The software industry has been under strain as a result of macroeconomic headwinds. However, due to the strong demand for its products and services, the industry will likely grow steadily in the long run.
Therefore, investors could buy fundamentally strong software stocks VMware, Inc. (VMW), F5, Inc. (FFIV), and Sapiens International Corporation N.V. (SPNS).
Gartner predicts worldwide software spending will exceed $922.75 billion this year, up 13.7% year-over-year.
Moreover, the worldwide business software market is predicted to grow at an 11.2% CAGR until 2028, reaching $987.61 billion, driven by increasing digitalization, technological advancements in the cloud, and the growing need to analyze vast business data.
In addition, the global software as a service (SaaS) market is expected the market growth.
Investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 22.5% returns over the past six months and 8.9% over the past three months.
Take a detailed look at the stocks mentioned above:
VMware, Inc. (VMW)
VMW provides software solutions in modern applications, cloud management and infrastructure, networking, security, and digital workspaces worldwide. It offers VMware multi-cloud solutions, including VMware vSphere, vSAN and VxRail, vRealize Cloud Management solutions, and VMware Cloud Foundation.
VMW’s forward EV/EBITDA multiple of 14.44 is 1.8% lower than the industry average of 14.70. Its forward Price/Cash Flow multiple of 16.17 is 18.3% lower than the industry average of 19.78.
VMW’s trailing-12-month ROCE of 178.02% is significantly higher than the industry average of 0.62%. Its trailing-12-month EBIT margin of 15.78x is 253.3% higher than the industry average of 4.47x.
VMW’s total revenue increased 6.1% year-over-year to $3.28 billion for the first quarter that ended May 5, 2023. Its non-GAAP operating income increased 6.2% year-over-year to $819 million.
Its non-GAAP net income increased 18.8% year-over-year to $644 million. Additionally, the company’s non-GAAP EPS came in at $1.49, representing a 16.4% increase year-over-year.
The consensus revenue estimate of $13.97 billion for the year ending January 2024 represents a 4.7% increase year-over-year. Its EPS is expected to grow 5.4% year-over-year to $6.89 for the same period. VMW’s shares have gained 41.9% over the past six months to close the last trading session at $162.48.
VMW’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, translating to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VMW has an A grade for Quality. It is ranked #3 out of 48 stocks in the Software – Business industry. Click here for the additional POWR Ratings for Growth, Value, Momentum, Sentiment, and Stability for VMW.
F5, Inc. (FFIV)
FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services.
FFIV’s forward EV/EBITDA multiple of 9.18 is 37.8% lower than the industry average of 14.77. Its forward EV/EBIT multiple of 10.40 is 42.6% lower than the industry average of 18.11.
FFIV’s trailing-12-month ROCE of 13.34% is significantly higher than the industry average of 0.62%. Its trailing-12-month net income margin of 11.84% is 488.6% higher than the industry average of 2.01%.
For the fiscal third quarter ended June 30, 2023, FFIV’s total net revenues increased 4.2% year-over-year to $702.64 million. The company’s non-GAAP net income and non-GAAP EPS came in at $193.65 million and $3.21, up 24.8% and 24.9% year-over-year, respectively.
Street expects FFIV’s revenue to increase 4.2% year-over-year to $2.81 billion for the year ending September 2023. Its EPS is expected to grow 12.1% year-over-year to $11.42 for the same period. Over the past three months, the stock has gained 9.6% to close the last trading session at $156.17.
FFIV’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked first in the same industry. It has an A grade for Quality and a B for Growth and Value. To see additional FFIV’s ratings for Sentiment, Momentum and Stability, click here.
Sapiens International Corporation N.V. (SPNS)
Headquartered in Holon, Israel, SPNS provides software solutions for the insurance and financial services industries worldwide. It offers the platforms Sapiens CoreSuite, Sapiens IDITSuite, Sapiens UnderwritingPro, Sapiens ApplicationPro, Sapiens IllustrationPro, and Sapiens ConsolidationMaster.
SPNS’ forward Price/Book multiple of 3.74 is 4.5% lower than the industry average of 3.92. Its forward EV/EBIT multiple of 16.60 is 8.4% lower than the industry average of 18.11.
SPNS’ trailing-12-month ROCE of 14.07% is significantly higher than the industry average of 0.62%. Its trailing-12-month net income margin of 11.47% is 470.2% higher than the industry average of 2.01%.
In the fiscal second quarter ended June 30, 2023, SPNS’ non-GAAP revenue increased 8.2% year-over-year to $128.40 million. The company’s non-GAAP gross profit increased 9% year-over-year to $58 million. Its non-GAAP operating income increased 12.9% year-over-year to $23.40 million.
The company’s non-GAAP net income and non-GAAP EPS came in at $18.60 million and $0.33, up 24.2% and 22.2% year-over-year, respectively.
Analysts expect SPNS’ revenue to increase 8.4% year-over-year to $514.36 million for the year ending December 2023. Its EPS is expected to grow 9.3% year-over-year to $1.32 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 56.8% over the past nine months to close the last trading session at $29.53.
It’s no surprise that SPNS has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Growth, Stability, and Sentiment. It is ranked #2 in the same industry.
Beyond what is stated above, we’ve also rated SPNS for Value, Momentum, and Quality. Get all SPNS ratings here.
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VMW shares rose $0.52 (+0.32%) in premarket trading Tuesday. Year-to-date, VMW has gained 32.78%, versus a 16.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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