Due to growing digitization and companies adopting cloud-based solutions, the software industry has been expanding.
As the industry shows solid potential, fundamentally strong software stocks, The Descartes Systems Group Inc. (DSGX), New Relic, Inc. (NEWR), and Vimeo, Inc. (VMEO) might be solid buys.
The shift from software deployment on-premises to software-as-a-service is increasingly relevant and a topic that a lot of companies will deal with in the coming years. As a result of market speed and volatility, software investments are increasingly shifting to the cloud to be more flexible and independent.
Revenue in the software market is expected to grow at a CAGR of 4.2% to reach $414.70 billion by 2028.
Nowadays, companies use over 70% of cloud-based programs to stay on top of activities such as sales and projects and organize their data or finances. The SaaS market value is predicted to grow in 2023 to $208.1 billion, 17.5% over the market growth in 2022.
John-David Lovelock, Distinguished VP Analyst at Gartner, said, “While inflation is devastating consumer markets, contributing to layoffs at B2C companies, enterprises continue to increase spending on digital business initiatives despite the world economic slowdown.”
Gartner predicts spending to reach $4.5 trillion in 2023, a 2.4% rise from the previous year.
Let’s discuss the stocks mentioned above in detail:
The Descartes Systems Group Inc. (DSGX)
Headquartered in Waterloo, Canada. DSGX provides cloud-based logistics and supply chain solutions worldwide. The company’s Logistics Technology platform offers a range of modular, interoperable web and wireless logistics management solutions.
On April 20, 2023, DSGX announced that it has acquired the assets of Localz, a technology platform to help engage with customers on the day they’re having goods or services delivered.
Its trailing-12-month gross profit margin of 76.68% is 56.5% higher than the 48.99% industry average. Its trailing-12-month net income margin of 21.04% is 789.7% higher than the 2.36% industry average.
During the fiscal fourth quarter ended January 31, 2023, DSGX’s revenues increased 11.3% year-over-year to $125.1 million. Net income increased 55.2% year-over-year to $29.8 million, while its EPS increased 54.5% year-over-year to $29.8.
DSGX’s revenue is expected to increase 14.4% year-over-year to $133.19 million for the fiscal first quarter ended April 2023. Its EPS is expected to increase 43.2% year-over-year to $0.40 for the same quarter. Also, it has surpassed revenue and EPS estimates in three of the trailing four quarters, which is impressive.
Shares of DSGX have gained 29.8% over the past year to close the last trading session at $78.06.
DSGX’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has an A grade for Stability and a B in Sentiment and Quality. It is ranked #3 out of 24 stocks in the Software - SAAS industry.
Beyond what is stated above, we’ve also rated DSGX for Value, Growth, and Momentum. Get all DSGX ratings here.
New Relic, Inc. (NEWR)
Headquartered in San Francisco, California, NEWR is a software-as-a-service company delivers a software platform for customers to collect telemetry data and derive insights from that data in a unified front-end application.
On May 18, 2023, NEWR announced a new, deeply integrated experience for its infrastructure monitoring and APM capabilities that correlates the health and performance of applications and hosts in real-time.
On May 17, 2023, NEWR announced an integration with AWS Systems Manager Distributor to provide a native experience to automatically deploy the New Relic monitoring infrastructure agent via the AWS Command Line Interface and any AWS infrastructure-as-code tooling to streamline observability across Amazon Web Services environments.
Its trailing-12-month gross profit margin of 76.68% is 56.5% higher than the 48.99% industry average. Its trailing-12-month net income margin of 21.04% is 789.7% higher than the 2.36% industry average.
NEWR’s revenue rose 8% year-over-year to $239.76 million in the fiscal third quarter that ended December 31, 2022. Its non-GAAP net income attributable to NEWR came in at $21.81 million, compared to a loss of $11.69 million in the previous-year quarter. Non-GAAP net income attributable to NEWR per share came in at $0.32, compared to a negative of $0.18 in the previous-year quarter.
Street expects NEWR’s revenue for the fiscal fourth quarter ended March 2023 to increase 17.2% year-over-year to $241.13 million. Its EPS is expected to be $0.22 for the same quarter. Also, it has surpassed revenue estimates in each of the trailing four quarters.
The stock has gained 81.2% over the past year to close the last trading session at $84.87.
NEWR’s robust prospects are reflected in its POWR Ratings. The stock has an overall B rating, equating to a Buy in our proprietary rating system.
NEWR has a B grade for Quality, Growth, and Sentiment. It is ranked #4 in the same industry.
Click here to see the additional POWR Ratings for NEWR (Momentum, Value, and Stability).
Vimeo, Inc. (VMEO)
VMEO provides video software solutions worldwide. The company provides the video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
Its trailing-12-month levered FCF margin of 9.12% is 30% higher than the 7.01% industry average. Its trailing-12-month gross profit margin of 71.48% is 45.9% higher than the 48.99% industry average.
VMEO’s revenue came in at $103.58 million in the first quarter that ended March 31, 2023. Also, net loss decreased 97.4% year-over-year to $698 million. Operating loss decreased 89.3% year-over-year to $2.81 million.
VMEO’s revenue is expected to come in at $100.59 million for the fiscal second quarter ending June 2023. Also, it has surpassed revenue and EPS estimates in each of the trailing four quarters.
VMEO gained 7.6% year-to-date to close its last trading session at $3.96.
VMEO’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
VMEO also has a B grade for Value, Quality, and Sentiment. It is ranked #5 in the same industry.
For additional ratings for VMEO’s Growth, Momentum, Stability, and Growth, click here.
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DSGX shares were trading at $78.79 per share on Monday afternoon, up $0.73 (+0.94%). Year-to-date, DSGX has gained 13.12%, versus a 10.05% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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