The software industry has faced several macroeconomic headwinds since last year. However, the industry’s prospects remain strong, driven by rapid digitalization and heightened spending. Therefore, it could be wise for investors to buy fundamentally strong software stocks Salesforce (CRM), Synopsys (SNPS), Autodesk (ADSK), and Progress Software (PRGS). Read more….
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Last year, the Fed’s seven interest rate hikes had put the tech industry under immense pressure, with the tech-heavy Nasdaq Composite entering a bear market. Software stocks struggled as the demand outlook weakened amid high inflation and the rate hikes.
However, the software industry is well-placed to benefit from the rising demand for cloud-based software solutions and rapid digitalization. Bank of America’s Rick Sherlund is bullish on the software industry’s performance this year.
He said, “2022 was a terrible year for software stocks. We’ve seen tremendous compression in valuation. The good news is that downturns are ultimately followed by upturns. So, we’ve just got a lot of crosscurrents near-term.”
The application development software market is estimated to reach $1.16 trillion by 2031, growing at a CAGR of 23.5%. According to Gartner, worldwide IT spending is expected to rise 2.4% year-over-year in 2023, with the software segment rising 9.3% from the prior-year period.
To that end, it could be wise to buy fundamentally strong software stocks Salesforce, Inc. (CRM), Synopsys, Inc. (SNPS), Autodesk, Inc. (ADSK), and Progress Software Corporation (PRGS).
Salesforce, Inc. (CRM)
CRM provides customer relationship management technology that brings companies and customers together worldwide. Its Customer 360 platform empowers its customers to work together to deliver connected experiences for their customers. The company’s service offerings include Sales, Service, Marketing, and Commerce.
In terms of the trailing-12-month gross profit margin, CRM’s 72.69% is 47.2% higher than the 49.37% industry average. Likewise, its 30.62% trailing-12-month levered FCF Margin is 311.2% higher than the industry average of 7.45%.
For the fiscal third quarter that ended October 31, 2022, CRM’s total revenues increased 14.2% year-over-year to $7.84 billion. The company’s gross profit increased 14.5% year-over-year to $5.75 billion. Moreover, its income from operations increased significantly year-over-year to $460 million.
Analysts expect CRM’s EPS and revenue for the quarter ending January 31, 2023, to increase 62.4% and 9.2% year-over-year to $1.36 and $8 billion, respectively. CRM has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 27.5% over the past month to close the last trading session at $165.09.
CRM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Software – Application industry, it is ranked #27 out of 138 stocks. It has an A grade for Growth and a B for Sentiment.
We have also given CRM grades for Value, Momentum, Stability, and Quality. Get all CRM ratings here.
Synopsys, Inc. (SNPS)
SNPS provides electronic design automation software products used to design and test 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 EBIT margin, SNPS’ 23.11% is 265.8% higher than the 6.32% industry average. Likewise, its 18.21% trailing-12-month ROCE is 266.4% higher than the industry average of 4.97%.
SNPS’ total revenue increased 11.4% year-over-year to $1.28 billion for the fourth quarter (ended October 31, 2022). Its non-GAAP net income increased 4.2% year-over-year to $297.69 million. The company’s non-GAAP EPS increased 4.9% year-over-year to $1.91.
SNPS’ EPS and revenue for the quarter ending January 31, 2023, are expected to increase 3.6% and 6.7% year-over-year to $2.49 and $1.36 billion, respectively. It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 26.1% to close the last trading session at $356.67.
SNPS’ POWR Ratings reflect its solid prospects. The stock has an overall rating of B, equating to Buy in our proprietary rating system. It is ranked #17 within the same industry. The company has an A grade for Quality and a B for Sentiment.
Click here to see the additional POWR Ratings of SNPS for Growth, Value, Momentum, and Stability.
Autodesk, Inc. (ADSK)
ADSK provides 3D design, engineering, and entertainment software and services worldwide. The company offers AutoCAD Civil 3D, BIM 360, AutoCAD, and AutoCAD LT, among other software and tools.
In terms of the trailing-12-month gross profit margin, ADSK’s 91.63% is 85.6% higher than the 49.37% industry average. Likewise, its 56.64% trailing-12-month ROCE is significantly higher than the industry average of 4.97%.
ADSK’s total net revenue for the third quarter that ended October 31, 2022, increased 13.7% year-over-year to $1.28 billion. The company’s gross profit increased 13.9% year-over-year to $1.16 billion. Its non-GAAP income from operations increased 27.4% from the year-ago value to $465 million. Moreover, its non-GAAP EPS came in at $1.70, representing a 26.9% increase from the prior-year quarter.
ADSK’s EPS and revenue for the quarter ending January 31, 2023, are expected to increase 20.8% and 8.4% year-over-year to $1.81 and $1.31 billion, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters. The stock has gained 12.3% over the past nine months to close the last trading session at $208.46.
ADSK’s POWR Ratings reflect this positive outlook. ADSK has an overall rating of B, which translates to Buy in our proprietary rating system. It is ranked #9 in the Software – Application industry. It has an A grade for Quality and a B for Growth and Sentiment.
We have also given ADSK grades for Value, Momentum, and Stability. Get all ADSK ratings here.
Progress Software Corporation (PRGS)
PRGS develops, deploys, and manages business applications. The company offers OpenEdge, Sitefinity, Corticon, and DataDirect Connect, among other applications and solutions. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.
In terms of the trailing-12-month EBITDA margin, PRGS’ 33.93% is 199.8% higher than the 11.32% industry average. Likewise, its 35.42% trailing-12-month levered FCF margin is 375.7% higher than the industry average of 7.45%.
On January 3, 2023, PRGS announced an agreement to acquire MarkLogic, a company managing complex data and metadata. PRGS’ CEO, Yogesh Gupta, said, “Progress’ digital experience and infrastructure software products along with MarkLogic products will create an unmatched platform, giving customers access to an increasingly more complete offering to drive business success.”
PRGS’ non-GAAP revenue for the fourth quarter (ended November 30, 2022) increased 10.7% year-over-year to $159.17 million. The company’s non-GAAP net income increased 19.2% year-over-year to $49.24 million. Also, its non-GAAP EPS came in at $1.12, representing a 21.7% increase from the prior-year period.
Analysts expect PRGS’ EPS and revenue for the quarter ending February 28, 2023, to increase 7.8% and 7.4% year-over-year to $1.05 and $158.38 million, respectively. The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 17.2% over the past six months to close the last trading session at $52.80.
It is no surprise that PRGS has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.
It is ranked first in the Software – Application industry. It has an A grade for Quality and a B for Growth, Value, and Stability. To get the additional PRGS ratings for Momentum and Sentiment, click here.
CRM shares were trading at $166.52 per share on Friday afternoon, up $1.43 (+0.87%). Year-to-date, CRM has gained 25.59%, versus a 6.43% 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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