The tech industry faced several challenges last year due to high inflation and the Fed’s aggressive interest rate hikes. With inflation continuing to ease and the end of rate hikes in sight, tech stocks have rebounded sharply this year, with the tech-heavy Nasdaq Composite rising 37.2% year-to-date.
To that end, it could be wise to buy fundamentally strong software stocks Karooooo Ltd. (KARO), IBEX Limited (IBEX), and eGain Corporation (EGAN).
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
Gone are the days of traditional software applications which needed to be installed and run on a device or devices. With the advancement of technology, Software-as-a-Service (SaaS) has replaced traditional software applications.
SaaS is a software licensing and delivery model under which applications are provided to users on a subscription basis and are centrally hosted. Users or subscribers must access the applications over the web or the cloud. According to Gartner, SaaS spending is expected to rise 17.9% year-over-year to $197.29 billion.
With enterprises investing heavily in digital transformation and cloud computing, the demand for cloud-based software services such as SaaS and Infrastructure-as-a-Service (IaaS) is rising. Moreover, the software industry is well-positioned to gain from the advancements in emerging technologies like artificial intelligence (AI), the Internet of Things (IoT), blockchain, etc.
Investors’ interest in software stocks is evident from the iShares Expanded Tech – Software Sector ETF’s (IGV) 45.3% returns over the past nine months. Software spending is expected to grow 12.3% year-over-year to $891.37 billion in 2023.
Let’s take a closer look at their fundamentals.
Karooooo Ltd. (KARO)
Headquartered in Singapore, KARO provides mobility software-as-a-service (SaaS) platforms for connected vehicles in South Africa, the rest of Africa, Europe, the Asia-Pacific, the Middle East, and the United States. The company offers Fleet Telematics, LiveVision, MiFleet, and Karooooo Logistics.
In terms of the trailing-12-month EBITDA margin, KARO’s 37.74% is 340.6% higher than the 8.57% industry average. Likewise, its 64.79% trailing-12-month gross profit margin is 33.2% higher than the 48.66% industry average. Furthermore, its 1.03x trailing-12-month asset turnover ratio is 69% higher than the 0.61x industry average.
KARO’s revenue for the first quarter ended May 31, 2023, rose 24.4% year-over-year to ZAR996.79 million ($55.67 million). Its gross profit rose 18.2% year-over-year to ZAR626.54 million ($34.99 million). The company’s profit for the period increased 3.6% over the prior-year quarter to ZAR161.95 million ($9.05 million).
Its EPS came in at ZAR5.09, representing an increase of 2.6% year-over-year. Additionally, its adjusted EBITDA rose 9.2% year-over-year to ZAR386.12 million ($21.56 million).
Street expects KARO’s EPS and revenue for the quarter ending August 31, 2023, to increase 13.7% and 11% year-over-year to $0.31 and $52.10 million, respectively. Over the past year, the stock has gained 12.4% to close the last trading session at $24.40.
KARO’s POWR Ratings reflect strong prospects. It has an overall rating of A, translating to a Strong 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 135 stocks in the Software - Application industry. It has an A grade for Stability and Quality and a B for Value and Sentiment. Click here to see KARO’s ratings for Growth and Momentum.
IBEX Limited (IBEX)
IBEX provides end-to-end technology-enabled customer lifecycle experience solutions. The company’s products and services portfolio includes offers of customer service, technical support, revenue generation, and other value-added outsourced back-office services. As well as customer acquisition solution that comprises digital marketing, e-commerce technology, and platform solutions.
In terms of the trailing-12-month gross profit margin, IBEX’s 30.74% is 3.1% higher than the 29.83% industry average. Likewise, its 8.60% trailing-12-month levered FCF margin is 63.9% higher than the 5.24% industry average. Additionally, its 1.79x trailing-12-month asset turnover ratio is 123.8% higher than the industry average of 0.80x.
For the third quarter ended March 31, 2023, IBEX’s total revenues increased 1.9% year-over-year to $131.60 million. Its income from operations rose 161.3% year-over-year to $15.38 million. The company’s net cash inflow from operating activities increased 43.2% over the prior-year quarter to $17.18 million.
Its adjusted EBITDA rose 29.6% year-over-year to $24.36 million. Also, its adjusted net income increased 5.6% year-over-year to $11.30 million. Additionally, its adjusted EPS came in at $0.59, representing an increase of 3.5% year-over-year.
For the quarter ended June 30, 2023, IBEX’s EPS and revenue are expected to increase 13.9% and 1.7% year-over-year to $0.49 and $125.86 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 2.5% to close the last trading session at $20.05.
IBEX’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Sentiment and a B for Growth, Value, Stability, and Quality. It is ranked #2 in the same industry. To see IBEX’s rating for Momentum, click here.
eGain Corporation (EGAN)
EGAN specializes in developing, licensing, implementing, and supporting customer service infrastructure software solutions. Their main offering is the Knowledge Hub, a unified solution that automates, augments, and orchestrates customer engagement. EGAN provides subscription services for cloud-based access to their software and offers professional services.
On June 27, 2023, EGAN launched eGain Innovation in 30 Days for Generative AI, a risk-free pilot program to help businesses adopt generative AI quickly and easily. Experience generative AI for two weeks in a production setting with no cost or commitment.
Ashu Roy, CEO at EGAN, said, “This offer will focus on a compelling use-case for generative AI with a novel, risk-free approach to innovate with it boldly.”
In terms of the trailing-12-month gross profit margin, EGAN’s 71.89% is 47.8% higher than the 48.66% industry average. Likewise, its 0.83x trailing-12-month asset turnover ratio is 36.7% higher than the 0.61x industry average. Additionally, its 14.05% trailing-12-month levered FCF margin is 104.1% higher than the industry average of 6.89%.
For the fiscal third quarter ended March 31, 2023, EGAN’s total revenue came in at $23.01 million. Its non-GAAP gross profit came in at $15.79 million. Its non-GAAP net income came in at $1.08 million. In addition, its non-GAAP EPS came in at $0.03.
For the quarter ended June 30, 2023, EGAN’s EPS and revenue are expected to increase 83.3% and 0.9% year-over-year to $0.06 and $23.71 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained marginally to close the last trading session at $7.21.
EGAN’s strong fundamentals 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, Sentiment, and Quality and a B for Stability. Within the Software – Application industry, it is ranked first. To see EGAN’s ratings for Growth & Momentum, click here.
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KARO shares were trading at $24.23 per share on Thursday afternoon, down $0.17 (-0.70%). Year-to-date, KARO has gained 7.69%, versus a 19.57% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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