The software industry is benefiting from the growing shift to cloud-based services, automation in various sectors, increasing cyber security concerns, and the widespread use of data. Moreover, the growing adoption of advanced technologies is also boosting the prospects of the software industry.
Amid this backdrop, it could be wise to consider buying fundamentally strong software stocks GoDaddy Inc. (GDDY), Smartsheet Inc. (SMAR), and Tenable Holdings, Inc. (TENB).
Before diving deeper into the fundamentals of these stocks, let’s understand the software industry’s landscape better.
The digital transformation trend is spurring increased investments into advanced software solutions, emphasizing digitization, process automation, and data analytics for enhanced business insights and efficiency.
Gartner has projected worldwide IT spending to grow 6.8% year-over-year to $5 trillion in 2024. Moreover, spending on software this year is projected to increase 12.7% over the prior year to $1.03 trillion. Software spending has grown significantly due to the rise of the public cloud. The global cloud market is projected to rise from $626.40 billion in 2023 to $727.90 billion in 2024, marking a 16.2% year-over-year increase.
Due to the rising popularity of public cloud services, businesses are investing heavily in cloud-based services like Software-as-a-Service (SaaS). Cloud-based software applications are a big hit with enterprises due to their asset-light nature, scalability, affordability, and security.
The global SaaS market is projected to grow at a CAGR of 18.7% to reach $908.21 billion by 2030. Furthermore, the integration of generative AI into these software applications is expected to drive further demand for software applications.
Additionally, business software applications have been gaining popularity as they help enhance productivity and efficiency, improve customer management, analyze essential data, streamline processes, etc. The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.
Furthermore, the growing incidences of cyber-attacks on businesses have put the focus on software security. The software security sector remains well-positioned for expansion owing to the rise in ransomware attacks, data breaches, etc. Cybersecurity market revenues are projected to grow at a CAGR of 10.6% to reach $273.60 billion by 2028.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software ETF’s (IGV) 49.1% returns over the past year.
Now, let's take a closer look at their fundamentals.
GoDaddy Inc. (GDDY)
GDDY engages in the design and development of cloud-based products in the United States and internationally. It operates through two segments: Applications and Commerce and Core Platform.
In terms of the trailing-12-month levered FCF margin, GDDY’s 18.82% is 112% higher than the 8.88% industry average. Likewise, its 63.02% trailing-12-month gross profit margin is 29.4% higher than the 48.69% industry average. Furthermore, its 13.22% trailing-12-month EBIT margin is 185.2% higher than the 4.63% industry average.
GDDY’s total revenues for the third quarter ended September 30, 2023, rose 3.5% year-over-year to $1.07 billion. Its net income and EPS rose 31% and 41.3% over the prior-year quarter to $130.70 million and $0.89, respectively. Additionally, its non-GAAP normalized EBITDA rose 12.7% year-over-year to $296 million.
Street expects GDDY’s EPS and revenues for the quarter ended December 31, 2023, to increase 67.7% and 6% year-over-year to $1.04 and $1.10 billion, respectively. Over the past three months, the stock has gained 45.7% to close the last trading session at $106.66.
GDDY’s POWR Ratings reflect strong prospects. It has an overall rating of B, which translates to a Buy in our proprietary system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It is ranked #7 out of 43 stocks in the B-rated Software - Business industry. It has a B grade for Growth, Sentiment, and Quality. Click here to see GDDY’s Value, Momentum, and Stability ratings.
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations.
On October 23, 2023, SMAR introduced the Smartsheet Region in Australia, serving the Asia-Pacific-Japan (APJ) market. This expansion enables customers, including Fox Sports Australia and Wine Australia, to host their data onshore, meeting data residency requirements. The new region ensures enterprise-grade availability, scale, and compliance with various frameworks and regulatory standards.
In terms of the trailing-12-month levered FCF margin, SMAR’s 26.69% is 200.6% higher than the 8.88% industry average. Likewise, its 79.79% trailing-12-month gross profit margin is 63.9% higher than the 48.69% industry average. Additionally, its 0.82x trailing-12-month asset turnover ratio is 34% higher than the industry average of 0.62x.
For the third quarter, which ended October 31, 2023, SMAR’s total revenues rose 23.2% year-over-year to $245.92 million. Its non-GAAP operating income came in at $19.36 million, compared to a non-GAAP operating loss of $4.31 million.
For the same quarter, the company’s non-GAAP net income came in at $22.59 million, compared to a non-GAAP net loss of $1.89 million. Additionally, its non-GAAP EPS came in at $0.16, compared to a non-GAAP loss per share of $0.01 in the prior year quarter.
Analysts expect SMAR’s EPS and revenue for the quarter ending January 31, 2024, to increase 158.7% and 20.4% year-over-year to $0.18 and $255.66 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 13.7% to close the last trading session at $44.97.
SMAR’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.
It has an A grade for Sentiment and a B for Growth and Quality. It is ranked #7 out of 20 stocks in the A-rated Software - SAAS industry. To see SMAR’s Value, Momentum, and Stability ratings, click here.
Tenable Holdings, Inc. (TENB)
TENB provides cyber exposure solutions in the Americas, Europe, the Middle East, Africa, the Asia Pacific, and Japan. Its platforms include Tenable.io, Tenable.cs, Tenable.io Web Application Scanning, Tenable Lumin Exposure, and Tenable.asm.
In terms of the trailing-12-month gross profit margin, TENB’s 76.62% is 57.4% higher than the 48.69% industry average. Likewise, its 18.81% trailing-12-month levered FCF margin is 111.8% higher than the 8.88% industry average.
For the third quarter, which ended September 30, 2023, TENB’s revenue increased 15.3% year-over-year to $201.53 million. Its gross profit rose 14.3% over the previous year's quarter to $155.78 million. In addition, the company’s non-GAAP net income and EPS increased 61% and 53.3% year-over-year to $27.67 million and $0.23, respectively.
For the quarter ended December 31, 2023, TENB’s revenue is expected to increase 12% year-over-year to $206.68 million. Its EPS for the same quarter is expected to increase 13% year-over-year to $0.14. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 27.3% to close the last trading session at $47.10.
TENB’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.
It has a B grade for Growth, Sentiment, and Quality. It is ranked #3 out of 23 stocks in the B-rated Software - Security industry. To see TENB’s 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.
GDDY shares were trading at $107.81 per share on Thursday morning, up $1.15 (+1.08%). Year-to-date, GDDY has gained 1.55%, versus a 2.21% 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.
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