Despite the current macroeconomic challenges, the software industry is well poised for long-term growth due to a surge in enterprise data, widespread automation in various sectors, and increased IT spending from both government and enterprises. All of these factors play a significant role in the growth and expansion of the business software industry.
Considering these factors, it could be wise to buy fundamentally strong software stocks Yext, Inc. (YEXT), SolarWinds Corporation (SWI), and CSG Systems International, Inc. (CSGS), given their solid growth prospects.
Before diving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
Enterprises across the globe are focusing on improving their digital capabilities across their operations by integrating smart software solutions. Business software enables enterprises to create, promote, sell, market, manage, and scale their businesses.
The demand for software is growing as businesses aim to increase their productivity, reduce costs, and improve customer management. Apart from enterprises, governments are also increasing their IT spending.
In the U.S., there's a notable increase in the government's investment in IT infrastructure for civilian federal agencies. The President's budget for IT spending is projected to reach approximately $65 billion this year, marking an 11% rise over the previous year.
Moreover, the increasing adoption of cutting-edge technologies like artificial intelligence (AI), blockchain, machine learning (ML), metaverse, and the Internet of Things (IoT) by enterprises is boosting the growth prospects of the software industry.
Gartner forecasts software spending to grow 13.7% year-over-year to $922.75 billion in 2023. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 41.3% returns year-to-date.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software - Business stock picks, beginning with the third choice.
Stock #3: Yext, Inc. (YEXT)
YEXT organizes business facts to answer consumer questions in North America and internationally. It operates the Yext platform, a cloud-based platform allowing its customers to answer consumer questions. The platform enables its customers to centralize, control, and manage data fields, including store information; professional information; FAQs, and other information.
On July 19, 2023, YEXT announced AI Generated Review Response, allowing businesses to automatically use AI with their data to create personalized review responses across owned and third-party channels. This helps enhance customer engagement and improve ratings by delivering contextually appropriate and brand-based replies.
On July 31, 2023, YEXT announced the general availability of the Summer '23 Release, featuring AI-driven enhancements for businesses to create consumer-grade digital experiences at scale. The release includes Yext Chat, Yext Content, and Yext Reviews upgrades, simplifying the process of generating experiences across owned and third-party channels using AI technology.
Marc Ferrentino, President and Chief operating officer at YEXT, said, "The greatest advantage for any business is to deliver indispensable experiences to prospects, customers, and employees. With Yext, any organization can leverage leading AI technologies to deliver groundbreaking experiences all from a single digital experience platform."
YEXT’s revenue grew at a CAGR of 8.4% over the past three years.
In terms of the trailing-12-month gross profit margin, YEXT’s 74.95% is 55.5% higher than the 48.20% industry average. Likewise, its 8.32% trailing-12-month levered FCF margin is 17.9% higher than the 7.06% industry average.
For the fiscal first quarter that ended April 30, 2023, YEXT’s revenues increased 0.7% year-over-year to $99.45 million. Its non-GAAP gross profit increased 4.4% year-over-year to $78.75 million. The company’s non-GAAP net income came in at $10.60 million, compared to a net loss of $7.75 million in the year-ago quarter.
Its non-GAAP income per share attributable to common stockholders came in at $0.08, compared to a loss per share of $0.06 in the year-ago quarter. Additionally, its adjusted EBITDA came in at $14.45 million, compared to an adjusted EBITDA loss of $3.03 million in the prior-year quarter.
Analysts expect YEXT’s EPS for the quarter ending October 31, 2023, to increase 250% year-over-year to $0.07. Its revenue for the quarter ended July 31, 2023, is expected to increase 1.1% year-over-year to $101.98 million. Over the past year, the stock has gained 99.1% to close the last trading session at $8.66.
YEXT’s POWR Ratings reflect solid prospects. 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.
It is ranked #8 out of 47 stocks in the Software- Business industry. It has an A grade for Quality and a B for Growth. Click here to see YEXT’s Value, Momentum, Stability, and Sentiment ratings.
Stock #2: 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.
