Growing investments in digital transformations and the expansion of AI capabilities are expected to drive growth in the software industry. As the industry shows potential, quality software stocks SAP SE (SAP), Karooooo Ltd. (KARO), and Xperi Inc. (XPER) might be solid buys.
A surge in the volume of enterprise data, rising automation of business processes, and growing digitization are the major drivers of the software market. Moreover, increasing network security and privacy concerns support the industry's growth.
The global software market is expected to grow at a CAGR of 11.5% until 2030.
Moreover, government initiatives and investments in AI technologies to empower enterprises and end users are expected to drive growth in the software market.
According to Fortune Business Insights, the global artificial intelligence market is projected to grow to $2.03 trillion by 2030, exhibiting a CAGR of 21.6% until 2023.
Furthermore, the global cloud enterprise application software market is growing due to rapid industrialization, the extensive adoption of the software as a service (SaaS) cloud computing service model, and the large-scale integration of big data analytics.
The global cloud enterprise application software market is expected to reach $274.51 billion by 2027, growing at a CAGR of 15.3%.
Let’s discuss the stocks mentioned above in detail:
SAP SE (SAP)
Headquartered in Walldorf, Germany, SAP provides enterprise application software products worldwide. The company operates through Applications, Technology & Services; Qualtrics; Business Network; and Sustainability segments.
SAP’s trailing-12-month EBITDA margin of 19% is 133.4% higher than the 8.14% industry average. Its trailing-12-month net income margin of 6.41% is 225.1% higher than the 1.97% industry average.
On May 15, 2023, SAP announced the next step in its long-standing partnership with Microsoft Corporation (MSFT), using the latest in enterprise-ready generative AI innovation to help solve customers' most fundamental business challenges.
The companies will collaborate on integrating SAP SuccessFactors solutions with MSFT 365 Copilot and Copilot in Viva Learning, as well as MSFT's Azure OpenAI Service to access powerful language models that analyze and generate natural language. The integrations will enable new experiences designed to improve how organizations attract, retain and skill their people.
On May 11, SAP and Google Cloud announced an extensive expansion of their partnership, introducing a comprehensive open data offering designed to simplify data landscapes and unleash the power of business data.
The offering enables customers to build an end-to-end data cloud that brings data from across the enterprise landscape using the SAP Datasphere solution together with Google's data cloud, so businesses can view their entire data estates in real-time and maximize value from their Google Cloud and SAP software investments.
SAP pays $2.19 annually as dividends which translates to a yield of 1.63% at the current price. Its 4-year average dividend yield is 1.75%.
SAP’s non-IFRS total revenue increased 9.9% year-over-year to €7.44 billion ($8.13 billion) in the fiscal first quarter, which ended March 31, 2023. Its non-IFRS operating profit increased 11.9% year-over-year to €1.88 billion ($2.05 billion). Also, its non-IFRS earnings per share increased 27% year-over-year to €1.27.
SAP’s revenue is expected to rise 6.7% year-over-year to $8.19 billion for the fiscal second quarter ending June 2023. The company’s EPS for the same quarter is expected to increase 31.3% year-over-year to $1.28. Additionally, the stock has topped consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock has gained 63.6% over the past nine months to close the last trading session at $137.28.
SAP’s POWR Ratings reflect its promising outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SAP also has a B grade for Growth, Quality, Stability, and Sentiment. It is ranked #6 out of 135 stocks in the Software - Application industry.
To access additional ratings for SAP’s Value and Momentum, click here.
Karooooo Ltd. (KARO)
Headquartered in Singapore, KARO provides mobility software-as-a-service (SaaS) platform for connected vehicles in South Africa, the rest of Africa, Europe, the Asia-Pacific, the Middle East, and the United States.
KARO’s trailing-12-month net income margin of 17.03% is 763% higher than the 1.97% industry average. Its trailing-12-month EBIT margin of 25.01% is 480.4% higher than the 4.31% industry average.
On May 8, KARO declared a quarterly dividend of $0.85, payable on July 3, 2023. KARO pays a $1.45 per share dividend annually, which translates to a 14.26% yield on the current price. The company has a four-year average dividend yield of 0.91%.
During the fiscal fourth quarter that ended February 28, 2023, KARO’s revenue increased 23.6% year-over-year to ZAR916.36 million ($50.33 million). Adjusted EBITDA increased 21.7% year-over-year to ZAR362.20 million ($19.89 million), while its adjusted earnings per share increased 30.2% year-over-year to ZAR4.70.
KARO’s revenue is expected to increase 3.6% year-over-year to $49.70 million for the fiscal first quarter ended May 2023. Its EPS is expected to be $0.29 for the same quarter.
Shares of KARO have gained 4.6% over the past six months to close the last trading session at $23.84.
KARO’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
The stock has an A grade for Quality and a B in Value, Stability, and Sentiment. It is ranked #5 in the same industry.
Beyond what is stated above, we’ve also rated for Growth and Momentum. Get all KARO ratings here.
Xperi Inc. (XPER)
XPER provides software and services in the United States. It offers Pay-TV solutions, including UX solutions that allow service providers to customize elements of the interactive program guide for their customers and upgrade the programming features and services.
XPER’s trailing-12-month CAPEX/Sales of 2.69% is 18.3% higher than the 2.27% industry average. Its trailing-12-month gross profit margin of 75.83% is 54% higher than the 49.24% industry average.
On May 24, 2023, XPER announced that BMW had selected TiVo’s video media platform to provide customers access to a growing number of video content providers, including linear and on-demand streaming services.
BMW’s implementation of the Powered by TiVo platform will include various country-specific content, offering news, movies, and access to media libraries. The video media platform is expected to roll out over-the-air in initial launch countries by the end of 2023 for customers of the all-new BMW 5 series and further models.
XPER’s revenue increased 6.7% year-over-year to $126.84 million during the first quarter that ended March 31, 2023. Non-GAAP operating income came in at $930 thousand, compared to a loss of $2.53 million in the previous-year quarter, while its non-GAAP earnings per share attributable to the company came in at $0.04.
Street expects XPER’s revenue for the fiscal first quarter ending June 2023 to come in at $128.39 million, indicating a 1.7% year-over-year growth.
The stock has gained 49.4% year-to-date to close the last trading session at $12.86.
It is no surprise that XPER has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system.
XPER is graded a B in Growth, Sentiment, and Quality. It is ranked #3 in the same industry.
In addition to the grades stated above, XPER’s grades for Stability, Momentum, and Value can be seen here.
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SAP shares were trading at $135.68 per share on Tuesday morning, down $1.60 (-1.17%). Year-to-date, SAP has gained 33.09%, versus a 14.39% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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