The software industry is growing due to digitization trends and increased demand for advanced solutions, which are driven by the desire for innovative products and services. Given the industry’s promising growth prospects, investors could consider buying fundamentally strong software stocks Workday, Inc. (WDAY), Akamai Technologies, Inc. (AKAM), and Smartsheet Inc. (SMAR).
The software industry will benefit from growing AI usage, a shift to cloud-based solutions, and cybersecurity measures, resulting in intelligent systems and ongoing technical advancements. The U.S. software market is expected to reach $353.50 billion in 2024 and grow at a 4.1% CAGR to reach revenue of $414.70 billion by 2028.
The application development software industry is expanding due to rising demand for customized apps and smartphone use. Low-code platforms, DevOps integration, cloud-native development, and user experience are among the trends driving innovation. The worldwide application development software market will increase at a CAGR of 6.9%, reaching $234.70 billion in 2028.
The business software market is changing dramatically thanks to digitalization, cloud-based solutions, multichannel integration, resource management, and data analysis for revenue growth. The business software market is estimated to reach $1.10 trillion by 2029, growing at a CAGR of 11.2%.
In addition, the growing popularity of public cloud-based services is driving the demand for Software-as-a-Service (SaaS). The global Software as a Service (SaaS) market is estimated to reach $1.23 trillion by 2032, growing at a CAGR of 18.4%. Moreover, investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 41.3% returns over the past year.
With these encouraging market trends in mind, let’s delve into the fundamentals of the three software stocks.
Workday, Inc. (WDAY)
WDAY offers enterprise cloud applications facilitating planning, execution, analysis, and integration across diverse environments. Additionally, it delivers spend management solutions to streamline supplier selection, contract management, indirect spend oversight, and sourcing event execution for enhanced business operations and efficiency.
On February 26, 2024, WDAY announced the acquisition of HiredScore, a leading AI-driven talent orchestration solutions provider. It will allow WDAY to broaden its products while improving talent acquisition and internal mobility capabilities. The integrated solution might establish WDAY as a leader in addressing changing labor needs, resulting in increased customer satisfaction and market growth.
WDAY’s trailing-12-month net income margin of 19.02% is 610.7% higher than the industry average of 2.68%. Its 27.64% trailing-12-month levered FCF margin is 200.7% higher than the 9.19% industry average. Additionally, its 75.60% trailing-12-month gross profit margin is 55.7% higher than the 48.57% industry average.
For the fiscal fourth quarter that ended January 31, 2024, WDAY’s revenue increased 16.8% year-over-year to $1.92 billion. Its non-GAAP operating income grew 51.1% from the year-ago value to $461 million.
Moreover, the company’s non-GAAP net income and net income per share rose 64.5% and 58.6% from the prior year’s period to $421 million and $1.57, respectively.
Analysts expect WDAY’s revenue and EPS for the quarter ending April 30, 2024, to increase 17.2% and 20.7% year-over-year to $1.97 billion and $1.58, respectively. Also, the company surpassed the consensus revenue and EPS estimates in each of the four trailing quarters. Shares of WDAY have gained 37% over the past year to close the last trading session at $268.47.
WDAY’s POWR Ratings reflect this promising outlook. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
WDAY has an A grade for Growth and a B for Sentiment and Quality. Within the B-rated Software - Application industry, it is ranked #15 out of 132 stocks. To see the additional ratings of WDAY for Value, Momentum, and Stability, click here.
Akamai Technologies, Inc. (AKAM)
AKAM provides cloud services for securing, delivering, and computing content, applications, and software over the internet worldwide. It offers cloud solutions to keep infrastructure, websites, applications, application programming interfaces, and users safe from various cyberattacks and online threats. It also provides web and mobile performance solutions.
AKAM’s trailing-12-month EBIT margin of 18.56% is 286.3% higher than the 4.80% industry average. Its trailing-12-month CAPEX / Sales of 15.19% is 550.6% higher than the 2.33% industry average. Additionally, its 14.37% trailing-12-month net income margin is 436.7% higher than the 2.68% industry average.
AKAM’s revenue for the fourth quarter that ended December 31, 2023, increased 7.2% year-over-year to $995.02 million. The company’s non-GAAP income from operations grew 17.5% from the year-ago value to $302.67 million.
Its non-GAAP net income of $262.63 million, or $1.69 per share, up 21.3% and 23.4% from the previous year’s quarter, respectively. Furthermore, the company’s adjusted EBITDA increased 11.6% year-over-year to $425.99 million.
For the quarter that ended March 31, 2024, AKAM’s EPS and revenue are expected to increase 14.9% and 8% year-over-year to $1.61 and $988.90 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 30.2% to close the last trading session at $105.09.
AKAM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #13 out of 44 stocks in the B-rated Software - Business industry. To see additional AKAM’s ratings for Growth, Value, Momentum, Stability, Sentiment, and Quality, click here.
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. It serves aerospace, automotive, biotechnology, consumer, e-commerce, education, finance, government, healthcare, IT services, marketing, media, non-profit, publishing, software, technology, and travel sectors.
SMAR’s trailing-12-month levered FCF margin of 28.30% is 207.9% higher than the industry average of 9.19%. Its 80.54% trailing-12-month gross profit margin is 65.8% higher than the 48.57% industry average. Additionally, its 0.78x trailing-12-month asset turnover ratio is 26.9% higher than the 0.62x industry average.
During the fiscal fourth quarter that ended January 31, 2024, SMAR’s total revenue and gross profit increased 21% and 25.6% year-over-year to $256.95 million and $210.46 million, respectively.
Also, for the same quarter, its non-GAAP net income came in at $47.15 million, or $0.34 per share, up 375.2% and 385.7% year-over-year, respectively.
Street expects SMAR’s EPS and revenue for the quarter ending April 30, 2024, to increase 39.7% and 17.5% year-over-year to $0.27 and $258.29 million, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has declined 5% to close the last trading session at $38.69.
It’s no surprise that SMAR has an overall B rating, equating to a Buy in our POWR Ratings system.
It has an A grade for Growth and a B for Sentiment and Quality. It is ranked #6 out of 19 stocks in the B-rated Software - SAAS industry. Beyond what is stated above, we’ve also rated SMAR for Value, Momentum, and Stability. Get all SMAR ratings here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
WDAY shares were trading at $266.83 per share on Friday morning, down $1.64 (-0.61%). Year-to-date, WDAY has declined -3.34%, versus a 8.37% 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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