The software industry is expected to thrive as a result of cloud adoption, demand for digital transformation and investments in artificial intelligence and machine learning.
Given the industry’s growth prospects, investors could consider buying fundamentally sound software stocks Trend Micro Incorporated (TMICY), Yext, Inc. (YEXT) and Vimeo, Inc. (VMEO) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
According to Gartner, the software spending is expected to grow by 13.8% in 2024. Organizations are investing more in software solutions to streamline processes and leverage emerging technologies in order to improve operational efficiency and customer experience.
Also, the global Software as a Service (SaaS) industry is expected to reach $908.21 billion by 2030, growing at an 18.7% CAGR. Public and hybrid cloud-based solutions, integration, and centralized data-driven analytics are driving growth in the Software as a Service (SaaS) market.
In addition, the global software market is expected to reach $1.79 trillion by 2032, growing at a CAGR of 11.7%. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 14.9% returns over the past six months and 14.1% over the past three months.
Considering these conducive trends, let’s look at the fundamentals of the three software stocks.
Trend Micro Incorporated (TMICY)
TMICY, based in Japan, develops and sells security software for computers and the Internet. It offers hybrid cloud security, intrusion prevention, cloud migration, network defense, security for small and medium-sized enterprises, endpoint security, and 5G security solutions.
TMICY’s forward EV/EBITDA multiple of 13.62 is 12.7% lower than the industry average of 15.60.
TMICY’s trailing-12-month net income margin of 5.77% is 162.8% higher than the industry average of 2.20%. Its trailing-12-month ROTA of 2.98% is significantly higher than the industry average of 0.26%.
TMICY’s net sales for the nine months ended September 30, 2023, increased 13.3% from the previous year’s period to ¥183.73 billion ($1.29 billion), while its operating income came in at ¥29.61 billion ($208.10 million), up 14.5% year-over-year.
Additionally, net income attributable to owners of the parent amounted to ¥12.81 billion ($89.97 million) and ¥93.26 per share in the same period.
Analysts expect TMICY’s revenue to increase 179.2% year-over-year to $1.71 billion for the year ending December 2023. Its EPS is expected to come in at $1.01 for the same period. The stock has gained 34.9% over the past three months to close the last trading session at $54.86.
TMICY’s POWR Ratings reflect this promising outlook. The stock 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.
TMICY also has an A grade for Stability and a B for Growth and Quality. It is ranked #2 out of 23 stocks in the Software - Security industry. Click here for the additional POWR Ratings for Sentiment, Value and Momentum for TMICY.
Yext, Inc. (YEXT)
YEXT offers a cloud-based platform enabling businesses to control and update their information across various online platforms, helping them answer consumer questions and manage online reviews. The company primarily serves the healthcare, retail, and financial services industries.
YEXT’s forward non-GAAP P/E multiple of 18.70 is 22.2% lower than the industry average of 24.03. Its forward EV/Sales multiple of 1.54% is 46.4% lower than the industry average of 2.88.
YEXT’s trailing-12-month gross profit margin of 77.22% is 58.7% higher than the industry average of 48.67%. Its trailing-12-month levered FCF margin of 14.60% is 73.6% higher than the industry average of 8.41%.
During the fiscal 2024 third quarter that ended October 31, 2023, YEXT’s revenue increased marginally year-over-year to $101.16 million. Its adjusted EBITDA grew 90.7% from the year-ago quarter to $13.51 million.
Furthermore, YEXT’s non-GAAP net income attributable to common stockholders stood at $11.29 million and $0.09 per share up 349.4% and 350% year-over-year, respectively.
The consensus revenue estimate of $403.44 million for the year ending January 2024 represents a marginal increase year-over-year. Its EPS is expected to come in at $0.30 for the same period. YEXT’s shares have lost 11.1% over the past three months to close the last trading session at $5.61.
YEXT’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 first among the 43 stocks in the B-rated Software - Business industry. It has an A grade for Growth and a B for Value, Sentiment and Quality. To see additional YEXT’s ratings for Stability and Momentum, click here.
Vimeo, Inc. (VMEO)
VMEO provides video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
VMEO’s forward EV/Sales multiple of 0.89 is 50.1% lower than the industry average of 1.78.
VMEO’s trailing-12-month gross profit margin of 77.77% is 58.3% higher than the 49.13% industry average. Its trailing-12-month ROTA of 1.40% is 14.2% higher than the 1.22% industry average.
For the fiscal third quarter ended September 30, 2023, VMEO’s revenue stood at $106.25 million. Its non-GAAP gross profit rose 1.8% year-over-year to $84.70 million. The company’s adjusted EBITDA increased 509.5% over the prior-year quarter to $12.80 million.
Also, its net earnings came in at $8.46 million, compared to a net loss of $21.42 million. The company’s EPS stood at $0.05, compared to a loss per share of $0.13 in the prior year’s quarter.
Street expects VMEO’ revenue to increase marginally year-over-year to $418.89 million for the year ending December 2024. The stock has gained 12.2% year-to-date to close the last trading session at $3.85.
It’s no surprise that VMEO has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Value, Sentiment and Quality. It is ranked first among 23 stocks in the A-rated Software - SAAS industry.
Beyond what is stated above, we’ve also rated VMEO for Stability, Growth and Momentum. Get all VMEO ratings here.
What To Do Next?
Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:
3 Stocks to DOUBLE This Year >
TMICY shares were trading at $54.86 per share on Monday morning, down $1.01 (-1.80%). Year-to-date, TMICY has gained 18.62%, versus a 24.64% 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.
Evaluating 3 Software Stocks for 2024 Success StockNews.com
