Increased spending on digital transformation across different sectors is boosting the demand for advanced software solutions. The software industry is well positioned for long-term growth due to the growing adoption of cloud-based services and the integration of emerging technologies like generative AI to facilitate enhanced operational efficiency.
Therefore, investors could consider adding fundamentally strong software stocks ServiceNow, Inc. (NOW), Informatica Inc. (INFA), Sprinklr, Inc. (CXM), CSG Systems International, Inc. (CSGS), Weave Communications, Inc. (WEAV), and Kaltura, Inc. (KLTR) to their watchlist.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the software industry’s prospects.
The tech-heavy Nasdaq Composite has rallied 35.1% over the past year, driven by the hype around generative AI and the Federal Reserve’s indication of interest rate cuts this year. Interest rate cuts will be positive for the tech sector, which includes software companies.
The software industry is thriving due to the rapid increase in enterprise data volume and the automation of business processes in sectors like retail, manufacturing, healthcare, and transportation. The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.
The use of advanced software solutions has become almost mandatory following the digitization of business operations. Gartner forecasts software spending to increase 13.8% year-over-year to $1.04 trillion this year.
Moreover, increased spending and adoption of public cloud services are fueling the demand for cloud-based software applications. These cloud-based software applications provide advantages like data ownership, flexibility, scalability, accessibility, security and privacy. Spending on cloud application services (SaaS) is expected to increase by 18.9% over the prior year to $243.99 billion this year.
Furthermore, cutting-edge software applications have become essential to leverage the power of data. Organizations benefit from software tools that help analyze data and drive data-driven decisions. Such software applications are also integrating technologies like generative AI to drive further operational efficiency.
Goldman Sachs estimates the total addressable market (TAM) of the generative AI software to be approximately $150 billion. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 54.1% returns over the past year.
Considering these conducive trends, let’s take a look at the fundamentals of the featured software stocks.
ServiceNow, Inc. (NOW)
NOW provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. The company operates the NOW platform for workflow automation, AI, process mining, machine learning, performance analytics etc. It also provides IT service management applications, strategic portfolio management product suites, IT operations management products, etc.
On December 18, 2023, NOW announced that it had signed an agreement to acquire task mining firm UltimateSuite, aligning with its strategy to enhance process mining and intelligent automation across the NOW Platform. The acquisition aims to bolster automation and AI capabilities to help customers identify process bottlenecks and drive stronger operational efficiencies.
NOW’s 7.64% trailing-12-month EBIT margin is 55.2% higher than the industry average of 4.92%. Likewise, its 18.72% trailing-12-month net income margin is 693.6% higher than the industry average of 2.36%. Furthermore, the stock’s 5.03% Return on Total Capital is 79.6% higher than the industry average of 2.80%.
For the fiscal third quarter, which ended September 30, 2023, NOW’s total revenues increased 25% year-over-year to $2.29 billion. Its non-GAAP gross profit increased 24.3% year-over-year to $1.88 billion. The company’s non-GAAP net income grew 51.5% over the prior-year quarter to $603 million. Also, its non-GAAP net income per share came in at $2.92, registering an increase of 49% year-over-year.
NOW’s revenue and EPS for the quarter ended December 31, 2023, are expected to increase 23.8% and 21.8% year-over-year to $2.40 billion and $2.78, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 76.5% to close the last trading session at $729.18.
NOW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
NOW has an A grade for Growth and a B for Quality. Within the B-rated Software – Business industry, it is ranked #15 of 42 stocks.
In addition to the POWR Ratings stated above, one can access NOW’s additional ratings for Value, Momentum, Stability, and Sentiment here.
Informatica Inc. (INFA)
INFA develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at enterprise scale in the United States. The company's platform includes a suite of interoperable data management products, including data integration products, API and application integration products, APIs and integration processes, and API management.
In terms of the trailing-12-month EBITDA margin, INFA’s 13.72% is 45.7% higher than the 9.42% industry average. Likewise, its gross profit margin of 79.33% is 61.5% higher than the industry average of 49.14%. Furthermore, the stock’s 25.08% trailing-12-month levered FCF margin is 190% higher than the industry average of 8.65%.
INFA’s total revenues for the fiscal third quarter ended September 30, 2023, increased 9.8% year-over-year to $408.56 million. Its non-GAAP net income increased 53.2% year-over-year to $80.62 million. The company’s adjusted EBITDA increased 48.9% over the prior year quarter to $132.19 million. Also, its non-GAAP net income per share came in at $0.27, representing an increment of 50% year-over-year.
For the quarter ended December 31, 2023, INFA’s EPS and revenue are expected to increase 23.7% and 8.4% year-over-year to $0.30 and $432.18 million, respectively. It surpassed the Street EPS estimates in three of four trailing quarters, which is impressive.
Over the past nine months, the stock has gained 83.9% to close the last trading session at $29.07.
INFA’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B in Sentiment and Quality. It is ranked first out of 21 stocks in the A-rated Software – SAAS industry. Beyond what is stated above, we’ve also rated INFA for Value, Momentum, and Stability. Get all the INFA ratings here.
Sprinklr, Inc. (CXM)
CXM provides enterprise cloud software products worldwide. The company offers a Unified Customer Experience Management platform. Its products include Sprinklr Insights, Sprinklr Service, Sprinklr Marketing, and Sprinklr Social. The company also provides professional, managed, training, and consultancy services.
