2022 has been a challenging year for tech stocks due to various macroeconomic concerns. The Fed’s aggressive rate hikes have made the high-growth tech stocks look unattractive to investors, leading to the tech-heavy Nasdaq Composite shedding 28.6% year-to-date.

However, inflation is now showing signs of cooling down, with November’s CPI rising 0.1% from the previous month and 7.1% from a year ago, below analyst estimates. The easing of inflation has prompted the Fed to stick to the word of slowing down the pace of rate hikes, as it announced a 50-basis-point rate increase yesterday.

With the Fed starting to slow down the pace of rate increases, software stocks could again turn into attractive investment options for investors. According to Gartner, enterprise software spending is projected to grow 8.6% in 2023.

Although the industry’s prospects look bright, not all software stocks will likely turn out to be profitable investments. In order to capitalize on the industry’s recovery prospects, it could be wise to buy fundamentally strong software stocks Salesforce, Inc. (CRM) and Mitek Systems, Inc. (MITK). On the other hand, Robinhood Markets, Inc. (HOOD) and Fastly, Inc. (FSLY) could be best avoided now due to their weak fundamentals and poor growth prospects.

Stocks to Buy:

Salesforce, Inc. (CRM)

CRM provides customer relationship management technology that brings companies and customers together worldwide. Its Customer 360 platform empowers its customers to work together to deliver connected experiences for their customers. The company’s service offerings include Sales, Service, Marketing, and Commerce.

On September 21, 2022, Insurtech leader, Zywave, announced a dedicated partnership and increased collaboration with CRM. This partnership is believed to bring together the worlds of insurance agency sales and client service, creating more efficient, strategic workflows powered by data and content to deliver a seamless client experience.

Raja Singh, Senior VP and General Manager at CRM, said, “Together, Salesforce and Zywave enable users to efficiently do their jobs and unlock their critical business data, so it can be leveraged for real-time intelligence going forward.”

For the fiscal third quarter ended October 31, 2022, CRM’s total revenues increased 14.2% year-over-year to $7.84 billion. The company’s gross profit increased 14.5% year-over-year to $5.75 billion. Moreover, its income from operations increased significantly year-over-year to $460 million.

Analysts expect CRM’s EPS and revenue for the quarter ending December 31, 2022, to increase 61.6% and 9.2% year-over-year to $1.36 and $8 billion, respectively. CRM has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has fallen 15.1% over the past month to close the last trading session at $134.75.

CRM’s strong fundamentals are reflected in its POWR Ratings. 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.

Within the Software – Application industry, it is ranked #15 out of 139 stocks. It has an A grade for Growth and a B for Sentiment.

We have also given CRM grades for Value, Momentum, Stability, and Quality.Get all CRM ratings here.

Mitek Systems, Inc. (MITK)

MITK develops, markets, and sells mobile image capture and digital identity verification solutions worldwide. The company’s solutions are embedded in native mobile apps and web browsers to facilitate digital consumer experiences. It offers products such as Mobile Deposit, Mobile Verify, Mobile Fill, CheckReader, among others.

For the fiscal third quarter ended June 30, 2022, MITK’s total revenue increased 23.8% year-over-year to $39.33 million. Its non-GAAP net income came in at $10.18 million. The company’s non-GAAP EPS came in at $0.23, representing no change from the year-ago period.

Analysts expect MITK’s revenue for the quarter ended September 30, 2022, to increase 16.1% year-over-year to $38.61 million. For fiscal 2022, its EPS is expected to increase 17.1% year-over-year to $0.89.

It has a commendable earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters. The stock has gained 24.7% over the past six months to close the last trading session at $10.90.

It is no surprise that MITK has an overall rating of B, translating to a Buy in our proprietary rating system. Within the Software – Application industry, it is ranked #8. In addition, it has a B grade for Growth, Value, and Quality.

Click here to see the additional ratings of MITK for Momentum, Stability, and Sentiment.

Stocks to Avoid:

Robinhood Markets, Inc. (HOOD)

HOOD operates a financial services platform that allows users to invest in stocks, exchange-traded funds, options, gold, and cryptocurrencies. The company also offers various learning and education solutions comprising Snacks, Learn, Newsfeed, and cash management services.

HOOD’s total net revenues for the fiscal third quarter ended September 30, 2022, declined 1.1% year-over-year to $361 million. Its net loss narrowed 87% year-over-year to $175 million. Additionally, its loss per share narrowed 90.3% year-over-year to $0.20.

HOOD’s EPS for the quarter ending December 31, 2022, is expected to remain negative. Its revenue for fiscal 2022 is expected to decline 24.6% year-over-year to $1.37 billion. The stock has fallen 48.8% year-to-date to close the last trading session at $9.09.

HOOD’s grim outlook is reflected in its POWR Ratings. The company has an overall rating of D, which translates to a Sell in our proprietary rating system. Within the same industry, it is ranked #120. The company has an F grade for Stability and a D for Value and Quality.

Click here to see the additional POWR Ratings of HOOD for Growth, Momentum, and Sentiment.

Fastly, Inc. (FSLY)

FSLY operates an edge cloud platform for processing, serving, and securing its customer’s applications worldwide. The edge cloud is a category of Infrastructure as a Service that enables developers to build, secure, and deliver digital experiences at the edge of the internet. It is a programmable platform designed for web and application delivery.

For the fiscal third quarter ended September 30, 2022, FSLY’s non-GAAP gross margin came in at 53.6%, compared to 57.5% in the year-ago period. The company’s non-GAAP operating loss widened 53.4% year-over-year to $19.84 million. Additionally, its non-GAAP net loss per common share widened 27.3% from the prior-year quarter to $0.14.

FSLY’s EPS for the quarter ending December 31, 2022, is expected to remain negative. The stock has fallen 73.2% year-to-date to close the last trading session at $9.50.

FSLY’s bleak prospects are reflected in its POWR Ratings. The company has an overall rating of D, translating to a Sell in our proprietary rating system. It is ranked #130 in the Software – Application industry. In addition, it has a D grade for Momentum, Stability, and Sentiment.

To see the additional ratings of FSLY for Growth, Value, and Quality, click here.

CRM shares were trading at $130.55 per share on Thursday afternoon, down $4.20 (-3.12%). Year-to-date, CRM has declined -48.63%, versus a -16.86% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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