Despite the macroeconomic challenges, the software industry is experiencing solid growth because of the expansion of digital transformation initiatives across different industries and the growing adoption of cloud-based software applications.
Considering these factors, it could be wise to buy fundamentally strong software stocks Workday, Inc. (WDAY), MarketWise, Inc. (MKTW), and Synopsys, Inc. (SNPS).
Before delving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
With its innovations and job creation, the software industry has significantly influenced the U.S. economy. It has contributed over $1.4 trillion to the U.S. value-added GDP in just two years, growing at 6.4%.
The software industry is experiencing robust growth thanks to the widespread adoption of cloud-based software applications. These applications offer numerous advantages over traditional software, driving the industry’s significant expansion.
According to Gartner, software spending is projected to reach $922.75 billion in 2023, representing an increase of 13.5% year-over-year. The global end-user spending on public cloud services is forecasted to grow 21.7% year-over-year to $597.30 billion in 2023. In 2023, Software-as-a-Service (SaaS) spending is projected to grow 17.9% year-over-year to $197 billion.
This growth is expected to be further propelled by integrating generative AI into software applications. According to a Goldman Sachs report, integrating generative AI into software is expected to increase customer spending on software, potentially adding an additional $150 billion to the existing $685 billion global software market.
The software market revenues are projected to reach $659 billion this year. Additionally, global software revenues are expected to grow at a CAGR of 5.4% to reach $858.10 billion by 2028. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 43.7% returns over the past year.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software – Application industry picks, beginning with the third choice.
Stock #3: Workday, Inc. (WDAY)
WDAY provides enterprise cloud applications in the United States and internationally. Its applications help its customers to plan, execute, analyze, and extend to other applications and environments and to manage their business and operations.
On September 28, 2023, WDAY and ADP announced an extended partnership to enhance joint customers' global payroll, compliance, and HR experiences by creating seamless interactions between their systems to improve data visibility. This partnership addresses global organizations' growing concern of disjointed HR and payroll systems.
Carl Eschenbach, co-CEO at WDAY, said, "This expanded partnership with ADP is an exciting next step in a journey spanning over ten years of jointly servicing one million employees and thousands of customers. By deepening the partnership between our two companies, we are better equipped to expand our global reach and serve our joint customers' ever-evolving needs."
On September 27, 2023, WDAY announced the launch of the Workday AI Marketplace during its annual customer conference, Workday Rising. This platform enables customers to access certified AI and ML solutions for business enhancement, emphasizing responsible AI principles.
Aneel Bhusri, co-founder, co-CEO, and chair at WDAY, predicted that the Workday AI Marketplace will help customers harness AI innovation and build for the future with proven, trusted, and responsible AI solutions.
In terms of the trailing-12-month levered FCF margin, WDAY’s 26.43% is 258.1% higher than the 7.38% industry average. Its 3.79% trailing-12-month Capex/Sales is 56.5% higher than the 2.42% industry average. Likewise, the stock’s 73.87% trailing-12-month gross profit margin is 50.5% higher than the 49.10% industry average.
WDAY’s revenues for the second quarter ended July 31, 2023, increased 16.3% year-over-year to $1.79 billion. Its operating income came in at $36.26 million, compared to an operating loss of $34.08 million in the year-ago quarter.
Additionally, the company’s non-GAAP net income rose 73.8% year-over-year to $378.26 million. Also, its non-GAAP net income per share rose 72.3% from the prior-year quarter to $1.43.
Analysts expect WDAY’s EPS and revenues for the quarter ending October 31, 2023, to increase 41.2% and 15.4% year-over-year to $1.40 and $1.85 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 49.9% to close the last trading session at $215.75.
WDAY’s strong fundamentals are reflected in its POWR Ratings. It 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.
It has an A grade for Growth and a B for Sentiment and Quality. Within the Software - Application industry, it is ranked #19 out of 134 stocks. To see WDAY’s Value, Momentum, and Stability ratings, click here.
Stock #2: MarketWise, Inc. (MKTW)
MKTW operates a content and technology multi-brand platform for self-directed investors in the United States and Internationally. Its platform includes subscription businesses that provide financial research, software, education, and tools to navigate the financial markets.
In terms of the trailing-12-month gross profit margin, MKTW’s 87.58% is 47.1% higher than the 59.55% industry average. Likewise, the stock’s 1.09x trailing-12-month asset turnover ratio is 421.6% higher than the 0.21x industry average.
For the second quarter that ended June 30, 2023, MKTW’s total revenue stood at $103.64 million. Its adjusted CFFO increased 8.2% year-over-year to $28.98 million. The company’s total subscribers rose 5.2% over the prior-year quarter to 16.70 million.
Additionally, its total operating expenses decreased 9.5% year-over-year to $94.73 million. The company’s net income attributable to MKTW came in at $36 thousand.
For the quarter ending March 31, 2024, MKTW’s revenue is expected to increase 0.6% year-over-year to $126.30 million. Its EPS for the fiscal year ending December 31, 2024, is expected to increase 159.5% year-over-year to $0.12. Over the past six months, the stock has declined 12.5% to close the last trading session at $1.44.
It’s no surprise that MKTW has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has an A grade for Value and a B for Quality. It is ranked #16 in the same industry. In total, we rate MKTW on eight different levels. Beyond what we stated above, we also have given MKTW grades for Growth, Momentum, Stability, and Sentiment. Get all the MKTW ratings here.
Stock #1: Synopsys, Inc. (SNPS)
SNPS provides electronic design automation software products for designing and testing integrated circuits. The company offers Digital and Custom IC Design solutions, Verification solutions, and FPGA design products that are programmed to perform specific functions.
In terms of the trailing-12-month EBITDA margin, SNPS’ 23.48% is 156.6% higher than the 9.15% industry average. Its 17.89% trailing-12-month Return on Common Equity is significantly higher than the 1.20% industry average. Likewise, the stock’s 10.42% trailing-12-month Return on Total Assets is considerably higher than the 0.37% industry average.
SNPS’ total revenues for the third quarter ended July 31, 2023, increased 19.2% year-over-year to $1.49 billion. Its non-GAAP net income attributable to SNPS increased 36.2% year-over-year to $445.88 million. In addition, its non-GAAP net income per share attributable to SNPS came in at $2.88, representing an increase of 37.1% year-over-year.
Street expects SNPS’ EPS and revenue for the quarter ending October 31, 2023, to increase 58.9% and 23.3% year-over-year to $3.03 and $1.58 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 79.7% to close the last trading session at $496.23.
SNPS’ 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 Quality and a B for Stability and Sentiment. It is ranked #10 in the Software - Application industry. Click here to see SNPS’ Value and Momentum ratings.
What To Do Next?
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SNPS shares were trading at $488.89 per share on Friday afternoon, down $7.34 (-1.48%). Year-to-date, SNPS has gained 53.12%, versus a 14.07% 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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