The software industry exhibits remarkable growth due to rapid technological advancements. Therefore, investors could buy up quality software stocks: The Descartes Systems Group Inc. (DSGX), Informatica Inc. (INFA) and DocuSign, Inc. (DOCU), which can boost your portfolio this month.
Software products and solutions are experiencing widespread adoption on the backs of the pandemic-induced shift toward remote work and the rapid proliferation of connected devices around the world.
Enterprises are increasingly adopting hybrid and public cloud solutions to enhance operations. As a result, Software as a Service (SaaS) is becoming increasingly embedded in enterprise applications in the cloud computing landscape.
With providers focusing on enhancing productivity through cloud-native capabilities and Artificial Intelligence (AI). Gartner predicts SaaS spending will grow 17.9% from 2022 to reach $197.29 billion this year, while spending is expected to grow another 17.7% year-over-year to $232.30 billion in 2024.
In addition, Artificial Intelligence (AI) has changed the landscape for many industries across the globe, fueling the prospects of the software industry. The AI software market is expected to reach approximately $1.09 trillion by 2032, growing at a CAGR of 23%.
Given the industry tailwinds, let’s examine the fundamentals of the top three stocks in the Software - SAAS industry, starting with the third.
Stock #3: The Descartes Systems Group Inc. (DSGX)
Headquartered in Waterloo, Canada, DSGX provides cloud-based logistics and supply chain management business process solutions that enhance logistics-intensive businesses' productivity, performance, and security worldwide.
On October 2, Arrive Logistics decided to improve carrier connectivity and visibility through DSGX's Freight Visibility Solution called Descartes MacroPoint™. This development demonstrates DSGX's influence and capabilities in the logistics technology industry.
DSGX’s trailing-12-month net income margin of 21.59% is 921.9% higher than the industry average of 2.11%. Also, its trailing-12-month ROCE and ROTA of 10.28% and 8.03% are significantly higher than the industry averages of 1.20% and 0.37%, respectively.
DSGX’s revenues for the fiscal second quarter of 2024 that ended July 31, 2023, increased 16.6% year-over-year to $143.39 million, while its income from operations came in at $36.83 million, up 16.7% from the year-ago value. Its adjusted EBITDA increased 12.2% year-over-year to $60.60 million.
Additionally, its net income increased 22.8% year-over-year to $28.12 million, while its earnings per share came in at $0.32, representing an 18.5% rise from the prior-year quarter.
DSGX’s revenue and EPS for the fiscal third quarter ending October 2023 are expected to increase 18.7% and 14.4% year-over-year to $144.14 million and $0.35, respectively. It surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock has gained 10.3% over the past year to close the last trading session at $73.86. Over the past five days, the stock has gained 2.9%.
DSGX’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
The stock has an A grade for Stability and B for Sentiment and Quality. Within the B-rated Software - SAAS industry, it is ranked #5 out of 23 stocks.
To see the additional ratings of DSGX for Growth, Value, and Momentum, click here.
Stock #2: Informatica Inc. (INFA)
INFA develops an artificial intelligence-powered platform, connecting, managing, and unifying data across multi-cloud, hybrid systems at an enterprise scale. The company also provides maintenance and professional services.
On September 19, it was reported that INFA and Oracle Corporation (ORCL) had advanced their strategic partnership by creating an Oracle Cloud Infrastructure (OCI) point of delivery to thousands of joint customers across North America. The deepening of this partnership is expected to benefit INFA.
In terms of the trailing-12-month EBITDA margin, INFA’s 12.38% is 35% higher than the 9.17% industry average. Likewise, its 78.99% trailing-12-month gross profit margin is 60.9% higher than the 49.10% industry average. Additionally, its 32.52% trailing-12-month levered FCF margin is 340.6% higher than the industry average of 7.38%.
INFA’s total revenues for the fiscal second quarter ended June 30, 2023, increased 1.1% year-over-year to $375.99 million. Its non-GAAP net income rose 7.2% from the same period last year to $48.14 million.
In addition, its non-GAAP net income per share increased 6.3% year-over-year to $0.17. Also, its adjusted EBITDA stood at $91.74 million, representing an increase of 21.8% from the prior-year period.
Analysts expect INFA’s EPS and revenue for the fiscal third quarter (ended September 2023) to increase 25.7% and 8.1% year-over-year to $0.23 and $402.07 million, respectively.
The stock has gained 32.3% year-to-date to close the last trading session at $21.55. It has gained 36.1% over the past six months.
INFA’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to Buy in our proprietary system.
It is ranked #3 in the Software – SAAS industry. It has an A grade for Growth and a B for Stability and Sentiment. Click here to see INFA’s Value, Momentum, and Quality ratings.
Stock #1: DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers the DocuSign e-signature solution that enables the sending and signing of agreements on various devices.
On July 25, DOCU introduced Liveness Detection for ID Verification, leveraging AI-enabled biometric checks to enhance remote identity verification and prevent fraud in online agreements. This technology improves trust and compliance for businesses while streamlining the user experience, offering a more secure alternative to traditional in-person identity verification methods.
DOCU’s trailing-12-month gross profit margin of 79.46% is 61.8% higher than the 49.10% industry average. Its trailing-12-month EBIT and levered FCF margins of 6.65% and 36.52% are 35.4% and 394.7% higher than the 4.91% and 7.38% industry average, respectively.
DOCU’s total revenue rose 10.5% year-over-year to $669.37 million in the second quarter that ended July 31, 2023. Its non-GAAP gross profit increased 11.3% from the prior-year period to $565.79 million.
Additionally, its non-GAAP net income rose 66% year-over-year to $149.62 million. The company’s non-GAAP net income per share came in at $0.72, representing an increase of 63.6% year-over-year.
DOCU’s consensus EPS and revenue estimates of $0.63 and $690.18 million for the fiscal third quarter (ending October 2023) indicate 11% and 6.9% year-over-year increases, respectively. It surpassed the EPS and revenue estimates in each of the trailing four quarters.
Over the past five days, the stock has gained 2.1% to close the last trading session at $42.35.
DOCU’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value and Quality. Within the same industry, it is ranked #2.
Click here to see the other ratings of DOCU (Momentum, Stability, and Stability).
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DOCU shares were trading at $42.15 per share on Wednesday afternoon, down $0.20 (-0.47%). Year-to-date, DOCU has declined -23.94%, versus a 14.56% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.
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