Technological advancements, digital transition across industries, augmented utilization of data-centric strategies, and cloud technology investments drive the software industry’s remarkable surge.
Given the sector’s vast growth potential, it could be prudent to add fundamentally strong software stocks Open Text Corporation (OTEX), Dassault Systèmes SE (DASTY), and PDF Solutions, Inc. (PDFS), trading under $40, to one’s portfolio now.
Before delving into the fundamentals of these stocks, let’s discuss why the software industry is poised to thrive in the foreseeable future.
The software industry has an undeniable global reach and influence, forecasted to fuel the U.S. economy significantly.
As enterprises worldwide begin to comprehend the transformative potential of digitization in reshaping their operations, there has been a substantial increase in investments in software. According to Gartner, Inc. (IT), software spending is anticipated to increase 14.1% year-over-year to reach $1.05 trillion in 2024.
In driving the change, software companies play a crucial role by providing a broad spectrum of services and solutions, including but not limited to cloud computing and cybersecurity.
The technology-centric Nasdaq Composite’s impressive 26.3% surge year-to-date has been propelled by growing enthusiasm around Generative AI and Large Language Models (LLMs).
Also, due to the notable gap between organizations requiring software for innovation and the number of available developers to fulfill these needs, cutting-edge technologies could help organizations achieve their goals more efficiently and accurately.
The global software market is anticipated to reach $1.40 trillion by 2030, growing at an 11.5% CAGR. The SPDR S&P Software & Services ETF’s (XSW) 14% return year-to-date substantiates investors’ interest in software stocks.
With these favorable trends in mind, let's delve into the fundamentals of the three Software-Application stock picks, beginning with the third choice.
Stock #3: Open Text Corporation (OTEX)
Headquartered in Waterloo, Canada, OTEX is an information management company that provides software and services. The company offers an integrated portfolio of information management solutions delivered at scale in the OpenText Cloud, enabling organizations to optimize their digital supply chains.
On August 24, OTEX partnered with Google Cloud to deliver AI-powered integrations that will help organizations unlock the power of their data on Google Cloud to their competitive advantage. The co-innovation of OTEX's information management solutions and Google Cloud's AI capabilities will accelerate how various organizations surface insights quickly, boost productivity, and transform customer experiences.
On September 22, the company paid its shareholders a quarterly dividend of $0.25 per share. The company has paid dividends for nine consecutive quarters.
OTEX pays an annual dividend of $1 per share, translating to a dividend yield of 2.85%. Its four-year average yield is 2.02%. OTEX’s dividend payments have grown at CAGRs of 11.9% and 11.5% over the past three and five years, respectively.
OTEX’s trailing-12-month cash from operations of $779.20 million is significantly higher than the industry average of $60.08 million. Its trailing-12-month ROCE and ROTC of 3.74% and 3.89% are 210.6% and 64.4% higher than the industry averages of 1.20% and 2.37%, respectively.
In terms of forward non-GAAP P/E, OTEX is trading at 7.44x, 65.1% lower than the industry average of 21.32x. The stock’s forward EV/EBIT multiple of 7.95 is 40.5% lower than the industry average of 13.37.
For the fiscal fourth quarter that ended June 30, 2023, OTEX’s total revenues and non-GAAP gross profit stood at $1.49 billion and $1.15 billion, up 65.2% and 67.6% year-over-year, respectively. Its non-GAAP income from operations stood at $431.74 million, up 48.4% from the year-ago quarter.
For the same quarter, non-GAAP net income and non-GAAP earnings per share attributable to OTEX stood at $245.84 million and $0.91, up 14.1% and 13.8% year-over-year, respectively. Its adjusted EBITDA stood at $462.85 million, up 47.6% year-over-year.
Analysts expect OTEX’s revenue and EPS in the fiscal first quarter ending September 2023 to increase 64.5% and 17.6% year-over-year to $1.40 billion and $0.91, respectively. The company surpassed consensus revenue and EPS estimates in three of the trailing four quarters, which is impressive.
The stock has gained 18.3% year-to-date to close the last trading session at $35.05. Over the past year, it gained 25.9%.
OTEX’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating 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.
The stock has a B grade for Growth and Value. In the Software-Application industry, it is ranked #36 out of the 133 stocks.
To see additional POWR Ratings for Momentum, Stability, Sentiment, and Quality for OTEX, click here.
Stock #2: Dassault Systèmes SE (DASTY)
Headquartered in Vélizy-Villacoublay, France, DASTY provides software solutions and services worldwide. It is divided into three sectors: Manufacturing Industries; Life Sciences & Healthcare; and Infrastructure & Cities.
