Amid signs of the economy achieving a soft landing, traders expect the Fed to keep rates stable at the next policy meeting in December. Moreover, the central bank will likely start cutting rates as early as March next year. This bodes well for software companies as these high-growth tech companies are susceptible to rising interest rates.
Amid this backdrop, it could be wise to invest in fundamentally strong software stocks Check Point Software Technologies Ltd. (CHKP), SolarWinds Corporation (SWI), and Vimeo, Inc. (VMEO) this week for potential gains.
Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.
Hopes of an end to the Fed’s hiking cycle and the economy achieving a soft landing have led to the strong performance of the tech-heavy Nasdaq Composite, which has returned 31.5% year-to-date. Despite headwinds arising from higher interest rates, the software industry has grown significantly due to increasing demand for advanced software and robust digitization initiatives across different sectors.
According to Gartner, global software spending is projected to rise 12.9% year-over-year to $916.24 billion this year and 13.8% year-over-year to $1.04 trillion in 2024. Increasing investments in public cloud services, cybersecurity, and business application software are driving the software industry’s growth.
Additionally, the move from traditional software applications to cloud-based software applications is boosting the industry’s growth.
In the 2024 Gartner CIO and Technology Executive Survey, 80% of CIOs reported they plan to increase cyber/information security spending in 2024. CIOs are also focusing on investing in Business Intelligence/data analytics and cloud platforms, with 78% and 73% of CIOs expressing interest in increasing spending on these technologies, respectively.
Moreover, integrating generative AI into cloud-based software applications is expected to be a game-changer for the software industry. Software companies with subscription-based business models are expected to benefit from integrating generative AI into their applications. Goldman Sachs estimates that the total addressable market (TAM) of the generative AI software is approximately $150 billion.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 42.5% returns year-to-date.
Let’s take a closer look at their fundamentals.
Check Point Software Technologies Ltd. (CHKP)
Headquartered in Tel Aviv, Israel, CHKP develops, markets, and supports a range of products and services for IT security worldwide. The company offers a multilevel security architecture, cloud, network, mobile devices, endpoint information, and IOT solutions.
On September 13, 2023, CHKP acquired Perimeter 81, a Security Service Edge (SSE) company. The acquisition will enable CHKP to help organizations accelerate the adoption of secure access across remote users, sites, the cloud, data centers, and the internet. The acquisition aims to deliver the most secure and fastest SSE solution in the market.
On September 6, CHKP announced the acquisition of Atmosec. This early-stage startup specializes in the rapid discovery and disconnection of malicious SaaS applications, preventing risky 3rd part SaaS communications, and rectifying SaaS misconfigurations. The acquisition would help CHKP enhance its SaaS security offering and address the security gaps and blind spots in SaaS applications.
In terms of the trailing-12-month EBITDA margin, CHKP’s 38.80% is 328.9% higher than the 9.04% industry average. Likewise, its 36.03% trailing-12-month net income margin is significantly higher than the 2.03% industry average. Moreover, its 88.54% trailing-12-month gross profit margin is 80.2% higher than the 49.14% industry average.
For the third quarter ended September 30, 2023, CHKP’s total revenues increased 3% year-over-year to $596 million. Its non-GAAP operating income increased 2.3% over the prior-year quarter to $269 million. The company’s non-GAAP net income rose 9.5% year-over-year to $242 million. Also, its adjusted EPS increased 17% year-over-year to $2.07.
For the quarter ending December 31, 2023, CHKP’s EPS and revenue are expected to increase 1.1% and 3.7% year-over-year to $2.48 and $662.39 million, respectively. The company surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.
Over the past six months, the stock has gained 19.2% to close the last trading session at $143.24.
CHKP’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.
SolarWinds Corporation (SWI)
SWI provides information technology (IT) management software products. The company offers a portfolio of solutions to technology professionals for monitoring, managing, and optimizing networks, systems, desktops, applications, storage, databases, website infrastructures, and IT service desks.
