Despite the prevailing uncertain macroeconomic conditions, the software industry continues to grow due to the escalating demand for digital solutions across various businesses. Notably, the surge in cloud computing drives the need for software-as-a-service (SaaS).
Considering these factors, it could be wise to buy fundamentally strong software stocks DocuSign, Inc. (DOCU), New Relic, Inc. (NEWR), Informatica Inc. (INFA), and MiX Telematics Limited (MIXT).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
While the tech sector faced challenges last year due to rapid rate hikes and heightened inflation, the tech-centric Nasdaq Composite has surged 29% year-to-date, primarily driven by the excitement surrounding generative AI. This rise in generative AI’s prominence is poised to impact software companies positively.
Businesses have proactively invested in digitalization efforts to enhance their operational efficiency and digital capabilities. Software companies play a pivotal role in this landscape by offering cloud-based services like Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS). These offerings have gradually replaced traditional software programs.
The demand for SaaS is growing along with the ever-rising adoption of public cloud services across enterprises. According to Gartner, worldwide end-used spending on public cloud services is expected to rise 21.7% year-over-year to reach $597.30 billion in 2023. Also, the research firm expects SaaS spending to increase 17.9% year-over-year to $197.29 billion in 2023.
Global software spending is forecasted to rise 12.3% this year, with expectations of a further 13.1% growth in 2024, surpassing the trillion-dollar mark. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 33.6% returns year-to-date.
Let’s take a closer look at their fundamentals.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers DocuSign e-signature solution that enables sending and signing of agreements on various devices.
On July 25, 2023, DOCU announced a partnership with Onfido to introduce a new feature to their Identify portfolio. This feature, known as Liveness Detection for ID Verification, uses AI technology to enhance the verification process. It securely confirms signers’ identities, presence, and valid IDs, preventing fake documents and identity spoofing. This offers a single-platform solution for secure agreements.
In terms of the trailing-12-month levered FCF margin, DOCU’s 30.55% is 344.9% higher than the 6.87% industry average. Likewise, its 79.27% trailing-12-month gross profit margin is 62.9% higher than the 48.66% industry average. Furthermore, its 0.91x trailing-12-month asset turnover ratio is 47.9% higher than the 0.61x industry average.
DOCU’s total revenues for the first quarter ended April 30, 2023, rose 12.3% year-over-year to $661.39 million. Its non-GAAP income from operations increased 72% year-over-year to $175.77 million. Additionally, its non-GAAP net income rose 94% year-over-year to $150.21 million.
The company’s non-GAAP EPS came in at $0.72, representing an increase of 89.5% year-over-year.
Street expects DOCU’s EPS and revenues for the quarter ended July 31, 2023, to increase 49% and 8.9% year-over-year to $0.66 and $677.32 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 8.6% to close the last trading session at $47.97.
DOCU’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 #3 out of 24 stocks in the B-rated Software - SAAS industry. It has an A grade for Growth and a B for Value and Quality. Click here to see DOCU’s Momentum, Stability, and Sentiment ratings.
New Relic, Inc. (NEWR)
NEWR delivers a software platform for customers to collect telemetry data and derive insights from that data in a unified front-end application. It offers a suite of products on its open and extensible cloud-based platform, which enables users to collect, store, and analyze telemetry data.
On July 31, 2023, NEWR announced its agreement to be acquired by Francisco Partners and TPG for $87.00 per share in cash, valuing the company at approximately $6.5 billion.
Bill Staples, CEO at NEWR, predicts that teaming up with Francisco Partners and TPG will accelerate their strategy, complete the consumption business transition, and provide a universal data-driven practice for all companies, acknowledging the team’s achievements and employees’ contributions. The transaction is expected to create significant value for its shareholders.
In terms of the trailing-12-month gross profit margin, NEWR’s 75.42% is 55% higher than the 48.66% industry average. Likewise, its 11.57% trailing-12-month levered FCF margin is 68.6% higher than the 6.87% industry average. Additionally, its 0.86x trailing-12-month asset turnover ratio is 39.3% higher than the industry average of 0.61x.
For the first quarter ended June 30, 2023, NEWR’s revenue rose 12.1% year-over-year to $242.63 million. Its non-GAAP gross profit increased 22.7% year-over-year to $192.57 million.
The company’s non-GAAP net income came in at $30.43 million, compared to a non-GAAP net loss of $17.16 million. Additionally, its non-GAAP income per share came in at $0.43, compared to a non-GAAP loss per share of $0.26 in the prior-year quarter.
