Enterprises are increasingly investing in software to enhance operational efficiency, automate repetitive tasks, improve transparency, and gain a competitive advantage in the market.
Given the software industry’s significant growth potential, we think it could be wise to invest in fundamentally sound software stocks The Sage Group plc (SGPYY), DocuSign, Inc. (DOCU), and New Relic, Inc. (NEWR) for solid gains.
Before delving into the fundamentals of the featured stocks, let’s discuss what is shaping the software industry’s future.
This year, the software industry is expected to witness robust growth as businesses prioritize spending on software-driven transformation initiatives to gain competitive advantages through increased productivity and automation. The rise of e-commerce is also leading to a boom in the adoption of software solutions.
Furthermore, technological advancements, such as Artificial Intelligence (AI) and the Internet of Things (IoT), have enabled innovative software-driven solutions. And the expanding number of connected devices has created a higher demand for software to support their functionality.
Gartner forecasts worldwide software spending to reach $891.39 billion, registering a 12.3% year-over-year increase.
Enterprises are also increasingly adopting cloud-based solutions to ensure uninterrupted business operations, further expanding the industry’s horizons. Among various cloud computing segments, Software as a Service (SaaS) is the largest, emerging as a standard delivery model for numerous enterprise applications.
Many companies find SaaS solutions irresistible due to their reliability, accessibility, and cost-effectiveness. These solutions provide a centralized platform connecting users to cloud-based services. Also, they enable quick application deployment, minimizing wasted time on tedious startup and maintenance tasks.
According to a report by Fortune Business Insights, the global SaaS market to expected to reach $883.34 billion by 2029, growing at a CAGR of 19.7%. Moreover, the iShares Expanded Tech-Software Sector ETF’s (IGV) 34.7% returns over the past six months illustrate investors’ interest in software stocks.
Let’s explore what could make SGPYY, DOCU, and NEWR worthwhile investments.
The Sage Group plc (SGPYY)
SGPYY is a cloud business management solution company headquartered in Newcastle upon Tyne, United Kingdom. It develops, distributes, and supports software and services for small and medium-sized businesses. The company’s segments include Northern Europe; International-Central and Southern Europe; and North America.
On May 9, SGPYY announced the acquisition of Corecon, a cloud-native preconstruction and project management solution company. This move is expected to expand SGPYY's customer relationships and strengthen its position as a leading provider of cloud-native technology in the construction industry.
Also, on February 23, the company partnered with Funding Circle, the United Kingdom’s largest small business lending platform, to streamline funding processes for small businesses.
Leveraging Funding Circle’s facilitation of over £14.5 billion ($18.56 billion) in funding for 130,000+ businesses, SGPYY intends to empower its global customer base to access enhanced funding opportunities. The company should benefit from improved customer service.
For the six months that ended March 31, 2023, SGPYY’s underlying revenue increased 16.3% year-over-year to £1.09 billion ($1.39 billion). Its underlying gross profit rose 16.6% from the year-ago value to £1.01 billion ($1.29 billion). Also, the company’s cash inflow from operating activities increased 23.7% year-over-year to £188 million ($240.70 million).
Furthermore, as of March 31, 2023, the company’s current assets stood at £979 million ($1.25 billion), compared to £874 million ($1.12 billion) as of March 31, 2022.
The consensus revenue estimate of $2.77 billion for the fiscal year ending September 2023 reflects a 19.6% year-over-year improvement. Likewise, the consensus revenue estimate of $2.99 billion for the fiscal year 2024 indicates a 7.8% rise year-over-year. Over the past year, the stock has gained 54.1% to close the last trading session at $45.07.
SGPYY’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
SGPYY has a B grade for Stability and Quality. It is ranked #2 in the 25-stock B-rated Software - SAAS industry.
In addition to the POWR Ratings I’ve just highlighted, you can see SGPYY’s ratings for Value, Growth, Momentum, and Sentiment here.
