Since last year, software stocks have been facing selling pressure due to the Fed’s aggressive rate hikes. Although the industry might remain under pressure in the foreseeable future, given the possibility of slowing demand, it is well-positioned for long-term growth. One could take advantage of the troubled market conditions by investing in high-quality software stocks Autodesk, Inc. (ADSK) and Progress Software Corporation (PRGS).
Before discussing the factors making me bullish on these stocks, let’s see what could drive the software industry’s growth in the long run.
Businesses are spending more on the digital transformation of their operations. Software plays a pivotal role in the day-to-day functioning of a business. The importance of software can be gauged from the growing popularity of the artificial intelligence-powered chatbot ChatGPT.
The software industry’s growth is primarily being driven by Software-as-a-Service (SaaS). With the rising adoption of public cloud services, the demand for SaaS is expected to grow. Gartner predicts that software spending will rise 11.3% to $879.63 billion in 2023.
Wedbush analyst Dan Ives believes that cost-cutting by major tech giants will likely show improved profits this year. According to The Business Research Company, the software products market will grow at a CAGR of 12% to $2.36 trillion by 2027.
Let’s delve deeper into the fundamentals of ADSK and PRGS.
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 91.57% is 82.5% higher than the 50.17% industry average. Its 28.67% trailing-12-month levered FCF margin is 371.7% higher than the 6.08% industry average. Likewise, its 8.72% trailing-12-month Return on Total Assets is 702.1% higher than the industry average of 1.09%.
ADSK’s total net revenue for the fourth quarter ended January 31, 2023, increased 8.8% year-over-year to $1.32 billion. The company’s gross profit increased 8.6% year-over-year to $1.19 billion. Its non-GAAP income from operations increased 13.8% from the year-ago value to $479.00 million.
In addition, its net income rose 229.2% from the prior-year period to $293 million. Moreover, its non-GAAP EPS came in at $1.86, representing a 24% increase from the prior-year quarter.
ADSK’s EPS and revenue for the quarter ending April 30, 2023, are expected to increase 9% and 8.4% year-over-year to $1.56 and $1.27 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 10.9% year-to-date to close the last trading session at $207.15.
ADSK’s POWR Ratings reflect this positive outlook. ADSK has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #10 out of 134 stocks in the Software - Application industry. It has an A grade for Quality and a B for Growth. To see the other ratings of ADSK for Value, Momentum, Stability, and Sentiment, click 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.
On February 7, 2023, PRGS announced the completion of the acquisition of MarkLogic. PRGS’ CEO Yogesh Gupta, said, “Our Total Growth Strategy consists of three pillars- Invest and Innovate, Acquire and Integrate and Drive Customer Success.”
“The MarkLogic acquisition aligns with this approach by adding industry-leading products to our already strong portfolio, new and meaningful customer relationships to our large customer base, and significant revenue to our top line,” he added.
In terms of the trailing-12-month EBIT margin, PRGS’ 21.17% is 355.2% higher than the 4.65% industry average. Its 33.78% trailing-12-month levered FCF margin is 455.8% higher than the 6.08% industry average. Likewise, its 23.45% trailing-12-month Return on Common Equity is 568.2% higher than the industry average of 3.51%.
PRGS’ revenue for the fourth quarter that ended November 30, 2022, increased 12% year-over-year to $157.13 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 an increase of 21.7% year-over-year.
Analysts expect PRGS’ EPS and revenue for the quarter ending February 28, 2023, to increase 8.3% and 7.6% year-over-year to $1.05 and $158.77 million, respectively. The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 35.7% to close the last trading session at $58.63.
PRGS’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #3 out of 134 stocks in the same industry. It has an A grade for Quality and a B for Growth and Value. Click here to see the other ratings of PRGS for Momentum, Stability, and Sentiment.
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ADSK shares were trading at $204.09 per share on Wednesday afternoon, down $3.06 (-1.48%). Year-to-date, ADSK has gained 9.21%, versus a 4.68% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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