Digital transformation of companies and the proliferation of AI and software solutions are driving investment and innovation in the software industry. So, investors could consider adding quality software stocks Palantir Technologies Inc. (PLTR), Elastic N.V. (ESTC), and Smartsheet Inc. (SMAR) to their watchlists this week. These stocks are poised for potential breakout growth.
Businesses are investing in software to keep up with the digital era, driving the software industry's growth. The Software as a Service (SaaS) model is a top choice for its scalability and remote work capabilities, making it one of IT's fastest-growing sectors.
The global SaaS market is expected to reach $720.44 billion by 2028, growing at a CAGR of 25.9%.
Moreover, Gartner's forecast indicates robust growth in global software spending. In 2023, it is expected to increase by 13.7% year-over-year, reaching a substantial $922.75 billion. The projection anticipates even stronger growth in 2024, with global software spending surging to $1.05 trillion, marking a 14.1% year-on-year upswing.
In addition, while Artificial intelligence has revolutionized healthcare work, with growing demand expected to drive market growth, its application in enhancing customer experiences is gaining traction. The collective investment in advanced AI software emerges as a significant driver for the market's expansion.
The AI software market is expected to reach approximately $1.09 trillion by 2032, at a CAGR of 23%.
In light of these encouraging trends, let's look at the fundamentals of the three best Software – SAAS stocks, beginning with number 3.
Stock #3: Palantir Technologies Inc. (PLTR)
PLTR builds and deploys software platforms for the intelligence community in the United States to help in counterterrorism investigations and operations. The company’s offerings include Palantir Gotham, Palantir Foundry, and Palantir Apollo.
PLTR has seen impressive growth in its revenue and total assets in the past three years, at CAGRs of 31.4% and 28.1%, respectively.
On September 13, 2023, PLTR announced it was partnering with Babcock International Group to strengthen its digital defense capabilities through an Enterprise Agreement (EA) announced at DSEI today in London.
The partnership will leverage Palantir AIP, the AI-enabled instance of the company’s software, to transform how the Babcock workforce captures, integrates, models, and builds data-driven solutions.
Moreover, on September 8, PLTR and Gemelli Generator Real World Data (RWD), a research facility of Fondazione Policlinico Universitario A. Gemelli IRCCS, announced a partnership to implement digital medicine research solutions that leverage artificial intelligence to improve patient care and health outcomes.
PLTR’s revenue increased 12.8% year-over-year to $533.32 million in the second quarter that ended June 30, 2023. The company’s adjusted income from operations stood at $135.04 million, up 25.2% year-over-year.
Also, the company’s adjusted net income attributable to common stockholders was $119.55 million or $0.05 per share, compared to a loss of $21.12 million or $0.01 during the previous year’s quarter.
Street expects PLTR’s EPS and revenue to increase 463.4% and 16.4% year-over-year to $0.06 and $556.04 million in the fiscal third quarter ending September 2023. Also, it surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock gained 136% year-to-date to close the last trading session at $15.15.
PLTR’s POWR Ratings reflect this promising outlook. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Growth and Quality. PLTR is ranked #19 among 24 stocks in the B-rated Software – SAAS industry.
Click here to access PLTR’s additional Value, Quality, Stability, and Sentiment ratings.
Stock #2: Elastic N.V. (ESTC)
Based in Amsterdam, the Netherlands. ESTC is a data analytics company that delivers solutions designed to run in public or private clouds in multi-cloud environments.
ESTC's revenue and levered free cash flow have shown strong growth, with 33.6% and 44.9% CAGRs over the past three years and 43.2% and 56.7% CAGRs over the past five years, respectively.
On September 19, ESTC announced the launch of Elastic AI Assistant for Observability and general availability of Universal Profiling, providing site reliability engineers (SREs), at all levels of expertise, with context-aware, relevant, and actionable operational insights that are specific to their IT environment.
ESTC’s total revenue rose 17.5% year-over-year to $293.75 million for its fiscal 2023 first quarter, which ended July 31, 2023. The company’s non-GAAP gross profit came in at $224.65 million, up 21.5% year-over-year. It reported a non-GAAP net income of $24.40 million and $0.25 per share, compared to a loss of $13.72 million and $0.15 in the year-ago quarter.
The consensus revenue estimate of $304.03 million for the fiscal second quarter ending October 2023 represents a 15% increase year-over-year. It surpassed EPS and revenue estimates in each of the four trailing quarters, which is impressive.
ESTC’s shares gained 49.6% year-to-date to close the last trading session at $77.05.
The stock has a B grade for Growth and Sentiment. It is ranked #13 in the same industry.
Beyond what we stated above, we also have ESTC’s ratings for Value, Stability, Momentum, and Quality. Get all ESTC ratings here.
Stock #1: Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations.
SMAR’s revenue and levered free cash flow have grown at 38.5% and 82.3% CAGR over the past three years and at a CAGR of 43.8% and 76.8% over the past five years.
On September 19, SMAR revealed its next-generation Smartsheet platform featuring new product capabilities that unlock sophisticated solution building, AI-driven data insights, and massive scale.
During the fiscal second quarter that ended July 31, 2023, SMAR’s total revenue increased 26.2% year-over-year to $235.59 million. Its gross profit stood at $188.55 million, up 29% year-over-year. Moreover, the company reported a non-GAAP operating income of $10.22 million, compared to a loss of $16.08 million in the previous-year quarter.
Analysts expect SMAR’s revenue to rise 20.9% year-over-year to $241.21 million in the fiscal third quarter ending October 2023. Its EPS is likely to be $0.09 in the same quarter. It has surpassed the revenue estimates in each of the trailing four quarters.
The stock has soared 15.2% over the past year, closing the last trading session at $41.51.
SMAR POWR Ratings reflect this robust outlook. It has a B grade for Growth, Sentiment, and Quality. It is ranked #8 in the same industry.
To see SMAR’s Value, Momentum, and Stability ratings, click here.
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PLTR shares were trading at $15.12 per share on Wednesday morning, down $0.03 (-0.20%). Year-to-date, PLTR has gained 135.51%, versus a 17.32% 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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