The tech industry faced several macroeconomic challenges since last year due to high inflation and the Fed’s aggressive interest rate hikes. The Central Bank held rates steady for the first time since January 2022. However, it is expected to resume rate hikes later this month because of strong macroeconomic data.
Although rising rates are not beneficial for high-growth tech stocks, the Fed is expected to start cutting interest rates next year, which could be positive news for tech names. Moreover, the software industry will likely benefit from rising digitization and cloud computing investments.
To that end, it could be wise to buy fundamentally strong software stocks ServiceNow, Inc. (NOW), Verint Systems Inc. (VRNT), and Agilysys, Inc. (AGYS). These stocks have an overall rating of B, equating to a Buy in our proprietary rating system, POWR Ratings.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
Enterprises are increasingly investing in digitizing their operations to improve their digital abilities. Software companies are helping enterprises achieve digitization by offering services and solutions like cloud computing, cybersecurity, etc.
The demand for cloud-based software services such as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) is rising as they are helping businesses streamline their operations and improve efficiency. Moreover, the software industry is well-positioned to gain from the advancements in newer technologies such as augmented reality (AR), virtual reality (VR), Internet of Things (IoT), etc.
According to Gartner, Infrastructure-as-a-Service (IaaS) user spending is expected to increase 30.9% year-over-year to $150.31 billion in 2023. Meanwhile, SaaS user spending is expected to rise 17.9% year-over-year to $197.29 billion.
Gartner expects software spending to grow 12.3% year-over-year to $891.37 billion in 2023. It expects the software segment to perform well as enterprises will likely capture competitive advantages through increased productivity, automation, and other software-driven transformation initiatives.
Let’s take a closer look at the featured stocks.
ServiceNow, Inc. (NOW)
NOW provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. The company operates the Now platform for workflow automation, artificial intelligence, machine learning, robotic process automation, process mining, performance analytics, electronic service catalogs and portals, data benchmarking, encryption, etc.
On June 28, 2023, NOW and Cognizant Technology Solutions Corporation (CTSH) announced a strategic partnership to advance the adoption of AI-driven automation across industries. The alliance is forecasted to create a $1 billion combined business for NOW and CTSH.
On June 13, 2023, NOW launched Now Assist for Virtual Agent, an AI solution that enables conversational self-service experiences. It integrates generative AI into the Now Platform, empowering customers to leverage intelligence at scale and streamline digital workflows. This solution aligns with NOW’s strategy to enhance user experiences and optimize business processes.
CJ Desai, president and chief operating officer at NOW, said, “By embedding generative AI into the Now Platform, we are empowering our customers to radically improve productivity and realize the true potential of enterprise-grade AI.”
In terms of the trailing-12-month EBITDA margin, NOW’s 11.42% is 35.3% higher than the 8.44% industry average. Likewise, its 78.45% trailing-12-month gross profit margin is 61% higher than the 48.72% industry average. Furthermore, its 5.25% trailing-12-month net income margin is 206.6% higher than the 1.71% industry average.
NOW’s total revenues for the first quarter ended March 31, 2023, rose 21.7% year-over-year to $2.10 billion. Its non-GAAP income from operations rose 26.3% year-over-year to $552 million. The company’s non-GAAP earnings per share came in at $2.37, representing an increase of 37% year-over-year. Additionally, its non-GAAP net income rose 37.2% year-over-year to $483 million.
Street expects NOW’s EPS and revenues for the quarter ended June 30, 2023, to increase 26% and 21.6% year-over-year to $2.04 and $2.13 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 48.5% to close the last trading session at $565.60.
NOW’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #12 out of 49 stocks in the Software - Business industry. It has an A grade for Growth and a B for Sentiment and Quality. Click here to see NOW’s Value, Momentum, and Stability ratings.
Verint Systems Inc. (VRNT)
VRNT provides customer engagement solutions worldwide. It offers various applications for use in Forecasting and Scheduling; Quality and Compliance; Interaction Insights; Real-time Work; Engagement Channels; an application for messaging and interactive voice response; Conversational AI; Knowledge Management, which enables humans and bots to deliver service with tools.
On March 29, 2023, VRNT announced it partnered with Google Cloud to integrate Google Cloud’s Contact Center AI with Verint’s Customer Engagement Platform. This collaboration allows organizations to bridge the Engagement Capacity Gap™ through CX automation, combining the strengths of both platforms for superior solutions.
John Bourne, senior vice president global channels and strategic alliances, at VRNT, said, “The Verint Platform is open and offers customers a broad range of best-of-breed applications in the cloud. We are pleased to work with Google Cloud to bring innovative CX automation solutions to the market.”
In terms of the trailing-12-month Capex/Sales, VRNT’s 3.07% is 33.2% higher than the 2.30% industry average. Likewise, its 69.45% gross profit margin is 42.5% higher than the 48.72% industry average. Additionally, VRNT’s 12.90% trailing-12-month levered FCF margin is 85% higher than the industry average of 6.97%.
For the first quarter ended April 30, 2023, VRNT’s total non-GAAP revenues came in at $217.19 million. Its non-GAAP gross profit rose 2.4% over the prior-year quarter to $151.51 million. Its non-GAAP operating income rose 2.9% year-over-year to $45.13 million. The company’s non-GAAP net income attributable to VRNT common shares increased 1.8% year-over-year to $34.81 million.
Its adjusted EBITDA rose 2.5% year-over-year to $51.86 million. Additionally, its non-GAAP EPS came in at $0.53, representing an increase of 1.9% year-over-year.
For the quarter ending July 31, 2023, VRNT’s EPS and revenue are expected to increase 2.3% and 0.6% year-over-year to $0.57 and $224.94 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has declined 0.4% to close the last trading session at $34.72.
VRNT’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth and Value. It is ranked #11 in the same industry. For additional VRNT ratings for Momentum, Sentiment, Stability, and Quality ratings, click here.
Agilysys, Inc. (AGYS)
AGYS and its subsidiaries operate as a developer and marketer of hardware and software products and services to the hospitality industry. It offers a point of sale, property management systems, inventory and procurement, payments, activity scheduling, reservations management, and related solutions to enhance the guest experience.
In terms of the trailing-12-month EBIT margin, AGYS’s 6.78% is 63.1% higher than the 4.16% industry average. Likewise, its 0.87x asset turnover ratio is 42.6% higher than the 0.61x industry average. Additionally, its 7.36% trailing-12-month net income margin is 329.9% higher than the industry average of 1.71%.
AGYS’s total net revenue for the fiscal fourth quarter ended March 31, 2023, increased 13.6% year-over-year to $52.90 million. Its gross profit increased 16.2% year-over-year to $32.18 million. Its adjusted net income rose 12.6% year-over-year to $6.94 million.
In addition, its adjusted EPS came in at $0.26, representing an increase of 8.3% year-over-year. Also, its adjusted EBITDA rose 8.5% year-over-year to $8.14 million.
For the quarter ended June 30, 2023, AGYS’s revenue is expected to increase 16.3% year-over-year to $55.24 million. Its EPS for fiscal 2025 is expected to increase 50.8% year-over-year to $1.26. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 26.9% to close the last trading session at $68.87.
AGYS’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Sentiment and Quality and a B for Momentum. Within the Software – Business industry, it is ranked #10. To see AGYS’ rating for Growth, Value, and Stability, click here.
What To Do Next?
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NOW shares were trading at $559.05 per share on Tuesday morning, down $6.55 (-1.16%). Year-to-date, NOW has gained 43.98%, versus a 15.99% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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