With inflation hitting more than the estimated levels in June 2022, concerns over the Federal Reserve’s aggressive interest rate hikes have led to further market sell-off. The tech tech-heavy has declined 28.1% year-to-date.
However, rising demand for advanced software with increasing adoption of cloud computing and IoT devices in various industries and surging investments in this space should help the industry see a significant rebound.
Investors’ interest in the software industry is evident from the Invesco Dynamic Software ETF’s (PSJ) 5.6% gains over the past month versus the SPDR S&P 500 Trust ETF’s (SPY) 1% returns. While many software stocks are yet to hit bottom, considering the industry’s solid growth prospects, it could be wise to invest in high-quality stocks in this space.
Quality software stocks Veeva Systems Inc. (VEEV) and Cadence Design Systems, Inc. (CDNS) are well-positioned to survive the volatility and outperform the market. So, these stocks could be excellent additions to your portfolio now.
Veeva Systems Inc. (VEEV)
With a market capitalization of $31.04 billion, VEEV provides cloud-based software solutions for the global life sciences industry. It offers enterprise applications, multi-channel platforms, customer relationships, and content management solutions to meet its customers’ needs and their strategic business functions, from R&D to commercialization.
On June 21, 2022, biopharmaceutical company ANI Pharmaceuticals, Inc. (ANIP) announced to leverage the complete suite of VEEV’s Veeva Commercial Cloud solutions to establish the digital foundation for the launch of Purified Cortrophin Gel 80 U/mL from ANIP’s new Rare Disease Business Unit in the U.S.
VEEV’s Veeva Business Consulting will help ANIP use advanced analytics to optimize for the most precise and impactful sales and medical interactions continuously. This should nurture VEEV’s relationship with ANIP in the long term.
VEEV’s total revenues for its fiscal 2023 first quarter ended April 30, 2022, increased 16.5% year-over-year to $505.10 million. The company’s non-GAAP gross profit came in at $378.08 million, representing a 15.7% rise from the prior-year period. Its non-GAAP operating income came in at $199.55 million, up 10% from the year-ago period.
While its non-GAAP net income increased 8.8% year-over-year to $159.79 million, its non-GAAP EPS increased 8.8% to $0.99. The company had $1.24 billion in cash and cash equivalents as of April 30, 2022.
Analysts expect VEEV’s EPS to be $4.15 for fiscal 2023 ending January 31, 2023, representing an 11.3% rise from the prior-year period. It surpassed Street EPS estimates in each of the trailing four quarters, which is impressive. The consensus revenue estimate of $2.17 billion for the same fiscal year indicates a 17.3% year-over-year improvement.
VEEV’s EPS is expected to grow at 13.9% per annum over the next five years. Its 72.6% trailing-12-month gross profit margin is 31.5% higher than the 55.2% industry average. The company’s trailing-12-month EBIT margin of 26.3% is 1962.4% higher than the industry average of 1.3%.
The company’s levered free cash flow has grown 13.3% over the past year, 423.9% above the industry average of 2.5%. Its operating cash flow growth of 2.6% over the past year is 160.6% higher than the 1% industry average. Over the past month, the stock has gained 12.4% to close the last trading session at $200.47.
VEEV’s POWR Ratings reflect its solid growth prospects. The stock has an overall B grade, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
It has an A grade for Sentiment and Quality and a B for Growth. Click here to see the additional ratings for VEEV’s Value, Momentum, and Stability.
VEEV is ranked #21 of 83 stocks in the C-rated Medical - Services industry.
Cadence Design Systems, Inc. (CDNS)
With a $41.14 billion market capitalization, CDNS provides software, hardware, services, and reusable integrated circuit (IC) design blocks worldwide. It operates through Custom IC Design and Simulation; Digital IC Design and Signoff; Functional Verification, including Emulation and Prototyping Hardware; Intellectual Property (IP); and System Design and Analysis product segments.
It offers methodology, education, hosted design solutions, technical support, and maintenance services.
On July 14, 2022, CDNS and Tower Semiconductor (TSEM), an Israel-based foundry of high-value analog semiconductor solutions, collaborated to develop a new, comprehensive automotive reference design flow using the Cadence Virtuoso Design Platform and Spectre Simulation Platform.
This will help their customers develop critical automotive ICs that satisfy the ISO 26262 certification and see rising demand in the coming months.
CDNS’ total revenue for its fiscal 2022 first quarter ended April 2, 2022, increased 22.5% year-over-year to $901.77 million. The company’s income from operations came in at $318.93 million, indicating a 564% rise from the prior-year period.
While its net income increased 25.7% year-over-year to $235.34 million, its EPS grew 26.9% to $0.85. The company had cash and cash equivalents of $1.14 billion as of April 2, 2022.
The consensus EPS estimate of $3.93 for fiscal 2022 ending December 31, 2022, shows a 19.5% rise from the prior-year period. It surpassed Street EPS estimates in each of the trailing four quarters. Analysts expect CDNS’ revenue to be $3.41 billion for the same fiscal year, indicating a 14.1% year-over-year improvement.
CDNS’ EPS is expected to grow at a 17.1% rate per annum over the next five years. Its 89.8% trailing-12-month gross profit margin is 77.3% higher than the 50.7% industry average. The company’s trailing-12-month EBIT margin of 28.3% is 254.2% higher than the industry average of 8%.
The company’s levered free cash flow has grown 48.9% over the past year, 291.1% above the industry average of 12.5%. Its operating cash flow growth of 37.2% over the past year is 831.3% higher than the 4% industry average. Over the past month, the stock has gained 8.3% to close the last trading session at $153.34.
CDNS’ POWR Ratings reflect this promising outlook. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It has an A grade for Quality and a B for Growth and Sentiment. In addition to the POWR Ratings grade we have just highlighted, one can see CDNS’ Momentum, Value, and Stability ratings here.
The stock is ranked #23 of 156 stocks in the Software - Application industry.
VEEV shares were unchanged in after-hours trading Thursday. Year-to-date, VEEV has declined -22.42%, versus a -19.84% rise in the benchmark S&P 500 index during the same period.
About the Author: Sweta Vijayan
Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.
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