In terms of the trailing-12-month net income margin, CXM’s 4.21% is 78.4% higher than the 2.36% industry average. Likewise, its 2.72% trailing-12-month Return on Total Assets is 467.8% higher than the industry average of 0.48%. Furthermore, the stock’s 0.71x trailing-12-month asset turnover ratio is 14.7% higher than the industry average of 0.62x.
For the fiscal third quarter, which ended October 31, 2023, CXM’s total revenue increased 18.5% year-over-year to $186.33 million. The company’s non-GAAP gross profit increased 19.7% over the prior year to $140.49 million. Its non-GAAP net income increased 456.1% over the previous year's quarter to $31.22 million.
Also, its non-GAAP net income per share came in at $0.11, representing an increase of 450% year-over-year.
Street expects CXM’s EPS and revenue for the quarter ending January 31, 2024, to increase 45.4% and 14.2% year-over-year to $0.09 and $188.76 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 46.7% to close the last trading session at $12.34.
CXM’s solid prospects are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the Software - Application industry, it is ranked #45 out of 134 stocks. It has an A grade for Growth. To see the additional ratings of CXM for Value, Momentum, Stability, Sentiment, and Quality, click here.
CSG Systems International, Inc. (CSGS)
CSGS provides revenue management and digital monetization, customer engagement, and payment solutions primarily to the communications industry in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It offers an Advanced Convergent Platform. The company also provides managed and professional services as well as licenses for various solutions.
In terms of the trailing-12-month EBIT margin, CSGS’ 12.65% is 28.6% higher than the 9.84% industry average. Likewise, its 10.42% trailing-12-month levered FCF margin is 73.3% higher than the industry average of 6.01%. Furthermore, the stock’s 10.64% trailing-12-month Return on Total Capital is 50% higher than the industry average of 7.09%.
CSGS’ revenue for the fiscal third quarter ended September 30, 2023, increased 5% year-over-year to $286.87 million. Its non-GAAP net income amounted to $28 million. The company’s non-GAAP operating income came in at $45.20 million. Also, its non-GAAP EPS came in at $0.92.
Analysts expect CSGS’ revenue and EPS for the quarter ended December 31, 2023, to increase 1.9% and 2.5% year-over-year to $274.34 million and $0.86, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 2.3% to close the last trading session at $52.54.
It's no surprise that CSGS has an overall rating of B, which translates to a Buy in our POWR Ratings system.
It is ranked #16 in the Software – Business industry. It has a B grade for Value and Quality. Click here to see the additional ratings of CSGS for Growth, Momentum, Stability, and Sentiment.
Weave Communications, Inc. (WEAV)
WEAV provides a customer communications and engagement software platform in the United States and Canada. Its platform enables small and medium-sized businesses to maximize the value of their customer interactions and minimize the time and effort spent on manual or mundane tasks. Its products include Customized Phone System, Weave Text Messaging, Weave Missed Call Text, Weave Team, and Weave Mobile App.
In terms of the trailing-12-month gross profit margin, WEAV’s 67.37% is 37.1% higher than the 49.14% industry average. Likewise, its 16.96% trailing-12-month levered FCF margin is 96.1% higher than the industry average of 8.65%. Furthermore, the stock’s 0.77x trailing-12-month asset turnover ratio is 24.2% higher than the industry average of 0.62x.
WEAV’s total revenue for the fiscal third quarter ended September 30, 2023, increased 20.2% year-over-year to $43.54 million. Its non-GAAP gross profit grew 29% over the prior year's quarter to $30.19 million. Its free cash flow came in at $2.08 million, compared to a cash outflow of $4.62 million in the year-ago quarter.
Street expects WEAV’s revenue for the quarter ended December 31, 2023, to increase 17.3% year-over-year to $44.20 million. The company has an impressive surprise history, having beaten the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 139.1%, closing the last trading session at $11.02.
WEAV’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
Within the Software – Application industry, it is ranked #46. It has an A grade for Sentiment. To see the additional ratings of WEAV for Growth, Value, Momentum, Stability, and Quality, click here.
Kaltura, Inc. (KLTR)
KLTR provides various Software-as-a-Service products and solutions and a Platform-as-a-Service in the United States, Europe, the Middle East, Africa, and internationally. The company operates through two segments: Enterprise, Education, and Technology (EE&T) and Media and Telecom (M&T). It offers video products, such as webinars, virtual and hybrid events, and video industry solutions.
In terms of the trailing-12-month gross profit margin, KLTR’s 63.63% is 29.5% higher than the 49.14% industry average. Likewise, its 0.90x trailing-12-month asset turnover ratio is 44.9% higher than the industry average of 0.62x.
For the fiscal third quarter that ended September 30, 2023, KLTR’s total revenue increased 6.1% year-over-year to $43.54 million. Its non-GAAP gross profit rose 4.9% year-over-year to $28.10 million. The company’s adjusted EBITDA amounted to $309 thousand, compared to an adjusted EBITDA loss of $7.19 million in the prior year quarter.
For fiscal 2023, KLTR’s revenue is expected to increase 2.2% year-over-year to $172.57 million. It surpassed the consensus EPS estimates in three of the trailing four quarters, which is impressive. Over the past three months, the stock has gained 6.6% to close the last trading session at $1.78.
It’s no surprise that KLTR has an overall rating of B, which translates to a Buy in our POWR Ratings system.
It has a B grade for Value and Stability. It is ranked #10 in the Software – SAAS industry. Click here to see KLTR’s other ratings for Growth, Momentum, Sentiment, and Quality.
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NOW shares were trading at $729.18 per share on Monday afternoon, up $2.72 (+0.37%). Year-to-date, NOW has gained 3.21%, versus a 0.29% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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