app-centric visibility, proactive optimization, and multi-cloud management, the platform aims to revolutionize the development landscape.
For the fiscal first quarter ended May 5, 2023, VMW’s total revenue increased 6.1% from the previous year's quarter to $3.28 billion. Its non-GAAP operating income increased 6.2% from the year-ago value to $819 million. The company’s adjusted net income and non-GAAP EPS came in at $644 million and $1.49, representing increases of 18.8% and 16.4%, respectively, from the prior-year quarter.
Additionally, VMW’s net cash provided by operational activities improved 74.1% from the year-ago value to $1.75 billion, and free cash flows stood at $1.65 billion, up 83% year-over-year.
The consensus revenue estimate of $3.46 billion for the second quarter (ended July 2023) represents a 3.6% increase year-over-year. The consensus EPS estimate of $1.72 for the same quarter indicates a 4.7% increase year-over-year.
VMW’s shares have gained 52.1% over the past six months to close the last trading session at $167.49.
VMW’s POWR Ratings reflect solid prospects. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VMW also has an A grade for Quality. It is ranked #4 out of 47 stocks in the Software – Business industry. Click here to see the other ratings of VMW for Growth, Value, Momentum, Stability, and Sentiment.
Stock #2: Sapiens International Corporation N.V. (SPNS)
SPNS offers insurance and financial software solutions worldwide. Its offerings encompass CoreSuite for various insurance lines, DigitalSuite for stakeholders, and financial tools like FinancialPro. Founded in 1982, SPNS serves through direct and partner sales from its base in Holon, Israel.
On August 23, a Tier-1 South African bank went live with SPNS IDITSuite for Property & Casualty in Namibia, expanding from its usage in South Africa. The bank selected SPNS due to their existing relationship and successful implementation in South Africa, entrusting SPNS to manage core short-term insurance systems.
In the same month, Aktia Life, a prominent Finnish life insurer serving around 100,000 customers, opted for SPNS’ CoreSuite for Life and Pensions to transform their core system. SPNS was chosen for its intricate insurance ecosystem integration expertise, offering a comprehensive, digitally enhanced platform for individual and group products spanning Life, Wealth, and Pension insurances.
Such developments reflect the company’s strong demand and should help expand its offerings into new markets.
During the second quarter that ended June 30, 2023, SPNS’ revenue increased 8.2% year-over-year to $128.29 million, while its gross profit increased 9% year-over-year to $54.66 million. Its non-GAAP operating income grew 12.9% from the year-ago value to $23.42 million.
In addition, its adjusted net income and non-GAAP EPS came in at $18.61 million and $0.33, representing increases of 24.2% and 22.2%, respectively, from the prior-year quarter. Also, the company’s adjusted EBITDA increased 12.5% year-over-year to $24.39 million.
Street expects SPNS’ revenue for the third quarter (ending September 30, 2023) to increase 9.3% year-over-year to $130.05 million. Its EPS for the ongoing quarter is expected to grow by 12.1% year-over-year to $0.34. Moreover, it surpassed the EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 60.7% year-to-date to close the last trading session at $29.70.
SPNS’ 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. It has a B grade for Growth, Stability, and Sentiment.
Within the same industry, it is ranked #2. Click here to view SPNS’ ratings for Value, Momentum, and Quality.
Stock #1: F5, Inc. (FFIV)
FFIV offers multi-cloud application security and delivery solutions globally, aiding customers in deploying, securing, and managing applications across various architectures. Its offerings include F5 BIG-IP appliances, F5 NGINX Software Solutions, F5 Distributed Cloud WAAP, and F5 Distributed Cloud Bot Defense.
On June 19, Telefónica Tech and FFIV extended their partnership by introducing Web Application Defense (WAD), a SaaS-based managed service. Hosted on the FFIV Distributed Cloud Platform, it empowers Telefónica Tech’s enterprise clients to swiftly identify threats using telemetry data, AI, and machine learning, protecting applications across various deployments.
The partnership aims to improve the security and speed of app deployment in distributed and multi-cloud environments.
On May 22, FFIV inaugurated a state-of-the-art engineering center in Bengaluru, India, located in Embassy Golf Links Business Park. Aligned with Bengaluru’s theme, it will drive research, development, and product innovation for FFIV’s multi-cloud application security solutions, offering opportunities for engineers to work on cutting-edge technologies.
This inauguration marks a new page in the handbook of FFIV, setting itself up in the Indian business ecosystem and catering to their needs, eventually benefiting the company’s topline.
For the fiscal third quarter that ended June 30, 2023, FFIV’s total revenue increased 4.2% from the prior-year quarter to $702.64 million, while its gross profit increased 3.2% year-over-year to $560.96 million. Its non-GAAP operating profit stood at $233 million, up 20.1% from the year-ago value.
The company’s adjusted net income and non-GAAP EPS came in at $193.65 million and $3.21, representing increases of 25.2% and 24.9%, respectively, from the prior-year quarter. Also, its cash, cash equivalents, and restricted cash, at the end of the period, came in at $681.59 million, up 24.8% year-over-year.
The consensus revenue estimate of $702.42 million for the third quarter (ending September 2023) represents a marginal increase year-over-year. The consensus EPS estimate of $3.21 for the current quarter indicates a 22.4% improvement year-over-year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
Over the past six months, the stock has gained 12.7% to close the last trading session at $161.19.
It’s no surprise that FFIV has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It also has an A grade for Quality and a B for Growth and Value. Out of 47 stocks in the same industry, it is ranked first.
In addition to the POWR Ratings we’ve stated above, we also have FFIV’s ratings for Momentum, Stability, and Sentiment. Get all FFIV ratings here.
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VMW shares were trading at $167.56 per share on Wednesday afternoon, up $0.07 (+0.04%). Year-to-date, VMW has gained 36.49%, versus a 18.85% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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