Last year was challenging for tech stocks due to various macroeconomic headwinds, including multi-decade high inflation, the Fed’s aggressive rate hikes, and geopolitical instability owing to Russia’s invasion of Ukraine. The tech-heavy Nasdaq Composite lost more than 25% over the past year.
However, with inflation showing signs of cooling recently, the Fed is expected to slow down the rate hikes this year, potentially turning high-growth software stocks into attractive investment picks once again.
Moreover, the software industry is poised to witness significant growth in the foreseeable future, driven by the introduction of new, advanced technologies, such as the internet of things (IoT), 5G, artificial intelligence (AR), virtual reality (VR), the surge in e-commerce, and increased automation of business operations.
Furthermore, growing corporate and federal investments in the tech space should boost the industry’s growth. According to the forecast by Gartner, Inc. (IT), worldwide IT spending is expected to reach $4.6 trillion in 2023, up 5.1% year-over-year.
“Enterprise IT spending is recession-proof as CEOs and CFOs, rather than cutting IT budgets, are increasing spending on digital business initiatives,” said John-David Lovelock, Distinguished VP Analyst at Gartner.
Based on a report by SkyQuest, the global software market is expected to reach $872.72 billion by 2028, growing at a CAGR of more than 7.2%. Given the industry's promising growth prospects, fundamentally sound software stocks Fortinet, Inc. (FTNT) and Yext, Inc. (YEXT) could be solid buys this year.
Fortinet, Inc. (FTNT)
FTNT offers comprehensive, integrated, and automated cybersecurity solutions internationally. It sells FortiGate hardware and software licenses, which enable a range of networking and security features. It also provides security subscriptions, technical support, and training services.
On December 14, 2022, FTNT announced that five new managed security service providers (MSSP) had integrated FTNT Secure SD-WAN to achieve better business outcomes.
A Forrester-commissioned study quantified the network and security advantages of Secure SD-WAN. Further, it revealed that a composite organization comprising interviewees with FTNT Secure SD-WAN experience generated 300% ROI over three years and payback in eight months.
On October 18, FTNT provided the most integrated single-vendor SASE solution available, converging best-of-breed networking and security unified by a single operating system. With the most recent FortiSASE cloud-delivered upgrades, FTNT is even more equipped to provide consistent security and user experience.
For the fiscal 2022 third quarter (ended September 30, 2022), FTNT’s total revenue increased 32.6% year-over-year to $1.15 billion, while its total gross profit grew 32.1% from the year-ago value to $866.50 million. Non-GAAP operating income rose 45.3% from the previous year’s quarter to $324.90 million.
In addition, net income attributable to FTNT was $262.70 million, up 58.3% year-over-year, and its EPS stood at $0.33, up 65% year-over-year.
The consensus EPS estimate of $1.15 for the fiscal year ended December 2022 indicates a 44.3% year-over-year improvement. Likewise, the consensus revenue estimate of $4.43 billion for the same year reflects a growth of 32.5% from the prior year. Moreover, FTNT surpassed its consensus estimates in all four trailing quarters, which is impressive.
In addition, the consensus EPS and revenue estimates of $1.39 and $5.36 billion for the current fiscal year (ending December 2023) indicate 20.5% and 21.1% year-over-year improvement, respectively. Shares of FTNT have declined 0.8% intraday to close the last trading session at $48.40.
FTNT’s promising outlook is reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Quality and a B for Growth and Sentiment. Within the Software - Security industry, it has topped among a total of 22 stocks.
Beyond what we stated above, we also have FTNT’s ratings for Stability, Value, and Momentum. Get all FTNT ratings here.
Yext, Inc. (YEXT)
YEXT organizes business facts to answer customer inquiries globally. It runs the Yext platform, a cloud-based platform that enables its users to manage their customer reviews, answer consumer queries, and control information about their businesses.
Recently, YEXT announced a collaboration with Apple Business Connect for a new, free service that enables firms of all sizes to claim their geographical place cards and customize how vital information is displayed.
Before the official release, YEXT worked with several well-known companies to test the integration and thereby saw numerous advantages, singling out data accuracy and operational effectiveness as firms' selling points. The collaboration might benefit YEXT.
On November 14, 2022, YEXT announced the launch of its category-leading Search product on AWS Marketplace, a digital catalog with thousands of listings from independent software vendors. Allowing businesses to conduct business directly through AWS Marketplace should simplify the purchasing process, quicken time to value, and increase the global reach of YEXT's patent search solution.
For the fiscal 2023 third quarter ended October 31, 2022, YEXT’s non-GAAP income from operations came in at $2.69 million compared to a loss of $4.90 million in the prior year’s quarter. The company’s non-GAAP net income and EPS stood at $2.51 million and $0.02 versus a net loss of $5.47 million and net loss per share of $0.04 in the previous year’s quarter, respectively.
Analysts expect YEXT’s revenue to increase 4.2% year-over-year to $416.08 million for the next fiscal year (ending January 2024). The company’s EPS for the same year is expected to come in at $0.13 compared to a loss per share of $0.04 in the previous year. The stock has gained 39.5% over the past six months to close the last trading session at $6.46.
YEXT’s POWR Ratings reflect its strong fundamentals. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
YEXT has a B grade for Quality, Sentiment, Value, and Growth. It has topped the 52- stock Software - Business industry.
To see additional POWR Ratings for Momentum and Stability for YEXT, click here.
FTNT shares were trading at $48.70 per share on Friday afternoon, up $0.30 (+0.62%). Year-to-date, FTNT has declined -0.39%, versus a 4.00% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
Good Stocks to Buy for 2023? 2 Software Stocks to Know StockNews.com
