Continued digital transformation across sectors, increased use of data-driven solutions, and significant investments in cloud-based technologies have all contributed to the software industry's rapid growth in recent years.
Moreover, growing emphasis on innovative technologies such as blockchain, artificial intelligence, and machine learning should further bolster the industry’s growth.
Additionally, the development of centralized infrastructure, cloud on edge, low-code, no-code, and other trends will help the industry maintain momentum. The global business software and services market is expected to grow at a CAGR of 11.7% from 2022 to 2030.
Given this backdrop, investors could consider scooping up the shares of quality software stocks Microsoft Corporation (MSFT), F5 Inc. (FFIV), and Sapiens International Corporation N.V. (SPNS).
On the other hand, with the industry grappling with rising borrowing costs owing to rapid interest rate hikes, it may be prudent to avoid ShiftPixy Inc. (PIXY) due to its unstable fundamentals.
Stocks to Buy:
Microsoft Corporation (MSFT)
MSFT is a leading American multinational technology company that creates, licenses, and sells computer software, services, electronic devices, and solutions worldwide. The business operates through three divisions: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.
Last month, Barclays PLC (BCS) and MSFT announced that Barclays had chosen Microsoft Teams as its preferred collaboration platform, enabling collaboration for over 120,000 colleagues and service partners in key locations worldwide.
Under the terms of the agreement, Barclays will streamline its existing communications and collaboration solutions, with Teams replacing several point solutions previously used throughout the company.
In July, Oracle Corporation (ORCL) and MSFT jointly announced the general availability of Oracle Database Service for Microsoft Azure. Customers of Microsoft Azure can now easily provision, access, and monitor enterprise-grade Oracle Database services in Oracle Cloud Infrastructure (OCI) using a familiar interface.
During the fourth quarter ended June 30, 2022, MSFT's total revenue increased 12.4% year-over-year to $51.87 billion. Its operating income increased 7.5% year-over-year to $20.53 billion. The company's non-GAAP net income grew 14.5% from the year-ago value to $69.45 billion, while its non-GAAP EPS grew 16% from the prior-year quarter to $9.21.
Street expects MSFT's revenues and EPS to rise 11.4% and 9.9% year-over-year to $220.87 billion and $10.12, respectively, in fiscal 2023. In addition, MSFT's EPS is expected to rise at a 15.4% CAGR over the next five years. Moreover, the company has an impressive earnings surprise history, as it topped Street EPS estimates in three of the trailing four quarters.
MSFT's POWR Ratings reflect this promising outlook. The company has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MSFT also rated a B for Sentiment, Quality, and Stability. Within the Software – Business industry, it is ranked #8 of 54 stocks.
To see additional POWR Ratings for Value, Momentum, and Growth for MSFT, click here.
F5 Inc. (FFIV)
FFIV offers multi-cloud application security and delivery solutions for network applications, servers, and storage systems. Customers can develop, deploy, operate, secure, and govern applications in any architecture, from on-premises to the public cloud, using the company's multi-cloud application security and delivery solutions.
In June, FFIV and SoftBank Corp. announced a partnership to provide advanced Multi-access Edge Computing (MEC) services in Japan and international markets.
Through leading cloud technology, F5's cloud-based services will provide the foundation for a low-latency, high-quality, and secure application communications environment, supporting SoftBank's efforts to promote digital transformation and the realization of a digital twin model at various companies and organizations.
For the second quarter ended June 30, 2022, FFIV's revenue increased 4% from the year-ago value to $674 million. Its operating income grew 11.5% year-over-year to $107.46 million. The company reported a non-GAAP net income of $155 million, while its EPS amounted to $2.57.
FFIV’s EPS is expected to grow at the rate of 94% per annum over the next five years. The consensus revenue estimate of $2.69 billion for fiscal 2022 represents a 3.2% increase from the same period last year.
It is no surprise that FFIV has an overall B rating, which equates to Buy in our POWR Ratings system. The stock also has an A grade for Quality and a B for Value. In the same industry, it is ranked #5
Beyond the POWR Rating grades I have just highlighted, you can view FFIV ratings for Growth, Sentiment, Momentum, and Stability.
Sapiens International Corporation N.V. (SPNS)
SPNS develops software for the insurance and financial services industries in North America, the European Union, the United Kingdom, Israel, and worldwide. The company markets and sells its products and services through direct and partner sales.
This month, SPNS unveiled its new Sapiens Decision Automated Logic Extraction (ALE) solution based on Artificial Intelligence (AI). Sapiens Decision ALE pioneers a new approach to digital transformation for insurance carriers.
Last month, SPNS announced a partnership with Intellagents, a no-code, hybrid cloud, independent insurance marketplace platform provider. The collaboration broadens the Sapiens CoreSuite for the P&C ecosystem by connecting agents and insurers to a new digital marketplace featuring best-in-class insurtech solutions, data sources, AI providers, and more.
During the second quarter ended June 30, 2022, SPNS’ revenue increased 3.7% year-over-year to $118.58 million. Its operating income increased 28.4% year-over-year to $16.91 million. The company’s net income surged 14.5% from the prior-year quarter to $11.91 million, while its EPS grew 10.5% year-over-year to $0.21.
Streets expect SNPS’ EPS and revenue to grow 9.6% and 11% year-over-year to $528.3 million and $1.31, respectively, in the fiscal year 2023.
SPNS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system. SPNS also has a B grade for Growth, Stability, and Value. The stock is ranked #6 in the same industry.
In addition to the POWR Rating grades I have just highlighted, you can see SPNS ratings for Momentum, Sentiment, and Quality.
Stock to Avoid:
ShiftPixy Inc. (PIXY)
PIXY and its subsidiaries offer staffing solutions in the United States. It provides payroll processing, human resource consulting, and workers' compensation administration and coverage, among other things.
The company also runs a human resources information systems platform to help with customer acquisition and onboarding of new clients into the company's closed proprietary operating and processing information system.
For the second quarter ended June 30, 2022, PIXY’s revenue increased 1.8% year-over-year to $9.64 million. However, its operating loss surged 68.5% from the prior-year quarter to $12.72 million. Its net loss increased 70.4% from the year-ago value to $12.83 million, while its loss per share grew 54.6% year-over-year to $0.34.
The stock has declined 80.8% over the past year and 23.1% over the past three months.
PIXY’s poor prospects are also apparent in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system.
It also has an F grade for Stability and Quality and a D for Growth. PIXY is ranked #49 in the D-rated Software – Business industry.
Click here to see the additional POWR Ratings for PIXY (Value, Momentum, and Sentiment).
MSFT shares were trading at $238.95 per share on Wednesday afternoon, down $3.50 (-1.44%). Year-to-date, MSFT has declined -28.49%, versus a -19.61% rise in the benchmark S&P 500 index during the same period.
About the Author: Pragya Pandey
Pragya is an equity research analyst and financial journalist with a passion for investing. In college she majored in finance and is currently pursuing the CFA program and is a Level II candidate.
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