It has been a banner year for application software stocks.
Application software is designed to carry out a specific task other than one related to a computer’s own operation.
The Morningstar US Software Application Index has soared 35.6% year to date through Aug. 29. That far exceeds the 16.3% gain for the Morningstar US Market Index.
Despite that jump for the application software sector, “there are still quality stocks … trading at appealing discounts for long-term investors,” according to a Morningstar report.
“The software industry has been undergoing some meaningful secular changes in recent years," wrote Morningstar analyst Dan Romanoff. “A transformational wave of modernization occurred within the enterprise. All these trends bode well for long-term software growth.”
Here is a list of software application stocks that earned a Morningstar moat rating of narrow or wide and are undervalued compared to the firm’s fair value estimates.
A wide moat means Morningstar sees the company enjoying competitive advantages for at least 20 years, and a narrow moat means competitive advantages for at least 10 years.
The list goes in order of valuation, as of Aug. 29, with the most undervalued stock first.
Ride-Sharing, Document Signing Stocks
1. Lyft (LYFT) -), the ride hailing company
Morningstar moat rating: narrow. Morningstar fair value estimate: $25. Friday closing quote: $10.80.
“Our main takeaway from Lyft’s second-quarter results is that while the firm lowered prices to be more in line with the market, its network effect did not weaken much,” wrote Morningstar analyst Ali Mogharabi. “The number of riders continued to grow.”
2. DocuSign (DOCU) -), the document signing company
Morningstar moat rating: narrow. Morningstar fair value estimate: $74. Friday’s closing quote: $50.21.
“DocuSign reported solid second-quarter results” Romanoff wrote. “Operating margin remains strong as a result of recent headcount reductions.”
To be sure, while the stock is “attractive for patient investors, we continue to prefer some of our wide-moat names, as macroeconomic uncertainty persists,” he said.
3. Uber Technologies (UBER) -), the ride hailing company
Morningstar moat rating: narrow. Morningstar fair value estimate: $68. Friday’s closing quote: $47.24.
4. SS&C Technologies (SSNC) -), which serves mostly the financial services and health sectors
Morningstar moat rating: narrow. Morningstar fair value estimate: $75. Friday’s closing quote: $55.75.
5. Zoom Video Communications (ZM) -), the video conferencing company
Morningstar moat rating: narrow. Morningstar fair value estimate: $89. Friday’s closing quote: $72.06.
Payroll, Human Resources, Municipal Governments
6. Paycom Software (PAYC) -), a payroll/human resources software provider
Morningstar moat rating: narrow. Morningstar fair value estimate: $370. Friday’s closing quote: $284.31.
7. Datadog (DDOG) -), whose software focuses on analyzing machine data
Morningstar moat rating: narrow. Morningstar fair value estimate: $115. Friday’s closing quote: $97.66.
8. Tyler Technologies (TYL) -), which provides software to municipal governments
Morningstar moat rating: wide. Morningstar fair value estimate: $475. Friday’s closing quote: $392.17.
9. Autodesk (ADSK) -), whose software serves architecture, engineering and other sectors.
Morningstar moat rating: wide. Morningstar fair value estimate: $247. Friday’s closing quote: $219.19.
