Despite high inflation and interest rate hikes last year posing challenges to the software industry, the rising demand and adoption of cloud-based software solutions and artificial intelligence keep it well poised for significant growth in the long term.
Therefore, investors could consider buying fundamentally strong software stocks VMware, Inc. (VMW), F5, Inc. (FFIV), Yext, Inc. (YEXT), and Sapiens International Corporation N.V. (SPNS). These stocks are A (Strong Buy) rated in our proprietary rating system.
Demand for cloud software, business intelligence software, and other types of software is being fuelled by the growing desire of businesses to digitally transform their operations.
Business software and services allow companies to accomplish data privacy and security goals through easy and quick access to unstructured data obtained through data analytics.
According to Statista, the worldwide software market revenues are expected to grow at a CAGR of 5.4%, resulting in a market volume of $858.10 billion by 2028. In addition, businesses are increasingly adopting software-based cloud solutions for their operations.
According to Gartner, worldwide IT spending is projected to total $4.6 trillion in 2023, an increase of 5.5% from last year. The software segment is anticipated to see double-digit growth this year as enterprises prioritize spending to capture competitive advantages through increased productivity, automation, and other software-driven transformation initiatives.
Given these factors, investors could look to buy the featured software stocks. Let’s take a closer look at their fundamentals.
VMware, Inc. (VMW)
VMW provides software solutions in modern applications, cloud management and infrastructure, networking, security, and digital workspaces worldwide. It offers VMware multi-cloud solutions, including VMware vSphere, vSAN and VxRail, vRealize Cloud Management solutions, and VMware Cloud Foundation.
On June 29, 2023, in conjunction with Confidential Computing Summit 2023, VMW announced that it is joining forces with AMD, Samsung, and members of the RISC-V Keystone community to simplify the development and operations of confidential computing applications.
These industry and community leaders will work together to ease the transition to practical, confidential computing by collaborating on and contributing to the open-source Certifier Framework for Confidential Computing project.
In terms of the trailing-12-month EBIT margin, VMW’s 15.78% is 266.2% higher than the 4.31% industry average. Its 9.57% trailing-12-month net income margin is 459% higher than the 1.71% industry average. Likewise, its 178.02% trailing-12-month Return on Common Equity is significantly higher than the 0.50% industry average.
VMW’s total revenue increased 6.1% year-over-year to $3.28 billion for the first quarter that ended May 5, 2023. Its non-GAAP operating income increased 6.2% year-over-year to $819 million.
Its non-GAAP net income increased 18.8% year-over-year to $644 million. Additionally, the company’s non-GAAP EPS came in at $1.49, representing a 16.4% increase year-over-year.
VMW’s EPS and revenue for the quarter ending July 31, 2023, are expected to increase 4.7% and 3.6% year-over-year to $1.72 and $3.46 billion, respectively. Over the past nine months, the stock has gained 33.9% to close the last trading session at $143.98.
VMW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Quality and a B for Value and Stability. Within the Software - Business industry, it is ranked #4 of 50 stocks. Click here to see the other POWR Ratings of VMW for Growth, Momentum, and Sentiment.
F5, Inc. (FFIV)
FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services.
In terms of the trailing-12-month EBIT margin, FFIV’s 15.38% is 256.9% higher than the 4.31% industry average. Its 78.80% trailing-12-month gross profit margin is 61.4% higher than the 48.83% industry average. Likewise, its 11.74% trailing-12-month net income margin is 585.7% higher than the 1.71% industry average.
For the fiscal second quarter ended March 31, 2023, FFIV’s total net revenues increased 10.9% year-over-year to $703.18 million. The company’s non-GAAP net income and non-GAAP EPS came in at $153.63 million and $2.53, respectively. Its gross profit rose 7.8% year-over-year to $547.52 million.
FFIV’s EPS and revenue for the quarter ending June 30, 2023, are expected to increase 11.2% and 3.8% year-over-year to $2.86 and $699.79 million, respectively. It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 2.7% to close the last trading session at $145.77.
FFIV’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy.
It is ranked #1 in the same industry. In addition, it has an A grade for Quality and a B for Growth and Value. Click here to see the other ratings of FFIV for Momentum, Stability, and Sentiment.
Yext, Inc. (YEXT)
YEXT organizes business facts to provide answers to consumer questions worldwide. It operates the Yext platform, a cloud-based platform that allows its customers to provide answers to consumer questions, to control the facts about their businesses and the content of their landing pages, and to manage their consumer reviews, as well as provides customers to update their information and content.
In terms of the trailing-12-month gross profit margin, YEXT’s 74.95% is 53% higher than the 48.99% industry average. Its 8.32% trailing-12-month levered FCF margin is 19.3% higher than the 6.98% industry average. Likewise, its 0.77x trailing-12-month asset turnover ratio is 26.7% higher than the 0.61x industry average.
For the fiscal first quarter ended April 30, 2023, YEXT’s non-GAAP gross profit increased 4.4% to $78.75 million. The company’s non-GAAP income from operations came in at $9.78 million, compared to a non-GAAP loss from operations of $7.42 million in the prior-year period.
Its non-GAAP net income came in at $10.60 million, compared to a non-GAAP net loss of $7.75 million in the year-ago period. Additionally, its non-GAAP net EPS came in at $0.08, compared to a non-GAAP net loss per share of $0.06 in the prior-year quarter.
YEXT’s EPS for the quarter ending October 2023 is expected to increase 250% year-over-year to $0.07. Its revenue for the quarter ending July 2023 is expected to increase 1.1% year-over-year to $101.98 million.
It has an impressive earnings surprise history, surpassing its consensus EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has gained 141.2% to close the last trading session at $11.07.
It is no surprise that YEXT has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #3 in the Software - Business industry. It has an A grade for Quality and a B for Growth and Value. In total, we rate YEXT on eight different levels. Beyond what we stated above, we have also given YEXT grades for Momentum, Stability, and Sentiment. Get all YEXT ratings here.
Sapiens International Corporation N.V. (SPNS)
Headquartered in Holon, Israel, SPNS provides software solutions for the insurance and financial services industries worldwide. It offers the platforms Sapiens CoreSuite, Sapiens IDITSuite, Sapiens UnderwritingPro, Sapiens ApplicationPro, Sapiens IllustrationPro, and Sapiens ConsolidationMaster.
In terms of the trailing-12-month EBIT margin, SPNS’ 14.29% is 231.7% higher than the 4.31% industry average. Its 10.97% net income margin is 540.8% higher than the 1.71% industry average. Likewise, its 12.65% trailing-12-month Return on Common Equity is significantly higher than the industry average of 0.50%.
For the fiscal quarter ended March 31, 2023, SPNS’ non-GAAP revenue increased 6% year-over-year to $124.80 million. The company’s non-GAAP gross profit increased 6.5% year-over-year, $56.40 million. Its non-GAAP operating income increased 8.4% year-over-year to $22.50 million.
SPNS’ EPS and revenue for the quarter ending June 30, 2023, are expected to increase 19.5% and 6.4% year-over-year to $0.32 and $126.19 million, respectively. The stock has gained 44.2% year-to-date to close the last trading session at $26.64.
SPNS’ solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy. It is ranked #2 in the same industry. In addition, it has a B grade for Growth, Value, and Stability.
To see the other ratings of SPNS for Momentum, Sentiment, and Quality, click here.
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VMW shares were trading at $145.15 per share on Friday afternoon, up $1.23 (+0.85%). Year-to-date, VMW has gained 18.24%, versus a 16.59% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
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