On May 16, 2023, SWI announced the addition of transformative artificial intelligence (AI) and machine learning (ML) capabilities to its IT service management (ITSM) solutions. The new AI features include a virtual agent designed to reduce ticket volume by enabling users to remediate easier-to-solve issues.
This will enhance and personalize the Service Desk through integrations with over 200 popular cloud applications.
Cullen Childress, GVP of product management at SWI, said, “Our ITSM solutions are a significant focus we’re investing in. This includes Service Desk, which enables teams to focus more on important business priorities rather than mundane, time-consuming tasks.”
“By leveraging advanced AI and powerful automation, SolarWinds makes users more productive, supports agents more efficiently, and helps ensure companies are more successful,” he added.
SWI’s EBITDA grew at a CAGR of 5.1% over the past three years. Likewise, its EBIT grew at a CAGR of 14.5% over the past three years.
In terms of the trailing-12-month EBITDA margin, SWI’s 30.81% is 236.6% higher than the 9.15% industry average. Likewise, its 90.31% trailing-12-month gross profit margin is 87.4% higher than the 48.20% industry average. Its 21.90% trailing-12-month EBIT margin is 385.1% higher than the 4.51% industry average.
SWI’s total revenue for the second quarter that ended June 30, 2023, increased 5.1% year-over-year to $185.03 million. Its non-GAAP gross profit rose 3.7% year-over-year to $167.05 million. The company’s non-GAAP operating income increased 17.7% year-over-year to $74.59 million. Its non-GAAP net income came in at $34.07 million.
Also, its non-GAAP EPS remained flat year-over-year to $0.21. Additionally, the company’s adjusted EBITDA increased 18.4% year-over-year to $79.14 million.
Street expects SWI’s EPS for the quarter ending December 31, 2023, to increase 1.1% year-over-year to $0.19. Its revenue for the quarter ending September 30, 2023, is expected to increase 2.4% year-over-year to $183.70 million. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past six months, the stock has gained 25.5% to close the last trading session at $10.69.
It’s no surprise that SWI has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Sentiment. Within the same industry, it is ranked #6. 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.
Stock #1: 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.
On August 2, 2023, CSGS announced its partnership with ATN to modernize its wireless business operations.
Leveraging CSGS's innovative solutions, ATN will automate mediation and wholesale settlement processes, gain access to real-time performance insights, and optimize resource allocation, thereby effectively executing of its three-year growth strategy. This partnership promises positive results for both parties.
CSGS’s revenue grew at a CAGR of 5% over the past three years. Its EBITDA grew at a CAGR of 2.2% over the past three years. Moreover, its EBIT grew at a CAGR of 3.5% over the past three years.
In terms of the trailing-12-month EBITDA margin, CSGS’s 15.46% is 14.3% higher than the 13.53% industry average. Likewise, its 48.20% trailing-12-month gross profit margin is 58.9% higher than the 30.33% industry average. Additionally, its 10.01% trailing-12-month levered FCF margin is 83% higher than the 5.47% industry average.
For the second quarter ended June 30, 2023, CSGS’s revenue increased 9.2% year-over-year to $286.33 million. Its non-GAAP operating income rose 16.9% year-over-year to $42.95 million. Its non-GAAP net income came in at $24.64 million. Also, its adjusted EPS came in at $0.80. In addition, its adjusted EBITDA rose 13.6% over the prior-year quarter to $56.68 million.
For the quarter ending December 31, 2023, CSGS’s EPS is expected to increase 2.4% year-over-year to $0.86. Its revenue for the quarter ending September 30, 2023, is expected to increase 3.9% year-over-year to $265.15 million. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 16% to close the last trading session at $55.46.
CSGS’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 Sentiment and a B for Value. It is ranked #3 in the Software - Business industry. To see CSGS’s Momentum, Stability, and Quality ratings, click here.
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CSGS shares were trading at $54.96 per share on Thursday afternoon, down $0.50 (-0.90%). Year-to-date, CSGS has declined -2.83%, versus a 18.83% 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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