Despite macroeconomic challenges, the software industry is poised for long-term growth due to technological advancements and increasing demand for software solutions.
Given the industry’s growth prospects, investors could consider buying fundamentally sound software stocks Microsoft Corporation (MSFT), Salesforce Inc. (CRM) and GoDaddy Inc. (GDDY) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
The software market in the U.S. is predicted to grow at a 4.2% CAGR until 2028, resulting in a market volume of $414.70 billion. This expansion can be attributed to a variety of factors, including increased demand for cloud-based software solutions, advancements in AI and ML technologies, and the increasing adoption of software-as-a-service (SaaS) models by businesses across industries.
Also, the global business software services market is predicted to grow at a 12.5% CAGR until 2032, reaching $1.36 trillion. The primary industry drivers boosting market expansion include an ever-increasing need for better operational effectiveness and transparency in organizations and businesses.
Moreover, investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 17.2% returns over the past six months.
Considering these conducive trends, let’s look at the fundamentals of the three software stocks.
Microsoft Corporation (MSFT)
MSFT is a global tech behemoth known for products like Microsoft Office, Windows, and Azure. It offers a range of services, devices, and solutions in areas like productivity, cloud computing, and personal computing. The company sells its products through various channels worldwide.
On December 19, 2023, MSFT and Elevat Inc (Elevat) are pleased to announce a strategic technical partnership that will transform the Internet of Things (IoT) environment. This collaboration, which will leverage Elevat Machine Connect and Microsoft Azure Edge, promises to speed digital transformation and provide enterprises with unmatched connection and insights.
On December 11, 2023, MSFT and The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) launched a new cooperation to address AI's impact on workers, with a focus on discussing AI trends, incorporating worker perspectives, and changing policies.
MSFT’s trailing-12-month net income margin of 35.31% is significantly higher than the industry average of 2.35%. Its trailing-12-month ROCE of 39.11% is significantly higher than the industry average of 1.13%.
During the first quarter, which ended September 30, 2023, MSFT reported total revenue of $56.52 billion, up 12.8% year-over-year. The company’s operating income and net income increased 25% and 27% from the prior year’s quarter to $26.90 billion and $22.29 billion, respectively. Its EPS increased 27% from the previous year’s quarter to $2.99.
Analysts expect MSFT’s revenue to increase 14.6% year-over-year to $242.95 billion for the year ending June 2024. Its EPS is expected to grow 14.2% year-over-year to $11.20 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 55.2% over the past year to close the last trading session at $373.26.
MSFT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MSFT also has an A grade for Sentiment and a B for Stability and Quality. It is ranked #10 out of 43 stocks in the B-rated Software - Business industry. Click here for the additional POWR Ratings for Growth, Value and Momentum for MSFT.
Salesforce Inc. (CRM)
CRM is a global CRM technology provider that helps companies manage customer relationships and offer services for sales, data management, customer support, and more, along with a platform for building apps.
On November 27, 2023, CRM and Amazon Web Services (AWS), an Amazon.com, Inc. (AMZN) company, announced a significant expansion of their long-standing global strategic partnership, deepening product integrations across data and artificial intelligence (AI), and offering select Salesforce products on the AWS Marketplace for the first time.
Customers will be able to seamlessly and securely manage their data across Salesforce and AWS, as well as safely and responsibly incorporate the newest generative AI technologies into their apps and workflows, thanks to the expanded agreement.
CRM’s trailing-12-month levered FCF margin of 33.93% is 297.8% higher than the industry average of 8.53%. Its trailing-12-month ROTA of 2.85% is 825.9% higher than the industry average of 0.31%.
During the fiscal third quarter that ended October 31, 2023, CRM’s total revenues came in at $8.72 billion, up 11.3% year-over-year, while its gross profit stood at $6.57 billion, up 14.2% from the year-ago quarter.
The company’s non-GAAP net income and net income per share rose 47.9% and 50.7% year-over-year to $2.07 billion and $2.11, respectively.
The consensus revenue estimate of $34.80 billion for the year ending January 2024 represents a 11% increase year-over-year. Its EPS is expected to grow 56.4% year-over-year to $8.19 for the same period. It surpassed EPS estimates in all four trailing quarters. CRM’s shares have gained 104.9% over the past year to close the last trading session at $264.34.
CRM’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 13 out of 131 stocks in the Software - Application industry. It has an A grade for Sentiment and a B for Growth and Quality. To see additional CRM’s ratings for Stability, Value and Momentum, click here.
GoDaddy Inc. (GDDY)
GDDY designs and develops cloud-based products and operates through two segments: Applications and Commerce and Core Platform. It offers applications products, including Websites + Marketing, a mobile-optimized online tool that enables customers to build websites and e-commerce-enabled online stores.
GDDY’s trailing-12-month ROTA of 5.45% is significantly higher than the 0.26% industry average. Its trailing-12-month ROTC of 10.31% is 283.1% higher than the 2.69% industry average.
For the fiscal third quarter ended September 30, 2023, GDDY’s total revenue amounted to $1.07 billion, up 3.5% year-over-year. Its net income and EPS rose 31% and 41.3% over the prior-year quarter to $130.70 million and $0.89, respectively.
Also, its non-GAAP unlevered free cash flow increased 7.9% from the year-ago quarter to $320.10 million, and its non-GAAP normalized EBITDA grew 12.7% year-over-year to $296 million.
Street expects GDDY’s revenue to increase 4.1% year-over-year to 4.26 billion for the year ending December 2023. Its EPS is expected to grow 24.2% year-over-year to $2.72 for the same period. The stock has gained 46.9% over the past year to close the last trading session at $107.41.
It’s no surprise that GDDY has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Growth, Sentiment and Quality. It is ranked #9 out of 43 stocks in the Software - Business industry.
Beyond what is stated above, we’ve also rated GDDY for Stability, Value and Momentum. Get all GDDY ratings here.
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MSFT shares were trading at $373.93 per share on Wednesday morning, up $0.67 (+0.18%). Year-to-date, MSFT has gained 57.30%, versus a 25.98% 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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