The software sector is witnessing an impressive upward swing, fueled by technological advancements, cross-industry digital shifts, the rising use of data-centric solutions, and investments in cloud technology.
Given the sector’s vast growth potential, software stocks Salesforce, Inc. (CRM), Synopsys, Inc. (SNPS), and Commvault Systems, Inc. (CVLT), possessing enormous growth potential, could be wise portfolio additions now.
Let’s discuss why the software industry is well-positioned to thrive in the foreseeable future before delving into the fundamental analysis of these stocks.
The impact of the software industry on individuals and institutions worldwide is undeniably profound. Despite last year’s turbulent macroeconomic landscape, the industry is projected to substantially stimulate the U.S. economy.
Enterprises worldwide have identified the transformative potential of digitalization in reinventing their operations. In driving this shift, software companies play a crucial role by offering diverse services and solution suites that encompass cloud computing and cybersecurity.
The technology-centric Nasdaq Composite’s remarkable 31% upsurge year-to-date is propelled by growing enthusiasm around Generative AI and Large Language Models (LLMs).
Also, due to the significant gap between organizations requiring software for innovation and the number of developers to fulfill these needs, breakthrough technologies could help organizations attain their objectives more efficiently and accurately.
With the incorporation of generative AI tools into products by software companies, customer spending on software is anticipated to increase. Goldman Sachs estimates that Generative AI will add an additional $150 billion to the existing global software market.
Gartner's latest projection anticipates the global IT spending to reach $4.72 trillion and experience a notable 4.3% upswing in 2023. This trend is expected to extend into an impressive 8.8% surge in 2024, pushing the expenditure figure to roughly $5.13 trillion, with the software segment anticipated to cross the $1 trillion benchmark within this period.
Moreover, the global software market is anticipated to reach $1.59 trillion by 2032, growing at an 11.9% CAGR. The SPDR S&P Software & Services ETF’s (XSW) 20.6% return year-to-date substantiates investors’ interest in software stocks.
Given this backdrop, quality software stocks CRM, SNPS, and CVLT could be wise portfolio additions now.
Salesforce, Inc. (CRM)
CRM is a cloud-based software company that provides customer relationship management technology that brings companies and customers together worldwide.
On June 29, 2023, CRM announced the investment of $4 billion in its UK business in the next five years. The company has been investing in the UK for many years, which builds on a five-year investment of $2.5 billion announced in 2018. The persistent investment could drive innovation and support its growing customer base.
On the same day, the company introduced generative AI capabilities for Sales Cloud and Service Cloud to transform how sellers and service teams work and interact with customers. The confluence of generative AI, data, and CRM could help every sales leader unleash growth and elevate sales productivity.
CRM’s revenue grew at a CAGRs of 20.9% and 23.6% over the past three and five years, respectively. In addition, over the past three years, its EBITDA and EBIT grew at CAGRs of 37.2% and 168.5%, respectively.
CRM’s trailing-12-month gross profit margin of 73.78% is 51.4% higher than the 48.72% industry average. Its trailing-12-month EBITDA margin of 20.63% is 125.4% higher than the 9.15% industry average.
CRM’s total revenues for the fiscal first quarter that ended April 30, 2023, increased 11.3% year-over-year to $8.25 billion, while its gross profit stood at $6.12 billion, up 14.1% from the year-ago quarter. Income from operations grew significantly year-over-year to $412 million.
The company’s non-GAAP net income and net income per share rose 70.5% and 72.4% year-over-year to $1.67 billion and $1.69, respectively. Moreover, its cash and cash equivalents increased 33.5% from the prior-year quarter to $9.16 billion.
Analysts expect CRM’s revenue and EPS for the fiscal third quarter ending October 2023 to increase 10.6% and 31.1% year-over-year to $8.66 billion and $1.84, respectively. Additionally, CRM topped consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 57.7% year-to-date to close the last trading session at $209.13. Moreover, it has gained 27.4% over the past six months.
CRM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
CRM also has an A grade for Growth and a B for Sentiment and Quality. It is ranked #11 out of 135 stocks in the Software – Application industry.
Click here to access additional ratings for CRM’s Value, Stability, and Momentum.
Synopsys, Inc. (SNPS)
SNPS provides electronic design automation software products for designing and testing integrated circuits. The company offers the Fusion Design Platform, Verification Continuum Platform, and FPGA design products.
Recently, SNPS announced the completion of the acquisition of PikeTec GmbH, one of the leaders in solutions for the testing and verification of automotive software for control unit systems.
