The software industry is benefiting as businesses adopt advanced software services for automation, cybersecurity, and data usage. The ever-rising spending on software, especially in the public cloud, boosts the industry's prospects further.
Amid this backdrop, it could be wise to consider buying fundamentally strong software stocks Autodesk, Inc. (ADSK), DocuSign, Inc. (DOCU), and Pegasystems Inc. (PEGA).
Businesses depend on software applications to streamline processes, boost productivity, ensure compliance, manage customers, and collaborate remotely, leading to better customer experiences. The global business software and services market is forecasted to grow at a CAGR of 11.9% until 2030.
The integration of generative AI in software applications will lead to enhanced automation and data analysis, which is anticipated to increase demand for software applications further. Gartner predicts worldwide IT spending to grow 6.8% year-over-year to $5 trillion in 2024, with spending on software projected to increase 12.7% over the prior year to $1.03 trillion.
Moreover, with the rising popularity of public and hybrid cloud-based services globally, companies are heavily investing in services like Software-as-a-Service (SaaS), which offer advantages such as accessibility, scalability, cost-efficiency, automatic updates, and security. The global SaaS market is projected to grow at a CAGR of 6.2% to reach $325.84 billion in 2028.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 41.3% returns over the past year.
Now, let's take a closer look at their fundamentals.
Autodesk, Inc. (ADSK)
ADSK provides 3D design, engineering, and entertainment technology solutions worldwide. The company offers AutoCAD Civil 3D, BuildingConnected, AutoCAD, AutoCAD LT, CAM software, Fusion 360, and Industry Collections for professionals in various industries, including civil engineering, preconstruction, design, manufacturing, and media.
On February 7, 2024, ADSK introduced Autodesk Informed Design, a cloud solution linking design and manufacturing to simplify building processes in the AECO industry. This platform blends with ADSK's Design and Make Platform, providing free Revit and Inventor add-ins for architects and engineers to craft feasible and sustainable designs.
On February 5, 2024, ADSK announced an agreement to acquire X2X's PIX business, a production management solution in media and entertainment, aiming to enhance collaboration, drive operational efficiencies, and connect pre- and post-production data for customers through its platform.
The acquisition is expected to close early in the fiscal year 2025, offering potential benefits in workflow optimization and value creation for media and entertainment companies.
In terms of the trailing-12-month levered FCF margin, ADSK’s 32.58% is 253.6% higher than the 9.21% industry average. Likewise, its 91.58% trailing-12-month gross profit margin is 88.4% higher than the 48.62% industry average. Furthermore, its 20.52% trailing-12-month EBIT margin is 318.6% higher than the 4.90% industry average.
ADSK’s total net revenue for the fiscal fourth quarter ended January 31, 2024, grew 11.5% year-over-year to $1.47 billion. Its non-GAAP income from operations rose 9% over the prior-year quarter to $522 million.
Additionally, the company’s non-GAAP net income per share came in at $2.09, representing an increase of 12.4% year-over-year. Moreover, its total assets, as of January 31, 2024, stood at $9.91 billion compared to $9.44 billion as of January 31, 2023.
Street expects ADSK’s EPS and revenue for the quarter ending April 30, 2024, to increase 12.7% and 9.7% year-over-year to $1.75 and $1.39 billion, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 25.6% to close the last trading session at $247.93.
ADSK’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 #13 out of 132 stocks in the B-rated Software - Application industry. It has an A grade for Quality and a B for Growth and Sentiment. Click here to see ADSK’s Value, Momentum, and Stability ratings.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers the DocuSign e-signature solution, which enables the sending and signing of agreements on various devices.
In terms of the trailing-12-month net income margin, DOCU’s 2.68% is 1.5% higher than the 2.64% industry average. Likewise, its 3.35% trailing-12-month Capex / Sales is 43% higher than the 2.34% industry average. Furthermore, its 8.47% trailing-12-month Return on Common Equity is 148.1% higher than the 3.41% industry average.
DOCU’s total revenues for the fourth quarter ended January 31, 2024, rose 8% year-over-year to $712.39 million. Its non-GAAP income from operations increased 14.7% year-over-year to $178.32 million.
Additionally, its non-GAAP net income attributable to common stockholders rose 19.5% year-over-year to $159.25 million. The company’s non-GAAP EPS came in at $0.76, representing an increase of 16.9% year-over-year.
Analysts expect DOCU’s EPS and revenue for the quarter ending April 30, 2024, to increase 8.9% and 6.9% year-over-year to $0.78 and $706.99 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 41.9% to close the last trading session at $60.14.
DOCU’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value and Quality. It is ranked #2 out of 19 stocks in the B-rated Software - SAAS industry. To see DOCU’s Momentum, Stability, and Sentiment ratings, click here.
Pegasystems Inc. (PEGA)
PEGA develops, markets, licenses, hosts, and supports enterprise software in the United States, the rest of the Americas, the United Kingdom, Europe, the Middle East, Africa, and the Asia-Pacific.
On March 5, 2024, PEGA announced that Deutsche Kreditbank AG (DKB) extended its contract, using PEGA’s low-code Pega Platform and Pega Constellation design system to automate services. This tech streamlines processes and boosts collaboration, in line with DKB's customer focus and economic aims.
On February 12, 2024, PEGA introduced the Pega GenAI Blueprint, combining generative AI with industry best practices to speed up app design for DKB. This collaborative tool streamlines workflows, aligns stakeholders, and optimizes designs, enhancing efficiency and innovation in enterprise-grade applications.
In terms of the trailing-12-month gross profit margin, PEGA’s 73.58% is 51.3% higher than the 48.62% industry average. Likewise, its 17.19% trailing-12-month levered FCF margin is 86.6% higher than the 9.21% industry average. Its 1x trailing-12-month asset turnover ratio is 61.6% higher than the 0.62x industry average.
For the fiscal fourth quarter that ended December 31, 2023, PEGA’s total revenue increased 19.6% year-over-year to $474.23 million. Its gross profit rose 26.1% from the year-ago value to $383.59 million. In addition, its non-GAAP net income and non-GAAP EPS increased 122.6% and 115.9% over the prior-year quarter to $152.14 million and $1.77, respectively.
For the quarter ended March 31, 2024, PEGA’s revenue is expected to increase 3.6% year-over-year to $337.04 million. Its EPS for the same quarter is expected to increase 106.3% year-over-year to $0.47. Over the past six months, the stock has gained 47.5% to close the last trading session at $63.23.
PEGA’s positive outlook is reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has an A grade for Growth and a B for Value, Sentiment, and Quality. It is ranked #4 out of 44 stocks in the B-rated Software - Business industry. To see PEGA’s Momentum and Stability ratings, click here.
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ADSK shares were trading at $241.41 per share on Wednesday morning, down $6.52 (-2.63%). Year-to-date, ADSK has declined -0.85%, versus a 8.62% 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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