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Thanks to rapid growth in cloud computing and artificial intelligence (AI) applications, software stocks are all the rage these days. But while some software stocks still have plenty of room for expansion, others may have already passed their peak growth years. So, how should investors identify the best software stocks to buy right now?
Well, analysts at Baird recently named their top software stock picks for 2024 - and based on the consensus among other Wall Street experts, it looks like experts have high hopes for software stocks Snowflake (SNOW), MongoDB (MDB), and Dynatrace (DT), in particular.
All three of these names have scored bullish ratings from analysts, with above-average growth projected for the year ahead. So, let's dive into why SNOW, MDB, and DT are worth considering for your portfolio this January.
Snowflake Stock: The Data Cloud Powerhouse
Snowflake Inc. (SNOW) is a cloud-based data warehousing company that provides a platform for data storage, processing, and analytics. The company's platform allows businesses to manage and analyze large amounts and diverse types of data across various cloud platforms, including Amazon (AMZN) Web Services (AWS), Alphabet's (GOOGL) Google Cloud Platform, and Microsoft (MSFT) Azure.
Snowflake stock has performed well over the last 52 weeks, delivering a gain of 45%.
With a market cap hovering around $64.83 billion and an enterprise value of $63.89 billion, Snowflake is the largest software stock on our list. Via its AWS partnership, Snowflake's software has been leveraged by high-profile customers like Disney Parks, positioning the company well to leverage the growing generative AI market.
Snowflake also has an eye on growth, scooping up Samooha and its "cross-cloud" data collaboration suite to beef up its own set of tools.
Financially, Snowflake's been on a roll, too. Their third-quarter earnings for fiscal 2024 were a hit, with revenue up by 31.8% year-over-year to $734.2 million, and earnings per share (EPS) at $0.25, which was way ahead of the expected $0.16.
Looking ahead, analysts are projecting forward revenue growth at 43.9%, well above the sector median of 7.8%.
Out of 36 analysts following SNOW, 23 are saying "strong buy," a couple are going with "moderate buy," 10 are on the fence with "hold," and just two are not feeling it with a "strong sell." The average price target is $203.72, just 1.9% above current levels, but Baird has a higher price target of $215.
MongoDB Stock: The Flexible Database Solution
MongoDB Inc. (MDB) is a provider of a general-purpose database platform that can handle various types of data and applications. MongoDB’s platform is based on a document-oriented model that allows for flexibility and performance.
Shares of MDB have more than doubled over the past 52 weeks, up about 116% over this time frame. However, the stock has pulled back about 11% from its 52-week high.
The recent pullback was prompted by MongoDB's third-quarter earnings. While MDB beat Wall Street's expectations on Q3 revenue and EPS - and offered stronger-than-expected revenue guidance for Q4 - investors sold the stock in response to softer-than-anticipated customer growth and calculated billings.
Analysts are still pretty bullish on MongoDB's long-term prospects. Forward revenue growth is projected at 32.3%, roughly four times the sector median.
Out of 26 analysts, 19 are saying "strong buy," three are going with "moderate buy," three are on the fence with a "hold," and one is recommending "strong sell." The average price target is $451.20 - right in line with Baird's $450 - suggesting there's room for the stock to rally over 14% from its current price.
Dynatrace Stock: The Software Intelligence Specialist
Dynatrace Inc. (DT) is a global technology company that provides a software intelligence platform. The platform is designed to simplify cloud complexity and accelerate digital transformation. With advanced observability, AI, and complete automation, Dynatrace's all-in-one platform provides answers, not just data, about the performance of applications, the underlying infrastructure, and the experience of all users.
Over the last 52 weeks, Dynatrace stock has gained more than 49%.
In its fiscal Q2 earnings report, the company beat EPS and revenue estimates and backed its full-year guidance, which led to a 15% increase in the stock price the next day. Revenue grew by over 27% year-over-year to $279.3 million, with annual recurring revenue (ARR) up 34% to $1.16 billion. This growth was largely driven by strong cloud adoption.
For the year ahead, the consensus is calling for robust revenue growth of 21.87%.
Based on the recommendations of 27 analysts, the consensus is a “strong buy” for Dynatrace's stock. Of these, 18 suggest a “strong buy,” 2 suggest a “moderate buy,” and 7 suggest a “hold.” The average target price is $57.88, which implies 5.5% upside, while Baird has a slightly higher target of $59.
While valuations may be slightly stretched, thereby limiting upside potential, all three of these software stocks stand out as top ideas in the space. Given their solid financial performance, robust revenue projections, and the endorsement of Wall Street analysts, this trio of SNOW, MDB, and DT might be the best in class for software stocks this January.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
