Consecutive interest rate hikes by the Federal Reserve have kept the software industry under pressure this year. However, digital transformation across various industries, increased use of data-driven solutions, and investments in cloud-based technology should boost the industry’s prospects in the foreseeable future.

According to Gartner Inc. (IT), global IT spending is projected to hit $4.60 trillion in 2023, reflecting a 5.1% increase year-over-year. Amid this, software spending is expected to grow 11.3% year-over-year to almost $880 billion.

Furthermore, as per SkyQuest’s analysis, the global software market was valued at $547.20 billion in 2021, and it is expected to reach a value of $872.72 billion by 2028, growing at a CAGR of more than 7.2% between 2022 and 2028.

Against this backdrop, the fundamentally sound software stock Salesforce, Inc. (CRM - Get Rating) could be a solid buy. However, given the macroeconomic headwinds, Fastly, Inc. (FSLY - Get Rating) might be best avoided now.

Stock to Buy:

Salesforce, Inc. (CRM - Get Rating)

CRM is a customer relationship management technology provider. The company’s Customer 360 platform enables its customers to work together to deliver connected experiences.

On December 15, CRM announced that Casey’s General Stores, Inc. (CASY), a convenience store retailer and pizza chain, had realized increased revenue and engagement with its customer base with the help of CRM’s technology. This demonstrates the company’s operative capability.

For the fiscal third quarter that ended October 31, CRM’s total revenues increased 14.2% year-over-year to $7.84 billion. Non-GAAP income from operations rose 30.9% from the prior-year quarter to $1.78 billion. Non-GAAP net income and non-GAAP net income per share came in at $1.40 billion and $1.40, up 9.8% and 10.2% year-over-year, respectively.

For the full year (fiscal 2023), the company estimates a revenue between $30.9 billion and $31 billion and non-GAAP EPS between $4.92 and $4.94.

CRM’s revenue is expected to increase 9.2% year-over-year to $8 billion in the fiscal fourth quarter ending January 2023. Its EPS is expected to grow 61.7% year-over-year to $1.36 in the same quarter. CRM topped Street EPS and revenue estimates in each of the trailing four quarters, which is impressive.

CRM has declined marginally over the past five days to close the last trading session at $128.47.

CRM’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

CRM has an A grade for Growth and a B for Sentiment. In the 136-stock Software – Application industry, it is ranked #15. Click here to see the additional POWR Ratings for CRM (Momentum, Value, Stability, and Quality).

Stock to Avoid:

Fastly, Inc. (FSLY - Get Rating)

FSLY operates an Infrastructure-as-a-Service edge cloud platform, which offers cloud computing, image optimization, security, edge computer technology, streaming solutions, and real-time content delivery network (CDN) services.

FSLY’s trailing-12-month gross profit margin of 47.91% is 3.3% lower than the industry average of 49.54%. Its trailing-12-month asset turnover ratio of 0.20% is 67.9% lower than the industry average of 0.63%.

FSLY’s non-GAAP operating loss for its fiscal third quarter ended September 30, 2022, increased 53.4% year-over-year to $19.84 million. The company’s non-GAAP loss came in at $16.78 million, indicating a 26.8% increase from the prior-year quarter.

Its non-GAAP net loss per share came in at $0.14, representing an increase of 27.3% from the prior-year quarter.

For the fiscal year ending December 2022, analysts expect the company’s EPS to be negative $0.65, indicating a decline of 35.3% year-over-year. Street expects FSLY’s revenue to come in at $427.57 million for the same period.

The stock has lost 16.6% over the past three months to close the last trading session at $7.45. Moreover, it has lost 8.1% over the past five days.

FSLY’s bleak prospects are reflected in its POWR Ratings. The stock has an overall D rating, which equates to a Sell in our proprietary rating system.

FSLY has a D grade for Stability and Momentum. FSLY is ranked #92 in the same industry. Click here to see the additional POWR Ratings for Growth, Value, Sentiment, and Quality for FSLY.

CRM shares were trading at $132.37 per share on Thursday afternoon, up $3.90 (+3.04%). Year-to-date, CRM has declined -47.91%, versus a -17.87% rise in the benchmark S&P 500 index during the same period.

About the Author: Sristi Suman Jayaswal

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors. More...

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