DocuSign, Inc. (DOCU)
DOCU offers an electronic signature product that enables electronic signing on various devices. It also provides DocuSign Agreement Cloud, a cloud software platform that automates the entire agreement process. The company sells its products through direct and partner-assisted sales and web-based self-service purchasing.
On June 9, it was reported that DOCU is exhibiting signs of stabilization after a post-pandemic slowdown, with the potential for strengthened longer-term prospects through the integration of AI. Also, it announced the utilization of Microsoft's (MSFT) OpenAI technology to offer agreement summaries.
Analysts at RBC Capital Markets suggest that generative AI could drive increased adoption of DOCU’s contract life cycle management products, which facilitate long-term agreement management.
For the fiscal 2024 first quarter that ended April 2023, DOCU’s non-GAAP gross profit grew 15% year-over-year to $546.50 million. Its non-GAAP income from operations rose 72% from the year-ago value to $175.77 million. Also, the company’s non-GAAP net income and non-GAAP EPS increased 93.9% and 89.5% year-over-year to $150.21 million and $0.72, respectively.
DOCU’s revenue is expected to grow 8.2% year-over-year to $2.72 billion for the fiscal year ending January 2024. The consensus EPS estimate for the ongoing year is expected to increase 25.9% year-over-year to $2.56. Moreover, the company topped its consensus revenue and EPS estimates in all four trailing quarters, which is impressive.
The stock has gained 4.7% over the past month to close the last trading session at $53.85.
DOCU’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
DOCU has an A grade for Growth and a B for Quality. It has topped the 25-stock Software – SAAS industry.
Click here to access additional DOCU ratings (Value, Stability, Sentiment, and Momentum).
New Relic, Inc. (NEWR)
NEWR provides a software platform for customers to collect and analyze telemetry data through a unified front-end application. Its platform also includes New Relic Instant Observability, which offers pre-built integrations, dashboards, and alerts for around 450 technologies and frameworks.
On May 31, NEWR unveiled its integration with Amazon Security Lake, allowing its customers to seamlessly access and monitor their security log data and events within the NEWR platform.
This integration is expected to strengthen NEWR’s offering and enable customers to leverage its robust security capabilities for efficient vulnerability management and security incident remediation.
Additionally, on May 3, the company announced that Zomato, an Indian restaurant discovery, food ordering, and delivery platform, had chosen to standardize on NEWR. By leveraging NEWR's offerings, Zomato can ensure exceptional uptime and reliability, enhancing the experience for its 17.4 million monthly transacting customers and 330,000 active restaurant partners across 1,000 Indian cities.
The partnership enables NEWR to showcase its capabilities in ensuring high performance, reliability, and scalability, providing a valuable competitive advantage in the rapidly growing global food tech segment.
For the fourth quarter that ended March 31, 2023, NEWR’s non-GAAP gross profit grew 31.1% year-over-year to $191.67 million. Its non-GAAP income from operations came in at $26.09 million, compared to a loss of $15.95 million in the prior year’s quarter.
In addition, the company’s non-GAAP net income and non-GAAP EPS stood at $29.41 million and $0.42, compared to a loss and loss per share of $16.01 million and $0.24 in the previous year’s period, respectively.
Analysts expect NEWR’s revenue to increase 10.7% year-over-year to $1.03 billion for the fiscal year ending March 2024. The company’s EPS for the current year is expected to grow 158.4% from the prior year to $1.63. Also, the company surpassed its consensus revenue estimates in all four trailing quarters.
Shares of NEWR have gained 12.7% over the past six months and 54.2% over the past year to close the last trading session at $66.93.
NEWR’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
NEWR has an A grade for Growth and a B for Sentiment and Quality. It is ranked #3 out of 25 stocks within the same industry.
Click here to access additional NEWR ratings for Momentum, Value, and Stability.
What To Do Next?
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SGPYY shares were trading at $44.93 per share on Tuesday afternoon, down $0.15 (-0.32%). Year-to-date, SGPYY has gained 27.52%, versus a 14.90% 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.
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