On September 18, DASTY introduced "Emma Twin," an avatar designed to raise awareness of the key role that virtual twins have in advancing healthcare and the innovations that are shaping the future of medicine.
DASTY’s Vice President of Corporate Equity, Marketing & Communications, Victoire de Margerie, said, “Our virtual twins have been used to swiftly develop COVID-19 vaccines, optimize surgical procedures, and provide patients with a greater understanding of treatment options. By leveraging our pioneering technology, we can draw attention to major healthcare challenges and demonstrate how the virtual world improves outcomes in real life.”
DASTY pays an annual dividend of $0.22 per share, translating to a dividend yield of 0.60%. Its four-year average yield is 0.41%. DASTY’s dividend payments have grown at CAGRs of 12.8% and 10.9% over the past three and five years, respectively.
DASTY’s trailing-12-month net income margin of 17.48% is 759.3% higher than the industry average of 2.03%. Its trailing-12-month ROCE and ROTA of 14.10% and 17.17% are significantly higher than the industry averages of 1.20% and 0.02%, respectively.
In terms of forward EV/sales, DASTY is trading at 7.78x, 17% lower than its five-year average of 9.38x. The stock’s forward EV/EBIT multiple of 24.03 is 17.8% lower than its five-year average of 29.22.
For the fiscal second quarter that ended June 30, 2023, DASTY’s total revenue and non-IFRS operating income stood at €1.45 billion ($1.53 billion) and €448.90 million ($472.52 million), up 4.7% and 1.5% year-over-year, respectively.
For the same quarter, net income attributable to shareholders (non-IFRS) and earnings per share (non-IFRS) stood at €371.60 million ($391.15 million) and €0.28, up 7.1% and 7.7% year-over-year, respectively. As of June 30, 2023, DASTY’s total current assets stood at €5.09 billion ($5.36 billion), compared to €4.84 billion ($5.10 billion) as of December 31, 2022.
Street expects DASTY’s revenue and EPS in the fiscal third quarter ending September 2023 to increase 7.6% and 18.3% year-over-year to $1.49 billion and $0.19, respectively. The company surpassed consensus EPS estimates in three of the trailing four quarters.
The stock has gained 4.4% year-to-date to close the last trading session at $37.34. Over the past year, it gained 2.6%.
DASTY’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
DASTY has an A grade for Quality and a B for Stability. Within the same industry, it is ranked #32.
Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Momentum, and Sentiment. Get all ratings of DASTY here.
Stock #1: PDF Solutions, Inc. (PDFS)
PDFS provides proprietary software and physical intellectual property products for integrated circuit designs, electrical measurement hardware tools, proven methodologies, and professional services internationally.
On September 5, PDFS launched a freemium entry point for its Exensio Analytics Platform, providing users with a new way to use and experience the market-leading analytics platform.
The launch would target green and brownfield customers interested in optimizing their SOC backend flow. This allows its potential customers to access a powerful big data platform for free, giving them a migration path to grow in the Exensio Analytics Platform.
PDFS’ trailing-12-month gross profit and net income margin of 70.13% and 5.57% are 42.8% and 173.7% higher than the industry averages of 49.10% and 2.03%, respectively. Its trailing-12-month ROTA of 43.12% is significantly higher than the industry average of 0.02%.
In terms of forward non-GAAP P/E, PDFS is trading at 46.46x, 72.4% lower than its five-year average of 168.41x.
For the fiscal second quarter that ended June 30, 2023, PDFS’ total revenues and non-GAAP gross profit stood at $41.60 million and $30.72 million, up 20% and 28.9% year-over-year, respectively.
For the same quarter, its non-GAAP net income and non-GAAP net income per share stood at $7.50 million and $0.19, up 74.7% and 72.7% year-over-year, respectively. As of June 30, 2023, PDFS’ total current assets stood at $204.35 million, compared to $193.41 million as of December 31, 2022.
Street expects PDFS’ revenue in the fiscal third quarter ending September 2023 to increase 3.3% year-over-year to $41.17 million. Its EPS is expected to come at $0.15. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 11.9% year-to-date to close the last trading session at $31.90. Over the past year, it gained 21.7%.
PDFS’ robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to Buy in our proprietary rating system.
PDFS has an A grade for Sentiment and a B for Growth. It is ranked #31 within the Software-Application industry.
Click here for the additional POWR Ratings for PDFS (Value, Momentum, Stability, and Quality).
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DASTY shares were trading at $38.13 per share on Friday morning, up $0.79 (+2.10%). Year-to-date, DASTY has gained 7.13%, versus a 11.97% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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