The software industry is growing due to increased investments in digitization initiatives and widespread data usage across various industries to make improved business decisions. Moreover, the growing adoption of public cloud-based services is also boosting the prospects of the software industry.
Given this backdrop, we believe software stocks Intuit Inc. (INTU), SolarWinds Corporation (SWI), and Vimeo, Inc. (VMEO) are solid additions to one’s portfolio to benefit from the favorable industry trends.
Before delving deeper into their fundamentals, let’s discuss what’s shaping the software industry’s prospects.
Driven by the increased corporate investments in cloud computing, digital transformation initiatives, big data analytics, and artificial intelligence (AI), the demand for advanced software solutions is expected to remain robust. Gartner projects worldwide IT spending to grow 8% year-over-year to $5.10 trillion this year.
Moreover, spending on software is projected to increase 13.8% over the prior-year quarter to $1.04 trillion. Additionally, the growing popularity of public cloud services has led to the adoption of Software as a Service (SaaS). The global cloud market is projected to rise from $626.4 billion in 2023 to $727.9 billion in 2024, marking a 16.2% year-over-year increase.
SaaS has enabled software companies to benefit from subscription-based, recurring revenue models. According to Statista, this year, the SaaS market is expected to generate $150.70 billion in revenue, with an average spend per employee projected at $0.89 thousand. SaaS revenues are forecasted to reach $186 billion by 2028, growing at a CAGR of 5.4%.
Furthermore, cloud-based software applications are a big hit with enterprises due to their scalability, affordability, and accessibility. These software applications are expected to witness further demand due to the integration of generative AI.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software ETF’s (IGV) 52.4% returns over the past year.
Let’s analyze the fundamentals of the three featured software stocks.
Intuit Inc. (INTU)
INTU provides financial management and compliance products and services for consumers, small businesses, self-employed, and accounting professionals in the United States, Canada, and internationally. The company operates in four segments: Small Business & Self-Employed, Consumer, Credit Karma, and ProTax.
On November 14, 2023, INTU announced a strategic partnership with Allstate Health Solutions to offer expanded insurance options for QuickBooks Online Payroll customers, providing a seamless and affordable integrated insurance experience for employers and employees.
On November 14, 2023, INTU Intuit introduced innovations, including QuickBooks Ledger for accountants, improvements in QuickBooks Online Accountant, and a refreshed ProAdvisor Program.
They also enhanced QuickBooks Online Advanced, improved QuickBooks Online Payroll, and introduced new e-commerce features, aiming to streamline workflows and provide insights for accountants and small businesses within their online ecosystem.
In terms of the trailing-12-month levered FCF margin, INTU’s 29.09% is 236.1% higher than the 8.65% industry average. Its 17.53% trailing-12-month net income margin is 804.2% higher than the 1.94% industry average. Likewise, the stock’s 22.86% trailing-12-month EBIT margin is 372.4% higher than the 4.84% industry average.
INTU’s net revenues for the first quarter ended October 31, 2023, increased 14.7% year-over-year to $2.98 billion. Its non-GAAP operating income rose 45% year-over-year to $662 million. Also, its non-GAAP net income came in at $698 million and $2.47 per share, representing an increase of 48.5% and 48.8% year-over-year, respectively.
Analysts expect INTU’s EPS and revenues for the quarter ending January 31, 2024, to increase 5.4% and 11.4% year-over-year to $2.32 and $3.39 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 53.7% to close the last trading session at $599.84.
It’s no surprise that INTU has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Sentiment, and Quality. Within the Software - Application industry, it is ranked #20 out of 133 stocks. To see INTU’s Value, Momentum, and Stability ratings, click here.
SolarWinds Corporation (SWI)
SWI provides information technology (IT) management software products. The company offers a portfolio of solutions to technology professionals for monitoring, managing, and optimizing networks, systems, desktops, applications, storage, databases, website infrastructures, and IT service desks.
In terms of the trailing-12-month EBITDA margin, SWI’s 35.84% is 287.4% higher than the 9.25% industry average. Likewise, its 90.25% trailing-12-month gross profit margin is 84.7% higher than the 48.86% industry average. Its 27.07% trailing-12-month EBIT margin is 459.3% higher than the 4.84% industry average.
SWI's total revenue for the fiscal third quarter, which ended on September 30, 2023, rose 5.7% year-over-year to $189.59 million. The company's non-GAAP operating income increased 19.7% over the year-ago quarter to $81.16 million. Moreover, its non-GAAP net income and non-GAAP EPS increased 20.3% and 15% year-over-year to $38.01 million and $0.23, respectively.
Street expects SWI’s EPS and revenue for the quarter ended December 31, 2023, to increase 10.5% and 1.8% year-over-year to $0.21 and $190.40 million, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 34.8% to close the last trading session at $11.61.
SWI’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Sentiment. It is ranked #4 out of 43 stocks in the B-rated Software - Business industry. In total, we rate SWI on eight different levels. Beyond what we stated above, we also have given SWI grades for Momentum, Stability, and Quality. Get all the SWI ratings here.
Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
On November 2, 2023, VMEO launched Vimeo Marketing, offering marketers an integrated toolset for video hosting, editing, and distribution. The end-to-end solution aims to provide control over the viewer experience, efficient video editing, and seamless content distribution, catering to the growing demand for a comprehensive video marketing solution in today's video-centric internet landscape.
In terms of the trailing-12-month gross profit margin, VMEO’s 77.77% is 58.8% higher than the 48.97% industry average. Likewise, its 0.69x trailing-12-month asset turnover ratio is 37.2% higher than the industry average of 0.50x. In addition, its 1.40% trailing-12-month Return on Total Assets is 6.3% higher than the industry average of 1.32%.
For the fiscal third quarter that ended September 30, 2023, VMEO’s revenue came in at $106.25 million. Its non-GAAP gross profit rose 1.8% year-over-year to $84.70 million. The company’s net earnings came in at $8.46 million, compared to a net loss of $21.42 million in the year-ago quarter. Additionally, its EPS stood at $0.05, compared to a loss per share of $0.13 in the prior year’s quarter.
For the quarter ending June 30, 2024, VMEO’s revenue is expected to increase 3% year-over-year to $104.90 million. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 7.9% to close the last trading session at $3.68.
VMEO’s POWR Ratings reflect its solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #4 out of 21 stocks in the A-rated Software - SAAS industry. It has a B grade for Value and Quality. To see VMEO’s Growth, Momentum, Stability, and Sentiment ratings, click here.
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INTU shares were trading at $603.71 per share on Thursday morning, up $3.87 (+0.65%). Year-to-date, INTU has declined -3.27%, versus a -0.24% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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