The software industry is set for substantial growth owing to enterprises' escalating dependence on software solutions. Technological advancements are further fortifying the sector, promoting innovation, streamlining development processes, and enabling immersive, interconnected experiences.
With a positive long-term outlook, acquiring shares of Pegasystems Inc. (PEGA) seems wise. In a similar vein, watching Palantir Technologies Inc. (PLTR) and ePlus inc. (PLUS) in anticipation of robust returns could be prudent. Prior to delving into the highlighted stocks, let us examine the industry dynamics.
The software industry has undergone significant transformative changes in recent years, driven by emerging technology trends. Edge computing, low-code development, and cybersecurity are leading a revolution, reshaping how software is developed, deployed, and utilized.
Artificial Intelligence (AI) and Machine Learning (ML) have evolved beyond mere buzzwords, emerging as essential elements within software applications. These algorithms play crucial roles in predictive analytics, personalization, automation, and enhancing user experiences and decision-making processes across various sectors.
A prominent trend involves software development firms' widespread embrace of cloud-native solutions. These solutions empower application development, team management, and seamless communication. They seamlessly integrate across diverse servers, facilitating streamlined operations for organizations with unparalleled efficiency.
In 2024, global expenditures on cloud computing infrastructure are projected to exceed $1 trillion for the first time. Additionally, large organizations' adoption of a multi-cloud strategy involving the procurement of cloud services from various providers is expected to increase from 76% to 85% by 2024.
Simultaneously, Gartner, Inc. (IT) forecasts a substantial 20.4% increase in global end-user spending on public cloud services to $678.80 billion in 2024, up from $563.60 billion in 2023. Moreover, it predicts that more than 70% of enterprises will use industry cloud platforms to accelerate their business initiatives, compared to less than 15% in 2023.
Global IT spending is anticipated to reach $5.10 trillion in 2024, reflecting an 8% year-over-year increase. Looking ahead, Spherical Insights projects the global enterprise software market to grow at a CAGR of 11% and reach $519.88 billion by 2030. In light of these encouraging trends, let’s look at the fundamentals of the featured software stocks.
Stock to Buy:
Pegasystems Inc. (PEGA)
PEGA develops and supports advanced enterprise software applications, including the intelligent automation software Pega Platform and the unified customer engagement and digital process automation platform, Pega Infinity. The company also delivers specialized customer engagement applications to enhance client processes and workflows.
On October 11, PEGA unveiled the Pega Financial Crime and Alerts Investigation Management Accelerator. The solution positions PEGA to capitalize on the burgeoning demand from financial institutions, addressing the surge in risk alerts and enhancing the efficiency of investigations. This could fortify PEGA's growth trajectory.
On September 26, PEGA announced significant enhancements in Pega Smart Dispute™ to empower retail banks in streamlining labor-intensive chargeback processes. The strategic update positions PEGA to meet the evolving needs of retail banking, enhancing operational efficiency and potentially contributing to the company's overall growth.
PEGA’s trailing-12-month gross profit margin of 71.94% is 47.8% higher than the industry average of 48.67%. Its trailing-12-month levered FCF margin of 13.34% is 58.7% higher than the industry average of 8.41%. Moreover, the stock’s trailing-12-month asset turnover ratio of 1.13x is 83.5% higher than the 0.62x industry average.
For the third quarter that ended September 30, 2023, PEGA’s total revenue increased 23.6% year-over-year to $334.64 million. Its gross profit grew 35.6% from the year-ago value to $240.88 million.
Additionally, the company’s non-GAAP net income and non-GAAP EPS amounted to $37.60 million and $0.44, compared to a non-GAAP net loss and non-GAAP net loss per share of $27.50 million and $0.34 in the previous year’s quarter, respectively.
For the fiscal year ending December 2023, PEGA’s revenue is estimated to increase 4.3% year-over-year to $1.37 billion. Likewise, the company’s EPS for the current year is expected to come in at $1.70, up 136.3% from the prior year. Shares of PEGA have gained 48.7% year-to-date to close the last trading session at $51.45.
PEGA’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
PEGA has an A grade for Growth and a B for Value and Sentiment. It is ranked #5 out of 43 stocks within the B-rated Software - Business industry.
In addition to the POWR Ratings I’ve highlighted, you can see PEGA’s Momentum, Quality and Stability ratings here.
Stocks to Hold:
Palantir Technologies Inc. (PLTR)
PLTR constructs and deploys software platforms tailored for the intelligence community, aiding counterterrorism investigations and operations. Its flagship product, Palantir Gotham, empowers users to uncover concealed patterns in datasets, facilitating strategic planning and real-world responses to identified threats within the platform.