On May 16, 2023, SWI announced the addition of transformative AI and ML capabilities to its IT service management (ITSM) solutions. The new AI features include a virtual agent designed to reduce ticket volume by enabling users to remediate easier-to-solve issues. This will enhance and personalize the Service Desk through integrations with over 200 popular cloud applications.
Cullen Childress, GVP of product management at SWI, said, “Our ITSM solutions are a significant focus we’re investing in. This includes Service Desk, which enables teams to focus more on important business priorities rather than mundane, time-consuming tasks.”
“By leveraging advanced AI and powerful automation, SolarWinds makes users more productive, supports agents more efficiently, and helps ensure companies are more successful,” he added.
In terms of the trailing-12-month levered FCF margin, SWI’s 30.81% is 290.2% higher than the 7.90% industry average. Likewise, its 90.25% trailing-12-month gross profit margin is 83.7% higher than the 49.14% industry average. Its 27.07% trailing-12-month EBIT margin is 465.9% higher than the 4.78% industry average.
SWI’s total revenue for the third quarter that ended September 30, 2023, increased 5.7% year-over-year to $189.59 million. Its non-GAAP gross profit rose 5.4% year-over-year to $172.15 million. The company’s non-GAAP operating income grew 19.7% year-over-year to $81.16 million. Its non-GAAP net income rose 20.3% over the prior-year quarter to $38.01 million.
In addition, the company’s non-GAAP EPS came in at $0.23, up 15% year-over-year. Also, its adjusted EBITDA increased 21% year-over-year to $85.06 million.
Street expects SWI’s EPS and revenue for the fourth quarter (ending December 31, 2023) to increase 9% and 1.7% year-over-year to $0.21 and $190.27 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters.
Over the past six months, the stock has gained 30.8% to close the last trading session at $11.30.
It’s no surprise that SWI has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, and Sentiment. Within the B-rated Software – Business industry, it is ranked #2 out of 45 stocks. In total, we rate SWI on eight different levels.
Beyond what we stated above, we also have given SWI grades for Momentum, Stability, and Quality. Get all the SWI ratings here.
Vimeo, Inc. (VMEO)
VMEO provides video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
In terms of the trailing-12-month Return on Total Assets (ROTA), VMEO’s 1.40% is 22.1% higher than the 1.15% industry average. Likewise, its 77.77% trailing-12-month gross profit margin is 59.6% higher than the 48.73% industry average. Its 0.69x trailing-12-month asset turnover ratio is 35.3% higher than the 0.51x industry average.
For the fiscal third quarter ended September 30, 2023, VMEO’s revenue stood at $106.25 million. Its non-GAAP gross profit rose 1.8% year-over-year to $84.70 million. The company’s adjusted EBITDA increased 509.5% over the prior-year quarter to $12.80 million. Its net earnings came in at $8.46 million, compared to a net loss of $21.42 million.
Also, the company’s EPS stood at $0.05, compared to a loss per share of $0.13 in the prior year’s quarter. Its net cash provided by operating activities increased 66.8% year-over-year to $16.61 million.
Analysts expect VMEO’s revenue for the quarter ending June 30, 2024, to increase 3% year-over-year to $104.90 million. The company’s EPS for the fiscal year 2023 is expected to grow 116.3% year-over-year to $0.08. It surpassed the consensus EPS estimates in each of the trailing four quarters.
Over the past month, the stock has gained 6.4% to close the last trading session at $3.51.
VMEO’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 tops the list of 23 stocks in the A-rated Software – SAAS industry. It has a B grade for Value, Sentiment, and Quality. Click here to see the other ratings of VMEO for Growth, Momentum, and Stability.
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CHKP shares rose $0.76 (+0.53%) in premarket trading Tuesday. Year-to-date, CHKP has gained 14.14%, versus a 17.98% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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