The software industry’s growth prospects look promising due to increased digitization initiatives, the shift to cloud-based services, the adoption of emerging technologies, and a rapidly evolving business landscape.
I think software stocks Salesforce, Inc. (CRM), ServiceNow, Inc. (NOW), and DocuSign, Inc. (DOCU) are well-positioned to capitalize on the industry tailwinds.
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the software industry’s prospects.
After facing the brunt of interest rate hikes over the past two years, the tech sector, which includes the software industry, experienced a significant resurgence. The Nasdaq Composite, known for its tech-heavy composition, surged 36.4% last year. With the Federal Reserve indicating interest rate cuts this year, the software industry is likely to benefit.
Software has been vital in the transformation of business processes. Advanced software solutions are helping businesses thrive against competition. Gartner predicts that software spending will grow 12.7% year-over-year to $1.03 trillion in 2024.
With the growing popularity of public cloud services, traditional software applications are being replaced by cloud-based software applications as they provide advantages like data ownership, flexibility, scalability, accessibility, security, and privacy. The global Software as a Service (SaaS) market is projected to grow at a CAGR of 18.7% to reach $908.21 billion by 2030.
Moreover, businesses are utilizing business application software to streamline processes, enhance productivity and work efficiency, automate various processes, improve collaboration and business decisions, improve customer services and engagement, boost brand awareness, etc. The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 53.1% returns over the past year.
Let's take a closer look at the fundamentals of the featured stocks.
Salesforce, Inc. (CRM)
CRM is a cloud-based software company. It provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company’s service includes sales to store data, monitor leads and processes, forecast opportunities, gain insights through analytics and relationship intelligence, and service that enables companies to deliver trusted and highly personalized customer service and support at scale.
On September 12, 2023, CRM announced that the Einstein 1 Platform now features advancements for Salesforce Data Cloud and Einstein AI capabilities. The Einstein 1 platform gives companies the ability to safely connect any data to build AI-powered apps with low code and deliver entirely new CRM experiences.
CRM’s Co-Founder and CTO Parker Harris said, “A company’s AI strategy is only as good as its data strategy. We pioneered the metadata framework nearly 25 years ago to seamlessly bridge data across applications. It’s the connective tissue that fuels innovation.”
Now, with Data Cloud and Einstein AI native on the Einstein 1 Platform, companies can easily create AI-powered apps and workflows that supercharge productivity, reduce costs, and deliver amazing customer experiences,” he added.
In terms of the trailing-12-month gross profit margin, CRM’s 74.99% is 52.4% higher than the 49.19% industry average. Likewise, its 24.96% trailing-12-month EBITDA margin is 165.3% higher than the industry average of 9.41%. Furthermore, the stock’s 33.93% trailing-12-month levered FCF margin is 285.9% higher than the industry average of 8.79%.
For the fiscal third quarter, which ended October 31, 2023, CRM’s total revenues increased 11.3% year-over-year to $8.72 billion. Its net cash provided by operating activities increased 389.5% over the prior-year quarter to $1.53 billion. The company’s non-GAAP net income rose 47.9% year-over-year to $2.09 billion. In addition, its non-GAAP EPS came in at $2.11, representing an increase of 50.7% year-over-year.
Street expects CRM’s EPS and revenue for the quarter ending January 31, 2024, to increase 34.8% and 10% year-over-year to $2.26 and $9.22 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 39.1% to close the last trading session at $276.77.
CRM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
Within the Software - Application industry, it is ranked #10 out of 132 stocks. It has a B grade for Growth, Sentiment, and Quality. Click here to see the other CRM ratings for Value, Momentum, and Stability.
ServiceNow, Inc. (NOW)
NOW provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. The company operates the NOW platform for workflow automation, AI, process mining, machine learning, performance analytics etc. It also provides IT service management applications, strategic portfolio management product suites, IT operations management products, etc.
On December 18, 2023, NOW announced that it had signed an agreement to acquire task mining firm UltimateSuite, aligning with its strategy to enhance process mining and intelligent automation across the NOW Platform. The acquisition aims to bolster automation and AI capabilities to help customers identify process bottlenecks and drive stronger operational efficiencies.
NOW’s 7.64% trailing-12-month EBIT margin is 56.5% higher than the industry average of 4.88%. Likewise, its 18.72% trailing-12-month net income margin is 818.6% higher than the industry average of 2.04%. Furthermore, the stock’s 5.03% Return on Total Capital is 86% higher than the industry average of 2.70%.
NOW’s total revenues for the third quarter, which ended September 30, 2023, increased 25% year-over-year to $2.29 billion. Its non-GAAP gross profit increased 24.3% year-over-year to $1.88 billion. The company’s non-GAAP net income grew 51.5% over the prior-year quarter to $603 million. Also, its non-GAAP net income per share came in at $2.92, representing an increase of 49% year-over-year.
For the quarter ended December 31, 2023, NOW’s revenue and EPS are expected to increase 23.8% and 21.9% year-over-year to $2.40 billion and $2.78, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive. Over the past year, the stock has gained 70.3% to close the last trading session at $753.42.
NOW’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It has an A grade for Growth and a B for Quality. Within the B-rated Software – Business industry, it is ranked #15 of 43 stocks. In addition to the POWR Ratings stated above, one can access NOW’s additional ratings for Value, Momentum, Stability, and Sentiment here.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers a DocuSign e-signature solution that enables the sending and signing of agreements on various devices. It provides Contract Lifecycle Management (CLM), Gen for Salesforce, Identify, Standards-Based Signatures, and Monitor.
On November 30, 2023, DOCU announced it achieved StateRAMP authorization, helping deepen its commitment to offer state and local governments access to seamless and secure agreement experiences.
DOCU’s Chief Information Security Officer Kurt Sauer said, “State and local governments need technology solutions that help them serve their constituents quickly and efficiently while also maintaining a strong security posture that protects their data. We’re thrilled to have two of our core products be StateRAMP Authorized to help state and local governments provide vital services in a seamless and trusted way.”
In terms of the trailing-12-month levered FCF margin, DOCU’s 36.42% is 314.1% higher than the 8.79% industry average. Likewise, its 79.38% trailing-12-month gross profit margin is 61.4% higher than the 49.19% industry average. Furthermore, its 7.20% trailing-12-month Return on Common Equity is 253.3% higher than the 2.04% industry average.
DOCU’s total revenues for the third quarter ended October 31, 2023, rose 8.5% year-over-year to $700.42 million. Its net cash provided by operating activities increased 402.8% over the prior-year quarter to $264.18 million. Its non-GAAP income from operations increased 27.4% year-over-year to $187.41 million.
Additionally, its non-GAAP net income rose 38.7% year-over-year to $163.80 million. Also, its non-GAAP EPS came in at $0.79, representing an increase of 38.6% year-over-year.
Street expects DOCU’s revenues for the quarter ending January 31, 2024, to increase 6% year-over-year to $698.96 million. Its EPS for fiscal 2024 is expected to increase 41.5% year-over-year to $2.87. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 55.5% to close the last trading session at $62.33.
DOCU’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #5 out of 21 stocks in the A-rated Software - SAAS industry. It has an A grade for Growth and a B for Quality. Click here to see DOCU’s Value, Momentum, Stability, and Sentiment ratings.
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 $278.97 per share on Wednesday morning, up $2.20 (+0.79%). Year-to-date, CRM has gained 6.02%, versus a 2.51% 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.
CRM, NOW, DOCU: Solid 2024 Buys or Not? StockNews.com