On December 13, PLTR announced the renewal of its partnership with UniCredit S.p.A. (UNCRY). The deployment of Palantir Foundry to expedite UNCRY’s digital transformation is expected to enhance operational efficiency significantly, fostering robust growth and strengthening PLTR's financial standing in the market.
On October 4, the company unveiled a pivotal advancement in its strategic alliance with PwC. The collaboration integrates PLTR's cutting-edge AI capabilities with PwC's industry expertise, enabling clients to unlock value through data and AI-driven operations.
Leveraging Palantir Foundry and the Artificial Intelligence Platform (AIP), PwC will assist clients in identifying and implementing strategies for value creation and operational transformation. This alliance could position PLTR at the forefront of innovative solutions, enhancing its growth potential and market influence.
PLTR’s trailing-12-month EBITDA margin of 3.25% is 65.5% lower than the industry average of 9.42%. In addition, the stock’s trailing-12-month CAPEX/Sales of 0.71% is 69.4% lower than the industry average of 2.33%. However, its trailing-12-month gross profit margin of 79.92% is 64.2% higher than the 48.67% industry average.
PLTR’s adjusted income from operations increased 101% year-over-year to $163.27 million for the third quarter that ended September 30, 2023. Its adjusted EBITDA grew 97.2% from the year-ago value to $171.94 million.
In addition, adjusted net income attributable to common stockholders stood at $155.02 million, up 864.3% year-over-year, whereas adjusted EPS increased 600% from the prior year’s period to $0.07.
The consensus revenue estimate of $2.22 billion for the fiscal year ending December 2023 reflects a 16.5% year-over-year improvement. Similarly, the consensus EPS estimate of $0.25 for the ongoing year exhibits a 312.4% rise from the previous year. Also, the company surpassed the consensus revenue and EPS estimates in three of the four trailing quarters.
The stock has gained 179.7% year-to-date to close the last trading session at $17.87.
PLTR’s prospects are reflected in its POWR Ratings. The stock has an overall rating of C, equating to Neutral in our proprietary rating system.
It also has an A grade for Quality and a C for Growth, Momentum and Sentiment. It is ranked #18 out of 22 stocks within the A-rated Software - SAAS industry. Click here to access the additional PLTR ratings (Value and Stability).
ePlus inc. (PLUS)
PLUS delivers comprehensive information technology (IT) solutions. Its Technology segment provides hardware, software (perpetual and subscription), maintenance, software assurance, and in-house and outsourced professional and managed services. The Financing segment is involved in facilitating financing arrangements.
On October 25, PLUS announced that its subsidiary, ePlus Technology, Inc., had joined the Fiber Broadband Association (FBA). This positions PLUS to capitalize on the FBA's mission, accelerating fiber broadband deployment. The enhanced connectivity can foster economic and societal benefits, potentially boosting PLUS' growth prospects.
On October 4, PLUS unveiled "Compromise Nothing," a groundbreaking program shifting the paradigm in security management. The initiative encourages organizations to address security comprehensively, transcending individual threats or isolated solutions. The aim is to enhance business resiliency and attain desired outcomes, reflecting PLUS's commitment to a holistic approach to navigating security challenges.
PLUS’ trailing-12-month gross profit margin of 24.50% is 49.7% lower than the industry average of 48.67%. Its trailing-12-month levered FCF margin of 1.50% is 82.1% lower than the industry average of 8.41%. However, the stock’s trailing-12-month asset turnover ratio of 1.52x is 146.5% higher than the 0.62x industry average.
For the second quarter that ended September 30, 2023, PLUS’ total net sales increased 19% year-over-year to $587.61 million. Its adjusted EBITDA grew 6.5% from the year-ago value to $53.57 million.
Furthermore, the company’s non-GAAP net earnings and non-GAAP net earnings per common share rose 8.1% and 8.5% from the prior year’s period to $37.17 million and $1.40, respectively.
Analysts expect PLUS’ revenue to increase 10.3% year-over-year to $2.28 billion for the fiscal year ending March 2024. Likewise, the company’s revenue for the current year is expected to rise 5.3% from the prior year to $5.29. Moreover, PLUS topped the consensus revenue and EPS estimates in all of the trailing four quarters.
The stock has gained 64.5% year-to-date, closing the last trading session at $73.73.
PLUS’ outlook is apparent in its POWR Ratings. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system.
It also has a B grade for Value and Sentiment and a C for Growth and Momentum. It is ranked #46 out of 132 stocks within the Software - Application industry.
Click here to access additional PLUS ratings (Quality and Stability).
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.
PLTR shares were trading at $18.00 per share on Thursday morning, up $0.13 (+0.73%). Year-to-date, PLTR has gained 180.37%, versus a 24.70% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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