The software industry has been under strain as a result of macroeconomic headwinds. However, due to the strong demand for its products and services, the industry will likely grow steadily in the long run.
Therefore, it could be wise for investors to buy fundamentally sound software stocks Salesforce, Inc. (CRM), Rimini Street, Inc. (RMNI), and SAP SE (SAP).
The software market is expected to reach $659 billion in revenue in 2023. Revenue is expected to grow at a CAGR of 5.4%, with a market volume of $858.10 billion by 2028. The increased demand for software solutions across healthcare, finance, and manufacturing industries is driving this expansion.
In addition, the global Artificial Intelligence Software market is estimated to grow at a CAGR of 29.6% until 2028, reaching $80.60 billion. Furthermore, the rising demand for automation and predictive analytics solutions drives market growth.
Investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 18.6% returns over the past six months and 38.2% over the past nine months.
With these favorable trends in mind, let’s delve into the fundamentals of three best Software – Application stocks, beginning with number 3.
Stock #3: Salesforce, Inc. (CRM)
CRM is a cloud-based software company that provides customer relationship management technology that brings companies and customers together worldwide.
On September 12, 2023, CRM and Google announced a strategic collaboration expansion to bring together Salesforce, the #1 AI CRM, and Google Workspace, the world’s most popular productivity application, to drive productivity with AI. This collaboration will result in new bidirectional connectors that will enable users to combine context from Salesforce and Google Workspace, such as Google Calendar, Docs, Meet, Gmail, and others, to create generative AI experiences across platforms.
This partnership aims to empower businesses with insightful insights and streamline their workflows by utilizing the power of AI across both platforms.
On August 31, 2023, CRM and IBM (IBM) established a partnership to enable organizations globally to accelerate their use of AI for CRM. Together, the two organizations assist clients in revolutionizing consumer, partner, and employee experiences while also assisting with data security.
Through this partnership, businesses are given the tools to improve operational efficiency while also increasing customer satisfaction.
CRM’s forward non-GAAP PEG multiple of 0.65 is 19.4% lower than the industry average of 0.81. Its forward Price/Book multiple of 3.24 is 18.2% lower than the industry average of 3.96.
CRM’s trailing-12-month EBITDA margin of 23.30% is 154.6% higher than the industry average of 9.15%. Its trailing-12-month EBIT margin of 12.98% is 182.6% higher than the industry average of 4.59%.
CRM’s total revenues for the fiscal second quarter that ended July 31, 2023, increased 11.4% year-over-year to $8.60 billion, while its gross profit stood at $6.49 billion, up 16% from the year-ago quarter. Income from operations grew significantly year-over-year to $1.48 billion.
The company’s non-GAAP net income and EPS rose 76% and 78.2% year-over-year to $2.09 billion and $2.12, respectively.
Analysts expect CRM’s revenue to increase 10.9% year-over-year to $34.78 billion for the year ending January 2024. Its EPS is expected to grow 53.3% year-over-year to $8.03 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 58.2% over the past nine months to close the last trading session at $203.20.
CRM’s POWR Ratings reflect this promising outlook. The stock has an overall A rating, translating to Strong 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 Sentiment and a B for Quality. It is ranked #7 out of 132 stocks in the Software – Application industry. Click here for the additional POWR Ratings for Momentum, Value and Stability for CRM.
Stock #2: Rimini Street, Inc. (RMNI)
RMNI is a global provider of end-to-end enterprise software support products and services for various industries. The company offers application management services for Oracle and SAP enterprise software products.
RMNI’s forward non-GAAP P/E multiple of 5.47 is 75.1% lower than the industry average of 21.93. Its forward EV/Sales multiple of 0.32 is 87.8% lower than the industry average of 2.63.
RMNI’s trailing-12-month EBIT margin of 10.8% is 134.1% higher than the industry average of 4.59%. Its trailing-12-month ROTC of 143.8% is significantly higher than the industry average of 2.13%.
For the second quarter that ended June 30, 2023, RMNI’s revenue amounted to $106.42 million increased 5.2% year-over-year, while its gross profit came in at $67.07 million, up 5% year-over-year.
In addition, its non-GAAP net income and adjusted EBITDA came in at $8.85 million and $15.79 million, representing increases of 38.9% and 43.3%, respectively, from the prior-year quarter.
The consensus revenue estimate of $427.76 million for the year ending December 2023 represents a 4.4% increase year-over-year. Its EPS is expected to come in at $0.39 for the same period. RMNI’s shares have lost 8.5% over the past month to close the last trading session at $2.15.
RMNI overall A rating equates to a Strong Buy in our POWR Ratings system. It also has an A grade for Quality and a B grade for Growth and Value.
It is ranked #6 in the same industry. Beyond what is stated above, we’ve also rated RMNI for Momentum, Sentiment and Stability. Get all RMNI ratings here.
Stock #1: 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.
On September 26, 2023, SAP announced Joule, a natural-language, generative AI copilot that will revolutionize company operations. Joule will be embedded throughout SAP’s cloud enterprise portfolio, delivering proactive and contextualized insights from SAP’s solutions and third-party sources.
Joule helps employees get work done faster and generate better business outcomes by quickly sorting through and contextualizing data from numerous platforms to uncover sharper insights. Joule builds on SAP’s established track record of breakthrough technology that produces tangible outcomes.
SAP’s forward non-GAAP PEG multiple of 1.59 is 11.4% lower than the industry average of 1.79. Its forward EV/EBIT multiple of 15.98 is 10.5% lower than the industry average of 17.85.
SAP’s trailing-12-month levered FCF margin of 24.25% is 235.2% higher than the 7.24% industry average. Its trailing-12-month net income margin of 16.13% is 693.1% higher than the 2.03% industry average.
SAP’s non-IFRS total revenue increased 4.8% year-over-year to €7.55 billion ($7.98 billion) in the fiscal second quarter, which ended June 30, 2023. Its non-IFRS operating profit increased 22.6% year-over-year to €2.06 billion ($2.18 billion). Also, its non-IFRS profit after tax and earnings per share increased 216.6% and 12.6% year-over-year to €3.46 billion ($3.66 billion) and €1.07, respectively.
Street expects SAP’s revenue to increase 8.7% year-over-year to $35.87 billion for the year ending December 2024. Its EPS is expected to grow 23.3% year-over-year to $6.68 for the same period. Over the past year, the stock has gained 57.1% to close the last trading session at $127.95.
SAP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #5 in the same industry. It has a B grade for Stability, Growth, and Quality. To see additional SAP’s ratings for Sentiment, Value and Momentum, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CRM shares were trading at $204.65 per share on Friday afternoon, up $1.45 (+0.71%). Year-to-date, CRM has gained 54.35%, versus a 13.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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