The software market is booming due to the growing volume of enterprise data, the automation of business operations, and the expanding reach of digital transformation. Therefore, investors could consider quality software stocks The Descartes Systems Group Inc. (DSGX), Informatica Inc. (INFA), and Vimeo, Inc. (VMEO)
Over the past few years, the widespread adoption of software products and solutions has been propelled by the growth of e-commerce, the ascent of e-health, the boom in online services, the pivot toward remote work, and the proliferation of interconnected devices.
Additionally, the market's expansion is reinforced by a heightened emphasis on network security and privacy concerns. Thus, the global software market is expected to grow at a CAGR of 11.5% from 2023 to 2030.
Moreover, cloud computing is acknowledged for its capacity to elevate operational efficiency within large enterprises by providing adaptable hybrid models. This trend is gaining traction, particularly in emerging economies, where businesses aim to enhance digital operations.
In addition, the cloud's business application layer is becoming more diverse, with providers focusing on improving productivity through cloud-native features, artificial intelligence, and composability. As a result, SaaS spending is expected to grow by 17.9% to reach $197 billion this year.
Consequently, the global cloud computing market is set to grow at a CAGR of 14.1% until 2030.
Given the industry tailwinds, it’s time to examine the fundamentals of three stocks worth investing in the B-rated Software – SAAS industry, starting with the third in line.
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.
DSGX’s trailing-12-month net income margin of 21.59% is 965.1% higher than the industry average of 2.03%. Its trailing-12-month levered FCF margin of 37.71% is 410.9% higher than the industry average of 7.38%.
On October 23, 2023, DSGX announced that Voluspa, a well-known home fragrance retailer in California, is utilizing DSGX's warehouse management and shipping solution to expedite order fulfillment and distribution to customers across the U.S., Canada, and globally.
On October 2, DSGX announced that Arrive Logistics had decided to improve carrier connectivity and visibility through DSGX’s Freight Visibility Solution called Descartes MacroPoint.
DSGX’s revenues increased 16.6% year-over-year to $143.39 million in the fiscal second quarter that ended July 31, 2023. Its income from operations came in at $36.83 million, up 16.7% from the year-ago quarter. Its adjusted EBITDA increased 12.2% year-over-year to $60.60 million.
Moreover, its net income increased 22.8% year-over-year to $28.12 million, and EPS rose 18.5% from the prior-year quarter to $0.32.
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 $144.16 million and $0.35, respectively. It surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
Shares of DGSX have gained 9.4% over the past year to close the last trading session at $72.54.
DSGX’s POWR Ratings reflect this promising outlook. 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, with each factor weighted to an optimal degree.
The stock has an A grade for Stability and B for Sentiment and Quality. Among the 22 stocks in the B-rated Software – SAAS industry, it is ranked #5.
In addition to the POWR Ratings highlighted above, one can access DSGX’s additional Growth, Value, and Momentum ratings 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.
INFA’s trailing-12-month gross profit margin of 78.99% is 60.3% higher than the industry average of 49.27%. Its trailing-12-month levered FCF margin of 32.52% is 335.4% higher than the industry average of 7.47%.
On September 21, INFA announced that the National Roads and Motorists’ Association (NRMA), Australia’s largest member-owned organization, had selected INFA’s AI-powered data management cloud platform, Intelligent Data Management Cloud (IDMC), to enhance customer engagement across various lines of business, including roadside assistance, travel, tourism, and lifestyle services.
INFA’s modern data management platform eliminates data silos, democratizes data access, and enhances the customer experience by quickly delivering high-quality, reliable data to support various organizational functions.
On September 19, INFA and Oracle Corporation (ORCL) announced that they had advanced their strategic partnership by introducing an Oracle Cloud Infrastructure (OCI) point of delivery to serve a large customer base in North America.
This collaboration includes new integrations and capabilities for INFA’s Intelligent Data Management Cloud (IDMC) on Oracle’s Modern Data Platform. IDMC, a cloud-native, AI-powered data management platform, simplifies the data lifecycle and ensures a unified data management experience for shared Informatica-Oracle customers, irrespective of cloud or on-premises architectures.
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, and non-GAAP net income per share increased 6.3% year-over-year to $0.17.
Moreover, its adjusted EBITDA increased 21.8% from the prior-year quarter to $91.74 million.
INFA expects approximately 8% year-over-year growth in GAAP total revenues, 13% growth in Subscription ARR, 35% in Cloud Subscription ARR, and 37% in non-GAAP operating income in the third quarter.
For the fiscal year 2023, the company anticipates around 5% year-over-year growth in GAAP total revenues, Total ARR, and a 35% growth in Cloud Subscription ARR. The company also raised its non-GAAP operating income and adjusted unlevered FCF, expecting 23% and 32% growth at the midpoint of the ranges, respectively.
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. In addition, the stock has exceeded the consensus EPS estimates in three of the trailing four quarters.
The stock has gained 24.7% year-to-date to close the last trading session at $20.31.
INFA’s POWR Ratings reflect sound prospects. The stock has an overall rating of B, translating to Buy in our proprietary rating system.
It has an A grade for Growth and Sentiment and a B for Stability. It is ranked #2 in the same industry.
Click here to access INFA’s Value, Momentum, and Quality ratings.
Stock #1: Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
VMEO’s trailing-12-month gross profit margin of 77.1% is 57.2% higher than the 49.02% industry average. Its 0.70x trailing-12-month asset turnover ratio is 46.2% higher than the 0.48x industry average.
In the second quarter ended June 30, 2023, VMEO reported revenue of $101.84 million. Its gross profit came in at $78.99 million. Its net income came in at $5.87 million, compared to a net loss of $26.50 million in the prior-year quarter. Also, its EPS came in at $0.03, compared to a loss per share of $0.16 in the year-ago quarter.
The company is optimistic about achieving its goal of returning to bookings growth by year-end while focusing on non-GAAP profitability. In the third quarter of 2023, VMEO anticipates revenue slightly above $100 million and Adjusted EBITDA around $2 million. For the fiscal year 2023, the company expects adjusted EBITDA ranging from $10 to $15 million.
Street expects VMEO’s EPS to rise 85.8% in the fiscal year 2023. Its revenue is likely to amount to $409.43 million in the current year. Also, the company has exceeded the consensus revenue estimates in each of the trailing four quarters and EPS estimates in three of the trailing four quarters.
The stock returned 2% intraday to close the last trading session at $3.12.
It’s no surprise that VMEO has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has a B grade for Value, Sentiment and Quality. It is ranked first in the Software – SAAS industry.
Beyond what is stated above, we’ve also rated VMEO for Growth, Momentum and Stability. Get all VMEO 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.
DSGX shares were trading at $71.20 per share on Wednesday afternoon, down $1.34 (-1.85%). Year-to-date, DSGX has gained 2.23%, versus a 10.69% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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