The software industry is expanding amid rising demand for innovative solutions and digitization across industries. Given the industry’s solid growth prospects, investors could consider buying fundamentally sound software stocks such as Adobe Inc. (ADBE), AppLovin Corporation (APP) and Progress Software Corporation (PRGS) for solid returns.

Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.

The demand for software applications has expanded significantly with increasing investments in digitalization. The rise of mobile apps, the increased use of cloud-based solutions, and the growing AI integration are boosting the industry. Also, there is a shift toward software-as-a-service (SaaS) models and a focus on improving the user experience through intuitive interfaces and customizable features.

The global application development software market is expected to reach $1.16 trillion by 2031, increasing at a 23.5% CAGR. The market for application development software is likely to expand due to the rising need for scalable and customizable software applications.

According to Precedence Research, software market revenue is expected to grow at an 11.7% CAGR over the next five years to $1.79 trillion by 2032. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 14.4% returns over the past six months.

Considering these conducive trends, let’s look at the fundamentals of the three Software – Application stock picks, beginning with number 3.

Stock #3: Adobe Inc. (ADBE)

ADBE provides professionals, communicators, businesses, and consumers with various products and services to create, manage, deliver, measure, optimize, engage, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media; Digital Experience; and Publishing and Advertising.

ABDE’s trailing-12-month net income margin of 27.12% is significantly higher than the 2.03% industry average. Its trailing-12-month ROCE of 33.97% is significantly higher than the 1.16% industry average.

ADBE’s total revenue for the fiscal third quarter that ended September 1, 2023, increased 10.3% year-over-year to $4.89 billion. Its non-GAAP operating income increased 15.8% year-over-year to $2.26 billion. The company’s non-GAAP net income increased 17.7% year-over-year to $1.88 billion.

In addition, its non-GAAP net income per share came in at $4.09, representing an increase of 20.3% year-over-year.

Street expects ADBE’s revenue to increase 10.1% year-over-year to $19.38 billion for the year ending November 2023. Its EPS is expected to grow 16.1% year-over-year to $15.92 for the same period. It surpassed EPS estimates in all four trailing quarters. Over the past year, the stock has gained 70.6% to close the last trading session at $539.56.

ADBE’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.

ADBE also has an A grade for Quality and a B for Sentiment. It is ranked #26 out of 133 stocks in the Software – Application industry. Click here to see the additional POWR Ratings for Growth, Value, Stability, and Momentum for ADBE.

Stock #2: AppLovin Corporation (APP)

APP builds a software-based platform for mobile app developers to enhance the marketing and monetization of their apps in the United States and internationally.

APP’s forward EV/EBITDA multiple of 11.78 is 11.9% lower than the industry average of 13.36. Its forward Price/CashFlow multiple of 13.04% is 272.1% lower than the industry average of 7.47.

APP’s trailing-12-month EBITDA margin of 27.70% is 202% higher than the 9.17% industry average. Its trailing-12-month Levered FCF margin of 27.80% is 42.3% higher than the 13.54% industry average.

For the fiscal second quarter ended June 30, 2023, APP’s revenues came in at $750.17 million. The company’s adjusted EBITDA came in at $333.51 million, representing an increase of 23.6% year-over-year.

Additionally, its net income attributable to APP stood at $80.36 million, compared to a net loss of $21.75 million in the year ago quarter. Its EPS came in at $0.22, compared to a loss per share of $0.06 in the year ago quarter.

The consensus revenue estimate of 3.10 billion for the year ending December 2023 represents an 9.9% increase year-over-year. Its EPS is expected to come in at $0.78 for the same period. APP’s shares have gained 223.3% over the past nine months to close the last trading session at $38.47.

APP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #24 in the same industry. It has a B grade for Growth and Quality. To see additional APP’s ratings for Value, Sentiment, Momentum, and Stability, click here.

Stock #1: Progress Software Corporation (PRGS)

PRGS develops, deploys, and manages business applications. OpenEdge, Sitefinity, Kemp LoadMaster, Developer Tools, and DataDirect Connect are some of the company’s applications. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.

On September 26, 2023, PRGS has announced a partnership with Software Improvement Group (SIG), an independent technology and advising organization specializing in software quality, security, and improvement, to assist assure the long-term maintainability and modernization of business-critical applications built on the Progress® OpenEdge® platform.

This partnership provides OpenEdge users with automated advise on areas to focus on while resolving technical debt and modernizing applications via Sigrid®, SIG’s software assurance platform. This partnership enables organizations to optimize their OpenEdge applications for long-term success in a continuously developing technical world by leveraging SIG’s expertise in software quality and optimization.

PRGS’ forward EV/EBITDA multiple of 11.93 is 10.7% lower than the industry average of 13.36. Its forward EV/EBIT multiple of 10.70% is 39.8% lower than the industry average of 17.77.

PRGS’ trailing-12-month net income margin of 11.65% is 472.7% higher than the 2.03% industry average. Its trailing-12-month ROCE of 19.35% is significantly higher than the 1.16% industry average.

PRGS’ revenue for the third quarter ended August 31, 2023, increased 15.7% year-over-year to $174.99 million. Its non-GAAP income from operations increased 13.8% year-over-year to $68.39 million. Its non-GAAP net income rose 10.6% year-over-year to $48.75 million. Also, its non-GAAP EPS came in at $1.08, representing an increase of 8% year-over-year.

Analysts expect PRGS’ revenue to increase 13.7% year-over-year to $694.23 million for the year ending November 2023. Its EPS is expected to grow at 2.5% year-over-year to $4.23 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 4.6% over past year to close the last trading session at $50.97.

It’s no surprise that PRGS has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Quality. It is ranked #18 in the same industry.

Beyond what is stated above, we’ve also rated PRGS for Growth, Value, Stability, Sentiment and Momentum. Get all PRGS ratings 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.

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ADBE shares were trading at $526.20 per share on Wednesday morning, down $13.36 (-2.48%). Year-to-date, ADBE has gained 56.36%, versus a 11.21% 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. More...

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