The software industry is expected to thrive as it continues to evolve in the face of disruptive technologies such as artificial intelligence (AI). Given the industry’s growth prospects, investors could consider buying fundamentally sound software stocks Fortinet, Inc. (FTNT), EverCommerce Inc. (EVCM) and Docebo Inc. (DCBO) for solid returns in 2024.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
The tech industry remains well-positioned for long-term growth due to increasing investment in cloud solutions, software, and cyber protection. These investments are driven by the growing demand for digital transformation across various sectors. Additionally, the adoption of emerging technologies like artificial intelligence and Internet of Things further contributes to the industry’s potential for sustained growth.
AI is becoming increasingly popular due to its capacity to automate processes, analyze data, and make decisions fast, creating opportunities for established players and start-ups. According to a recent International Data Corporation (IDC) forecast, the global artificial intelligence (AI) software industry will expand to $251 billion in 2027 at a CAGR of 31.4%.
Moreover, according to Gartner, software spending is projected to grow 13.8% in 2024. In addition, rapid digital transformation worldwide is boosting the application development software market growth. The market for application development software is anticipated to grow at a CAGR of 7% until 2028.
Investors’ interest in software stocks is evident from the SPDR S&P Software & Services ETF’s (XSW) 15.8% returns over the past six months.
Considering these conducive trends, let’s look at the fundamentals of the three software stocks.
Fortinet, Inc. (FTNT)
FTNT provides cybersecurity and networking solutions worldwide. It offers FortiGate hardware and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network acceleration.
On December 05, 2023, FTNT has expanded its strategic alliance with Digital Realty (DLR), the world's biggest provider of cloud- and carrier-neutral data center, colocation, and interconnection solutions. This collaboration accelerates the growth of Fortinet Universal SASE, which has already reached over 100 locations worldwide.
Customers can secure their hybrid IT workflows across clouds and geographies by leveraging Digital Realty's global data center platform, PlatformDIGITAL®.
FTNT’s trailing-12-month ROTA of 15.39% is significantly higher than the industry average of 0.15%. Its trailing-12-month ROTC of 100.90% is significantly higher than the industry average of 2.60%.
For the fiscal third quarter that ended September 30, 2023, FTNT’s total revenue increased 16.1% year-over-year to $1.33 billion. Its non-GAAP operating income grew 14.3% from the year-ago value to $371.40 million.
The company’s non-GAAP net income attributable to FTNT and its per share value came in at $323.50 million and $0.41, representing increases of 23.1% and 24.2%, respectively, from the prior-year quarter.
Analysts expect FTNT’s revenue to increase 20% year-over-year to $5.30 billion for the year ending December 2023. Its EPS is expected to grow 31% year-over-year to $1.56 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 17% over the past year to close the last trading session at $58.51.
FTNT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
FTNT also has an A grade for Quality and a B for Sentiment. It is ranked #5 out of 23 stocks in the B-rated Software - Security industry. Click here for the additional POWR Ratings for Growth, Value, Stability and Momentum for FTNT.
EverCommerce Inc. (EVCM)
EVCM provides integrated software-as-a-service solutions for service-based small and medium-sized businesses in the United States and internationally.
EVCM’s trailing-12-month levered FCF margin of 15.16% is 77.8% higher than the industry average of 8.53%. Its trailing-12-month EBITDA margin of 14.57% is 54.7% higher than the industry average of 9.42%.
During the fiscal third quarter that ended September 30, 2023, EVCM reported a 10.5% year-over-year surge in total revenues, reaching $174.74 million. Its adjusted gross profit rose 12.7% year-over-year to $113.27 million. Additionally, its adjusted EBITDA grew 38.6% from the prior-year quarter to $41.80 million.
The consensus revenue estimate of $678.34 million for the year ending December 2023 represents a 9.3% increase year-over-year. Its EPS is expected to grow 29.2% year-over-year to $0.52 for the same period. It surpassed EPS estimates in all four trailing quarters. EVCM’s shares have gained 55.8% over the past year to close the last trading session at $10.64.
EVCM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #9 out of 21 stocks in the A-rated Software - SAAS industry. It has an A grade for Growth and a B for Value, Stability and Sentiment. To see additional EVCM’s ratings for Momentum and Quality, click here.
Docebo Inc. (DCBO)
Based in Toronto, Canada, DCBO is an AI-powered learning management software company offering a cloud-based platform for personalized training and content creation. The company specializes in Learning Management Systems (LMS) for internal and external workforce development.
DCBO’s trailing-12-month ROTA of 0.48% is 219.8% higher than the 0.15% industry average. Its trailing-12-month levered FCF margin of 18.18% is 113.1% higher than the 8.53% industry average.
For the third quarter ended September 30, 2023, DCBO’s revenue and gross profit grew 25.8% and 26.5% from the previous-year quarter to $46.51 million and $37.73 million, respectively.
The company reported adjusted net income and EBITDA of $4.95 million and $4.51 million, up 236.4% and 616.2% year-over-year, respectively. Also, its free cash flow increased significantly from the prior-year quarter to $8.35 million.
Street expects DCBO’s revenue to increase 25.9% year-over-year to $179.98 million for the year ending December 2023. Its EPS is expected to come in at $0.54 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 56.5% over the past year to close the last trading session at $52.01.
It’s no surprise that DCBO has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Sentiment and Quality and a B for Growth. It is ranked #14 out of 131 stocks in the Software - Application industry.
Beyond what is stated above, we’ve also rated DCBO for Stability, Value and Momentum. Get all DCBO ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
FTNT shares were trading at $59.26 per share on Friday morning, up $0.75 (+1.28%). Year-to-date, FTNT has gained 21.21%, versus a 26.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
Top 3 Software Stocks to Consider in 2024 StockNews.com
