Despite the macroeconomic challenges, the software industry is well-positioned for robust growth due to technological advances, digital transformation across various sectors, adoption of data-driven solutions, and substantial investments in cloud technology.
Considering these factors, it could be wise to buy fundamentally strong software stocks: Blackbaud, Inc. (BLKB), Amdocs Limited (DOX), and VMware, Inc. (VMW).
Before diving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
Enterprises are making substantial investments in their digital transformation, and this has directly increased the demand for cloud-based software services like Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS).
These cloud-based software services are provided over the Internet and have replaced traditional software applications. Adoption of such software applications is helping enterprises reduce costs, improve scalability and accessibility, streamline operations, etc.
Additionally, the software industry’s growth is expected to be driven by integrating generative AI tools into existing software products. This is anticipated to drive up consumer spending on software.
The global software market is expected to surge to $1.59 trillion by 2032, growing at a CAGR of 11.9%. Gartner expects software spending to surge 13.7% year-over-year to $922.75 billion this year.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software - Business picks, beginning with the third choice.
Stock #3: Blackbaud, Inc. (BLKB)
BLKB operates internationally as a cloud software solutions provider to non-profits, foundations, companies, education and healthcare institutions, and other social good entities.
On October 3, 2023, BLKB announced the development of Impact Edge™, an AI-powered social impact reporting solution for CSR and social impact teams, consolidating data from various sources securely for increased visibility and storytelling.
Tom Davidson, Executive Vice President at BLKB Corporate Impact Solutions, said, "Impact Edge will bolster resource-constrained corporate impact teams. Leaders will feel the exponential scale it provides as it takes on the numerous and varied data requests they field each day from stakeholders across their organization."
On July 31, 2023, BLKB announced a strategic investment in Momentum, an AI-focused partner. This investment aims to enhance AI capabilities within BLKB solutions, specifically in BLKB’s Raiser's Edge NXT. Momentum's AI-driven fundraising tools have shown success, resulting in increased personalized touchpoints and higher donations for customers.
Mike Gianoni, President and CEO at BLKB, said, "A tremendous opportunity exists for social impact organizations to use AI to address key operational and financial challenges. Blackbaud is actively investing in organic analytics and AI capabilities and partnering with leading AI companies such as Momentum to enable our customers to reach donors at a scale never seen before."
In terms of the trailing-12-month EBITDA margin, BLKB’s 11.73% is 28.2% higher than the 9.15% industry average. Likewise, its 20.26% trailing-12-month levered FCF margin is 177.2% higher than the 7.31% industry average. Additionally, its 5.38% trailing-12-month EBIT margin is 15.5% higher than the 4.66% industry average.
BLKB’s total revenue for the fiscal second quarter ended June 30, 2023, increased 2.3% year-over-year to $271.04 million. Its non-GAAP gross profit increased 7.1% year-over-year to $166.90 million. The company’s non-GAAP income from operations increased 36.1% year-over-year to $74.14 million.
In addition, the company’s non-GAAP net income grew 35.2% year-over-year to $52.60 million. Its earnings per share increased 30.7% year-over-year to $0.98.
Street expects BLKB’s EPS and revenue for the quarter ended September 30, 2023, to increase 40.1% and 5.6% year-over-year to $0.97 and $275.89 million, respectively. It surpassed the consensus EPS estimates in each of the four trailing quarters. Over the past year, the stock has gained 52.1% to close the last trading session at $68.48.
BLKB’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. The POWR ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth, Stability, and Sentiment. It is ranked #14 out of 46 stocks in the B-rated Software - Business industry. To see BLKB’s Value, Momentum, and Quality ratings, click here.
Stock #2: Amdocs Limited (DOX)
DOX provides software and services worldwide. It designs, develops, operates, implements, supports, and markets open and modular cloud portfolios.
On July 3, 2023, DOX announced the completion of its acquisition of TEOCO’s service assurance business, allowing DOX to offer end-to-end service orchestration and ensure service quality for next-generation customer experiences.
Anthony Goonetilleke, Group President of Technology and Head of Strategy at DOX, believes that the integration of TEOCO's service assurance suite into DOX’s offerings will provide customers with a full, end-to-end network view, enabling them to predict, detect, and resolve service and network quality issues quickly and efficiently.
In terms of the trailing-12-month EBIT margin, DOX’s 14.78% is 217.3% higher than the 4.66% industry average. Likewise, its 11.80% trailing-12-month net income margin is 480.1% higher than the 2.03% industry average. Additionally, its 15.90% trailing-12-month Return on Common Equity is significantly higher than the 1.16% industry average.
For the fiscal third quarter ended June 30, 2023, DOX’s revenues increased 6.5% year-over-year to $1.24 billion. Its non-GAAP net income attributable to DOX increased 20.7% year-over-year to $188.92 million. The company’s non-GAAP EPS came in at $1.57, representing an increase of 23.6% year-over-year.
For the quarter ended September 30, 2023, DOX’s EPS and revenue are expected to increase 9.8% and 6.4% year-over-year to $1.42 and $1.24 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 3.6% to close the last trading session at $83.96.
DOX’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 #5 in the same industry. It has a B grade for Stability, Sentiment, and Quality. Click here to see DOX’s Growth, Value, and Momentum ratings.
Stock #1: VMware, Inc. (VMW)
VMW provides diverse software solutions globally, spanning modern applications, cloud management, networking, security, and workspaces. Its offerings encompass multi-cloud solutions, networking solutions like NSX, security solutions with Carbon Black, and workspace solutions, including Workspace ONE.
On August 22, 2023, VMW and NVIDIA Corporation (NVDA) announced the expansion of their partnership to develop the VMW Private AI Foundation. This platform will enable enterprises to customize generative AI models, streamline AI application development, and improve performance and privacy for AI workloads. It will be built on VMW Cloud Foundation and NVDA AI Enterprise software.
VMW’s CEO Raghu Raghuram said, “Generative AI and multi-cloud are the perfect match. Customer data is everywhere — in their data centers, at the edge, and in their clouds. Together with NVIDIA, we’ll empower enterprises to run their generative AI workloads adjacent to their data with confidence while addressing their corporate data privacy, security, and control concerns.”
In terms of the trailing-12-month Return on Common Equity, VMW’s 106.14% is significantly higher than the 1.16% industry average. Likewise, its 39.32% trailing-12-month levered FCF margin is 438.1% higher than the 7.31% industry average. Additionally, its 10.48% trailing-12-month net income margin is 415.1% higher than the 2.03% industry average.
VMW’s total revenue for the fiscal second quarter that ended August 4, 2023, increased 2.2% year-over-year to $3.41 billion. Its non-GAAP operating income increased 1.2% year-over-year to $977 million. The company’s non-GAAP net income increased 13.6% year-over-year to $792 million. In addition, its non-GAAP EPS came in at $1.83, representing an increase of 11.6% year-over-year.
Analysts expect VMW’s EPS and revenue for the quarter ending October 31, 2023, to increase 18.1% and 6.2% year-over-year to $1.74 and $3.41 billion, respectively. Over the past year, the stock has gained 51.4% to close the last trading session at $164.38.
VMW’s POWR Ratings reflect solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #2 in the Software - Business industry. It has an A grade for Quality and a B for Sentiment. To see VMW’s Growth, Value, Momentum, and Stability ratings, click here.
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.
VMW shares were trading at $165.11 per share on Wednesday afternoon, up $0.73 (+0.44%). Year-to-date, VMW has gained 34.50%, versus a 12.03% 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.
Evaluating 3 Exciting Software Stocks for October StockNews.com
