Despite macroeconomic issues, the software industry is predicted to prosper due to high demand for digitization and software solutions across businesses. So, quality tech stocks Microsoft Corporation (MSFT) and F5, Inc. (FFIV) could be wise additions to your portfolio.
According to the most recent Gartner, Inc. forecast, global software spending would hit $911.67 billion in 2023, a 13.5% increase from 2022.
Based on data from Statista, the global software market is predicted to develop at a CAGR of 5.4%, resulting in a market total of $858.10 billion by 2028. In addition, businesses are increasingly relying on software-based cloud solutions for their operations.
Furthermore, the global business software market is expected to increase at an 11.2% CAGR until 2028, reaching $987.61 billion, driven by increasing digitization, cloud technological improvements, and the growing demand to analyze vast amounts of business data.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 20.9% returns over the past three months and 39.1% over the past six months.
Take a detailed look at the stocks mentioned above:
Microsoft Corporation (MSFT)
MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes, Intelligent Cloud, and More Personal Computing.
On June 29, 2023, MSFT and Moody’s Corporation (MCO) established a new strategic alliance to provide next-generation data, analytics, research, collaboration, and risk solutions for financial services and global knowledge workers.
The partnership creates innovative offerings that enhance insights into corporate intelligence and risk assessment, powered by Microsoft AI and anchored by Moody’s proprietary data, analytics, and research, based on a combination of Moody’s robust data and analytical capabilities and the power and scale of Microsoft Azure OpenAI Service.
On June 20, 2023, MSFT and H&R Block (HRB) announced a partnership through which HRB intends to leverage its Azure OpenAI services and leading generative AI technology to build faster and more consultative tax experiences, unleashing higher levels of innovation to inspire even more confidence in Block customers at tax time.
“Every year, millions of Americans turn to H&R Block for the unique expertise, help, and financial confidence that only we provide,” said Alan Lowden, H&R Block Chief Information Officer. “Now we are coupling our unmatched tax expertise with groundbreaking technology from OpenAI and Microsoft to drive even better customer experiences.”
MSFT’s trailing-12-month ROTA and levered ROCE of 18.16% and 38.60% are significantly higher than the industry averages of 0.06% and 0.63%, respectively.
For the third quarter that ended March 31, 2023, MSFT’s revenue increased 7.1% year-over-year to $52.86 billion, and its gross margin increased 8.8% from the year-ago value to $36.73 billion. Its operating income came in at $22.35 billion, up 9.8% year-over-year.
The company’s net income increased 9.4% year-over-year to $18.30 billion, while its EPS was $2.45, an increase of 10.4% from the prior-year period.
The consensus revenue estimate of $235.25 billion for the year ending June 2024 represents a 11.4% increase year-over-year. Its EPS is expected to grow 13.9% year-over-year to $10.96 for the same period. It surpassed EPS estimates in three of four trailing quarters. MSFT’s shares have gained 52.5% over the past six months to close the last trading session at $359.49.
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 has a B for Sentiment, Stability, and Quality. Within the Software – Business industry, it is ranked #12 out of 49 stocks. Click here for the additional POWR Ratings for Growth, Momentum, and Value for MSFT.
F5, Inc. (FFIV)
FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services.
FFIV’s trailing-12-month EV/EBITDA multiple of 9.07 is 39.7% lower than the industry average of 15.05. Its trailing-12-month EV/EBIT multiple of 10.11 is 46.6% lower than the industry average of 18.95.
FFIV’s trailing-12-month ROCE of 12.74% is significantly higher than the 0.63% industry average, while its trailing-12-month ROTA of 6.25% is significantly higher than the industry average of 0.06%.
For the fiscal second quarter ended March 31, 2023, FFIV’s total net revenues increased 10.9% year-over-year to $703.18 million. The company’s non-GAAP net income and non-GAAP EPS came in at $153.63 million and $2.53, respectively. Its gross profit rose 7.8% year-over-year to $547.52 million.
Street expects FFIV’s revenue to increase 4.3% year-over-year to $2.81 billion for the year ending September 2023. Its EPS is expected to grow 8.8% year-over-year to $11.08 for the same period. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained 4.8% to close the last trading session at $149.75.
It’s no surprise that FFIV has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B grade for Value and Growth. It is ranked #1 in the same industry.
Beyond what is stated above, we’ve also rated FFIV for Sentiment, Momentum, and Stability. Get all FFIV ratings here.
What To Do Next?
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MSFT shares were trading at $360.39 per share on Wednesday morning, up $0.90 (+0.25%). Year-to-date, MSFT has gained 50.98%, versus a 20.10% 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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