SNPS’ general manager of the Systems Design Group, Ravi Subramanian, said, "Combining the expertise of Synopsys and PikeTec will enable us to bring to market innovative virtualization and testing solutions that directly address our customers' challenges as they shift left in software development and verification."
On August 14, Intel Corporation (INTC) and SNPS announced their definitive agreement to broaden their long-standing intellectual property (IP) and electronic design automation (EDA) strategic partnership with the development of a portfolio of IP on Intel 3 and Intel 18A for INTC’s foundry customers. This should bode well for SNPS.
Over the past three years, SNPS’ revenue and EBITDA have grown at 16.3% and 19.6% CAGRs. The company’s EBIT has increased at CAGRs of 23.4% and 23.7% over the past three and five years, respectively.
SNPS’ trailing-12-month ROCE of 17.89% is significantly higher than the industry average of 0.65%. Its trailing-12-month cash from operations of $1.77 billion is significantly higher than the industry average of $60.08 million.
SNPS’ total revenues increased 19.2% year-over-year to $1.49 billion for the fiscal third quarter that ended July 31, 2023. Gross margin for the quarter stood at $1.18 billion, up 20.8% from the year-ago quarter.
Non-GAAP net income and non-GAAP net income per share stood at $445.88 million and $2.88, up 36.2% and 37.1% from the prior-year period, respectively. Moreover, for the nine months that ended July 31, 2023, SNPS’ cash, cash equivalents, and restricted cash increased 21.8% year-over-year to $1.69 billion.
For the fiscal year ending October 2023, analysts expect SNPS’ revenue and EPS to be $5.83 billion and $11.09, indicating 14.6% and 24.6% year-over-year growths, respectively. In addition, SNPS has topped consensus revenue and EPS estimates in all trailing four quarters.
The stock has gained 40.4% year-to-date to close its last trading session at $448.24. Over the past six months, it gained 22.6%.
SNPS’ POWR Ratings reflect a robust outlook. It has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
SNPS is also rated an A for Growth and Quality and a B for Stability and Sentiment. Within the same industry, it is ranked #7.
Beyond what we have mentioned above, to see the POWR Ratings for SNPS (Value and Momentum), click here.
Commvault Systems, Inc. (CVLT)
CVLT provides data protection and information management software applications and related services globally. The company sells its products and services to large enterprises, small and medium-sized businesses, and government agencies.
With the rising trend of ransomware attacks that are persistently threatening the digital landscape, the onus is on IT and cybersecurity specialists to bolster and safeguard their backup infrastructures from malicious attacks. This has become a fundamental necessity in ensuring business continuity and data integrity.
CVLT recently announced the availability of Commvault Platform Release 2023E, bolsters secure data protection across hybrid multi-cloud environments. CVLT's cutting-edge Threat Scan offering provides proactive threat detection to ensure backup data's cleanliness, safety, and recoverability.
Over the past three years, CVLT’s revenue and EBITDA have grown at 4.8% and 31.5% CAGRs. The company’s EBIT has increased at CAGRs of 74.5% and 68.9% over the past three and five years, respectively.
CVLT’s trailing-12-month asset turnover of 1.02x is 66.6% higher than the industry average of 0.61x. Its trailing-12-month cash from operations of $186.89 million is 211.1% higher than the industry average of $60.08 million.
CVLT’s total revenues increased marginally year-over-year to $198.15 million for the fiscal first quarter that ended June 30, 2023, with subscription revenue increasing 11% from the prior-year quarter to $97.29 million. Its gross margin stood at $162.60 million.
Also, its non-GAAP net income and earnings per share stood at $32.53 million and $0.72, representing 10.3% and 12.5% increases year-over-year, respectively. Moreover, its non-GAAP free cash flow increased 75.7% from the year-ago quarter to $37.89 million.
For the fiscal second quarter ending September 2023, analysts expect CVLT’s revenue and EPS to be $195.21 million and $0.64, indicating 3.8% and 12.7% year-over-year increases, respectively. In addition, CVLT has topped consensus revenue and EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 16.4% to close its last trading session at $69.53. It is up 22.6% over the past year.
It’s no surprise that CVLT has an overall A rating, which translates to a Strong Buy in our POWR Ratings system.
CVLT has an A grade for Growth and Quality and a B for Sentiment and Value. It is ranked first within the same industry.
One can see CVLT’s additional POWR Ratings for Momentum and Stability here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
CRM shares rose $1.87 (+0.89%) in premarket trading Thursday. Year-to-date, CRM has gained 59.14%, versus a 17.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
3 Software Stocks to Watch With Potential for Massive Growth StockNews.com
