The software sector is witnessing an impressive upward swing, fueled by technological advancements, the rising use of data-centric solutions, and rising investments in cloud technology.
Upon careful analysis, I believe Microsoft Corporation (MSFT) should be kept on one's watchlist, while fundamentally weak software stock C3.ai, Inc. (AI) should be best avoided for now.
But before we delve into the fundamentals of the stocks listed above, let’s understand the software industry's potential.
Enterprises worldwide have identified the transformative potential of digitalization in reinventing their operations. According to Gartner, worldwide IT spending is projected to reach $5 trillion in 2024, marking a 6.8% increase from 2023. Gartner reported that 75% of rapidly growing companies plan to increase their spending on software in 2024 compared to 2023. This increased investment could bolster the demand for software by companies.
Software-as-a-service (SaaS) market is growing significantly and shows no signs of slowing down. The market is driven by rapid technological advancements and the integration of new technology like Artificial intelligence (AI), cloud-based solutions, and machine learning (ML) with SaaS technology to improve its operations' efficiency and master business intelligence. The SaaS market is anticipated to reach $908.21 billion, growing at an 18.7% CAGR by 2030.
Consequently, the global software market is expected to grow at a CAGR of 11.5% and reach $1.40 trillion by 2030.
Considering these conducive trends, let's take a look at the fundamentals of the two Software stocks, starting with the weakest from an investment point of view.
Stock to Sell:
C3.ai, Inc. (AI)
AI operates as an enterprise artificial intelligence (AI) software company in North America, Europe, the Middle East, Africa, the Asia Pacific, and internationally.
On March 5, AI introduced C3 Generative AI: Standard Edition, which is no-code, self-service generative AI application, and is available on Google Cloud Marketplace, supporting Google’s newest and most advanced large language model, Gemini.
With a simple, self-service, no-code onboarding flow that takes minutes to complete, C3 Generative AI: Standard Edition allows users to easily access insights from documents and unstructured files across their enterprise.
On January 31, AI’s C3 AI Reliability was selected by Genentech, the medical biotechnology company, as the continued provider of AI-based predictive maintenance software on the company’s biologics manufacturing equipment.
AI’s trailing-12-month asset turnover ratio of 0.27x is 55.1% lower than the industry average of 0.61x, while its trailing-12-month cash per share of $0.94 is 54.7% lower than the industry average of $2.08.
For the fiscal third quarter that ended January 31, 2024, AI’s total revenue and gross profit on a non-GAAP basis stood at $78.40 million and $54.68 million, respectively. Moreover, its loss from operations on a non-GAAP basis increased 71.6% year-over-year to $25.79 million.
For the same quarter, its net loss on a non-GAAP basis and non-GAAP net loss per share attributable to Class A and Class B common shareholders stood at $15.88 million and $0.13, up 157.9% and 116.7% from the year-ago quarter, respectively.
Street expects AI’s EPS in the fiscal fourth quarter ending April 2024 to decline 133.2% year-over-year to negative $0.30. Its revenue is expected to be $84.40 million for the same quarter.
The stock has declined 32.1% over the past nine months to close the last trading session at $29.10. Over the past three months, it has declined 7.4%.
AI’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
The stock has a D grade for Value, Stability, and Quality. Within the Software - SAAS industry, it is ranked #18 out 19 stocks.
To see additional POWR Ratings for Growth, Momentum, and Sentiment for AI, click here.
Stock to Hold:
Microsoft Corporation (MSFT)
MSFT develops and supports software, services, devices and solutions worldwide. The company’s segments include Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.
Recently, MSFT and Oracle expanded their collaboration to meet growing customer demand for Oracle Database@Azure worldwide. This expansion demonstrates MSFT’s mutual commitment to helping customers streamline the migration of workloads to the cloud so they can combine the best of Oracle with the breadth of MSFT cloud services, like Azure AI, to empower business innovation.
On March 12, MSFT’s board of directors declared a quarterly dividend of $0.75 per share. The dividend is payable to shareholders on June 13. It pays an annual dividend of $3 per share, which translates to a dividend yield of 0.72% on the current share price.
Its four-year average yield is 0.89%. MSFT’s dividend payments have grown at CAGRs of 10.2% each over the past three and five years.
MSFT’s trailing-12-month ROCE and ROTA of 39.17% and 17.54% are significantly higher than the industry averages of 3.16% and 1.34%, respectively. However, the stock’s asset turnover ratio of 0.55x is 10.9% lower than the industry average of 0.61x.
During the fiscal second quarter that ended December 31, 2023, MSFT’s total revenue and total cost of revenue increased 17.6% and 12.2% year-over-year to $62.02 billion and $19.62 billion, respectively.
For the same quarter, the company’s net income and earnings per share stood at $21.87 billion and $2.93, both up 33.2% from the year-ago quarter. As of December 31, 2023, MSFT’s total current assets amounted to $147.39 billion, compared to $184.26 billion as of June 30, 2023.
Street expects MSFT’s revenue and EPS for the fiscal third quarter ending March 2024 to increase 15.1% and 15.5% year-over-year to $60.85 billion and $2.83, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 63.1% over the past year to close the last trading session at $425.22. Over the past nine months, it has gained 26.1%.
MSFT’s mixed prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to Neutral in our proprietary rating system.
MSFT has a C grade for Growth and Momentum. Within the Software - Business industry, it is ranked #18 out of 44 stocks.
Beyond what we’ve stated above, we have also rated the stock for Value, Stability, Sentiment, and Quality. Get all ratings of MSFT here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
MSFT shares fell $425.22 (-100.00%) in premarket trading Friday. Year-to-date, MSFT has gained 13.22%, versus a 7.96% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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