For the quarter ending September 30, 2023, NEWR’s EPS and revenue are expected to increase 205.6% and 10.5% year-over-year to $0.40 and $250.65 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 61.7% to close the last trading session at $84.53.
NEWR’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth and Quality. It is ranked #5 in the same industry. To see NEWR’s Value, Momentum, Stability, and Sentiment ratings, click here.
Informatica Inc. (INFA)
INFA develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at enterprise scale in the United States.
On June 14, 2023, INFA announced its intention to acquire London-based startup Privitar, aiming to enhance data privacy within its AI-powered Intelligent Data Management Cloud (IDMC) platform. The deal will strengthen the privacy layer of INFA’s tech stack, particularly the company’s AI-powered Intelligent Data Management Cloud platform.
Jitesh Ghai, EVP and chief product officer at INFA, said, “In general, there has been an immense amount of investment and innovation in data and analytics. We are always on the hunt for compelling technology and best-of-breed solutions.”
On June 20, 2023, INFA launched its AI-powered Intelligent Data Management Cloud (IDMC) on Amazon Web Services (AWS) Asia Pacific (Tokyo) Region, aiding customers in cloud-based data management while complying with data residency rules.
This extends the Informatica-AWS partnership, benefiting digital transformation. The goal is secure, governed data solutions for better decision-making.
In terms of the trailing-12-month EBITDA margin, INFA’s 12.38% is 37.1% higher than the 9.03% industry average. Likewise, its 78.99% trailing-12-month gross profit margin is 62.3% higher than the 48.66% industry average. Additionally, its 32.52% trailing-12-month levered FCF margin is 373.7% higher than the industry average of 6.87%.
INFA’s total revenues for the fiscal second quarter ended June 30, 2023, increased 1.1% year-over-year to $375.99 million. Its non-GAAP net income rose 7.2% year-over-year to $48.14 million. In addition, its non-GAAP income per share increased 6.3% year-over-year to $0.17. Also, its adjusted EBITDA came in at $91.74 million, representing an increase of 21.8% year-over-year.
For the quarter ending September 30, 2023, INFA’s EPS and revenue are expected to increase 26.1% and 8% year-over-year to $0.23 and $401.65 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 21.7% to close the last trading session at $19.54.
INFA’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 is ranked first in the Software – SAAS industry. It has an A grade for Growth and Sentiment and a B for Stability. In addition to the POWR Ratings grades I’ve just highlighted, you can see INFA’s Value, Momentum, and Quality ratings here.
MiX Telematics Limited (MIXT)
MIXT and its subsidiaries provide fleet and mobile asset management solutions through a software-as-a-service (SaaS) delivery model. Its offers include MiX Fleet Manager, MiX Asset Manager, Matrix, Beam-e, and MiX Now.
In terms of the trailing-12-month EBITDA margin, MIXT’s 21.34% is 136.3% higher than the 9.03% industry average. Likewise, its 63.06% trailing-12-month gross profit margin is 29.6% higher than the 48.66% industry average. Additionally, its 10.48% trailing-12-month EBIT margin is 134.8% higher than the industry average of 4.47%.
For the fiscal first quarter ended June 30, 2023, MIXT’s total revenues increased 3.7% year-over-year to $36.35 million. Its gross profit rose 6.3% over the prior-year quarter to $21.73 million. The company’s net income attributable to MIXT increased 137.2% year-over-year to $1.61 million.
In addition, its EPS came in at $0.003, representing an increase of 200% year-over-year. Also, its adjusted EBITDA rose 44.3% year-over-year to $8.66 million.
For the quarter ending September 30, 2023, MIXT’s EPS and revenue are expected to increase 333.7% and 2.9% year-over-year to $0.13 and $36.12 million, respectively. Over the past month, the stock has gained 2.2% to close the last trading session at $6.61.
MIXT’s solid prospects are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has an A grade for Value and a B for Growth. Within the same industry, it is ranked first. In total, we rate MIXT on eight different levels. Beyond what we stated above, we also have given MIXT grades for Momentum, Stability, Sentiment, and Quality. Get all the MIXT’s ratings here.
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DOCU shares were trading at $47.44 per share on Tuesday morning, down $0.53 (-1.10%). Year-to-date, DOCU has declined -14.40%, versus a 15.63% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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