Since last year, the software industry has faced the brunt of the Fed’s aggressive interest rate hikes to bring down inflation. With inflation easing and given the bright prospects of the software industry, let’s explore why Progress Software Corporation (PRGS), Karooooo Ltd. (KARO), and Xperi Inc. (XPER) could be the software stocks to buy this March.
On the other hand, let’s also look at why one might want to avoid Robinhood Markets, Inc. (HOOD).
The aggressive monetary policy tightening by the central bank since last year had put the brakes on high-flying tech stocks. However, the Fed’s hawkish stance bore results as inflation declined for the seventh straight month annually in January.
Moreover, the growing demand among enterprises to digitally transform their operations drives the demand for cloud software, business intelligence software, and others. According to Statista, the worldwide software market revenues are expected to grow at a CAGR of 5.7%, resulting in a market volume of $812.90 billion by 2027.
In addition, according to Gartner Inc. (IT), worldwide IT spending is projected to increase 2.4% year-over-year, with the software segment growing 9.3% in 2023. VP Analyst at IT, John-David Lovelock, stated, “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.”
Although the prospects of the software industry seem promising, not all software companies are likely to capitalize on the tailwinds. Amid this backdrop, investors could look to buy fundamentally strong software stocks PRGS, KARO, and XPER, while it could be wise to avoid HOOD for its poor fundamentals and weak growth prospects.
Stocks to Buy:
Progress Software Corporation (PRGS)
PRGS develops, deploys, and manages business applications. The company offers OpenEdge, Sitefinity, Corticon, and DataDirect Connect, among other applications and solutions. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.
In terms of the trailing-12-month EBIT margin, PRGS’ 21.17% is 242.9% higher than the 6.17% industry average. Likewise, its 23.45% trailing-12-month Return on Common Equity is 371.6% higher than the industry average of 4.97%.
On February 7, 2023, PRGS announced the completion of the acquisition of MarkLogic. PRGS’ CEO, Yogesh Gupta, believes the acquisition aligns with PRGS’ ‘Total Growth Strategy’ by adding industry-leading products to its portfolio, new and meaningful customer relationships to its large customer base, and significant revenue.
PRGS’ revenue for the fourth quarter that ended November 30, 2022, increased 12% year-over-year to $157.13 million. The company’s non-GAAP net income increased 19.2% year-over-year to $49.24 million. Also, its non-GAAP EPS came in at $1.12, representing a 21.7% rise from the prior-year period.
Analysts expect PRGS’ EPS and revenue for the quarter ending February 28, 2023, to increase 8.1% and 7.6% year-over-year to $1.05 and $158.76 million, respectively. The company has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 18.7% over the past nine months to close the last trading session at $57.54.
PRGS’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #3 out of 197 stocks in the Software - Application industry. It has an A grade for Quality and a B for Growth, Value, and Stability. We have also given PRGS grades for Momentum and Sentiment. Get all PRGS ratings here.
Karooooo Ltd. (KARO)
Headquartered in Singapore, KARO provides a mobility Software-as-a-Service (SaaS) platform for connected vehicles worldwide. The company offers Fleet Telematics, LiveVision, MiFleet, and Karooooo Logistics, among other software applications.
In terms of the trailing-12-month gross profit margin, KARO’s 64.23% is 30.6% higher than the 49.19% industry average. Its 16.04% trailing-12-month levered FCF margin is 126.3% higher than the 7.09% industry average. Likewise, its 24.23% trailing-12-month Return on Common Equity is 387.3% higher than the industry average of 4.97%.
For the fiscal third quarter that ended November 30, 2022, KARO’s revenue increased 29.2% year-over-year to ZAR929.99 million ($50.47 million). The company’s gross profit increased 24.2% year-over-year to ZAR583.09 million ($31.64 million). Its operating profit increased 2.2% year-over-year to ZAR209.13 million ($11.35 million). Moreover, its adjusted EPS came in at ZAR4.70.
KARO’s EPS and revenue for the quarter ending February 28, 2023, are expected to increase 20.4% and 18.8% year-over-year to $0.27 and $55.44 million, respectively. The stock has gained 5.5% over the past three months to close the last trading session at $25.31.
KARO’s POWR Ratings reflect this positive outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It is ranked #7 in the same industry. In addition, it has an A grade for Sentiment and Quality and a B for Value and Stability. Get KARO’s ratings for Growth and Momentum here.
Xperi Inc. (XPER)
XPER provides software and services in the United States. It offers Pay-TV solutions, IPTV solutions, managed IPTV service, video metadata and service, app content linking services, advanced metadata, personalized content discovery, natural language voice and insights, and TiVo DVR subscriptions.
In terms of the trailing-12-month gross profit margin, XPER’s 75.52% is 53.5% higher than the 49.19% industry average. Likewise, its 11.39% trailing-12-month levered FCF margin is 60.7% higher than the industry average of 7.09%.
On January 5, 2023, XPER partnered with LG Electronics to integrate DTS:X immersive audio technology into LG's latest OLED and Premium LCD TVs. DTS, Inc., a wholly owned subsidiary of XPER, is dedicated to making the world sound better through its pioneering audio solutions for mobile, home, cinema, and beyond. This partnership could benefit the company.
XPER’s revenue for the fourth quarter that ended December 31, 2022, increased 8.6% year-over-year to $135.53 million. The company’s total current assets increased 19.9% year-over-year to $332.26 million.
XPER’s revenue for the quarter ending June 30, 2023, is expected to increase 2.5% year-over-year to $129.35 million. The stock has gained 16.1% over the past month to close the last trading session at $11.52.
XPER’s POWR Ratings reflect solid prospects. The company has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It is ranked #4 in the Software - Application industry. In addition, it has a B grade for Growth, Sentiment, and Quality.
Click here to see the other ratings of XPER for Value, Momentum, and Stability.
Stock to Avoid:
Robinhood Markets, Inc. (HOOD)
HOOD operates a financial services platform that allows users to invest in stocks, exchange-traded funds, options, gold, and cryptocurrencies. The company also offers various learning and education solutions comprising Snacks, Learn, Newsfeed, as well as cash management services.
In terms of the trailing-12-month asset turnover ratio, HOOD’s 0.06x is 66.3% lower than the 0.19x industry average. Its trailing-12-month net income margin is negative compared to the 27.37% industry average.
HOOD’s net loss attributable to common stockholders for the fourth quarter that ended December 31, 2022, narrowed 60.8% year-over-year to $166 million. Additionally, its net loss per share attributable to common stockholders narrowed 61.2% year-over-year to $0.19.
HOOD’s EPS for the quarter ending March 31, 2022, is expected to remain negative. The stock has fallen 6.4% over the past nine months to close the last trading session at $9.72.
HOOD’s grim outlook is reflected in its POWR Ratings. The company has an overall rating of D, which translates to Sell in our proprietary rating system. Within the same industry, it is ranked #173. The company has an F grade for Sentiment and a D for Value, Stability, and Quality.
Click here to see the additional POWR Ratings of HOOD (Growth and Momentum).
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PRGS shares were trading at $57.50 per share on Tuesday morning, down $0.04 (-0.07%). Year-to-date, PRGS has gained 13.97%, versus a 4.06% rise in the benchmark S&P 500 index during the same period.
About the Author: Malaika Alphonsus
Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions.
3 Software Stocks to Buy This March and 1 to Think About Avoiding StockNews.com
