The software industry has been under pressure due to the macroeconomic headwinds. However, the industry will likely grow steadily in the long run, thanks to the strong demand for its products and services.
Gartner expects global software investment to exceed $922.75 billion this year, an increase of 13.7% year-over-year. The forecast predicts higher growth in 2024, with worldwide software spending reaching $1.05 trillion, a 14.1% increase year on year. This expansion is driven mostly by rising demand for cloud-based software solutions and digital transformation projects across industries.
The software market in the U.S. is expected to reach $338.20 billion in revenue in 2023. Also, the revenue is predicted to grow at a 4.2% CAGR until 2028, resulting in a market volume of $414.70 billion.
This expansion might be attributed to the rising demand for software solutions in the healthcare, banking, and retail industries. In addition, improvements, particularly in areas such as AI and cloud computing, are increasing the usage of software goods and services, fueling market growth.
In addition, the global Artificial Intelligence Software market is estimated to grow at a CAGR of 29.6% until 2028, reaching $80.60 billion.
Investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 19.23% returns over the past six months.
With these favorable trends in mind, let’s delve into the fundamentals of the three best Software stocks, beginning with number 3.
Stock #3: Sapiens International Corporation N.V. (SPNS)
SPNS offers insurance and financial software solutions worldwide. Its offerings encompass CoreSuite for various insurance lines, DigitalSuite for stakeholders, and financial tools like FinancialPro. Founded in 1982, SPNS serves through direct and partner sales from its base in Holon, Israel.
SPNS’ forward EV/EBIT of 15.91x is 10.4% lower than the industry average of 17.75x. Its forward Price/ Book of 3.62x is 2.60% lower than the industry average of 3.72x.
SNPS’ trailing-12-month ROCE of 14.07% is significantly higher than the industry average of 1.01%. Its trailing-12-month ROTC of 8.85% is 315.7% higher than the industry average of 2.13%.
During the second quarter that ended June 30, 2023, SPNS’ revenue increased 8.2% year-over-year to $128.29 million, while its gross profit increased 9% year-over-year to $54.66 million.
In addition, its adjusted net income and non-GAAP EPS came in at $18.61 million and $0.33, representing increases of 24.2% and 22.2%, respectively, from the prior-year quarter. Also, the company’s adjusted EBITDA increased 12.5% year-over-year to $24.39 million.
The consensus revenue estimate of $514.36 million for the fiscal year ending December 2023 represents a 8.4% increase year-over-year. Its EPS is expected to grow 9.3% year-over-year to $1.32 for the same year. It has surpassed EPS estimates in three of four trailing quarters. SNPS’ shares have gained 54.2% over the past nine months to close the last trading session at $28.58.
SNPS’ POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SNPS also has an A grade for Growth and Quality and a B for Stability and Sentiment. It is ranked #11 out of 132 stocks in the Software – Application industry. Click here for the additional POWR Ratings for Value, and Momentum for SNPS.
Stock #2: CSG Systems International, Inc. (CSGS)
CSGS provides revenue management and digital monetization, customer engagement, and payment solutions primarily to the communications industry in the Americas, Europe, the Middle East, Africa, and the Asia Pacific.
CSGS’ forward EV/EBITDA multiple of 7.87 is 27.6% lower than the industry average of 10.87. Its forward EV/EBIT multiple of 10.34% is 31.2% lower than the industry average of 15.03.
CSGS’ trailing-12-month gross profit margin of 48.20% is 59.1% higher than the industry average of 30.30%, while its trailing-12-month levered FCF margin of 10.01% is 83% higher than the industry average of 5.47%.
For the fiscal second quarter ended June 30, 2023, CSGS’ revenue increased 9.2% year-over-year to $286.33 million. The company’s operating income increased 287.3% year-over-year to $28.21 million.
Also, its net income and EPS came in at $13.95 million and $0.45, representing increases of 162.4% and 164.7%, respectively, from the prior-year quarter.
Street expects CSGS’ revenue to increase 6.6% year-over-year to $1.08 billion for the year ending December 2023. Its EPS is expected to come in at $3.51 for the same period. It has surpassed EPS estimates in three of four trailing quarters. Shares of CSGS has lost marginally over the past three months to close the last trading session at $51.53.
CSGS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #4 out of 45 stocks in the Software – Business industry. It has an A grade for Sentiment and a B for Growth, and Value. To see additional CSGS’ ratings for Stability, Quality, and Momentum, click here.
Stock #1: F5, Inc. (FFIV)
FFIV offers multi-cloud application security and delivery solutions globally, aiding customers in deploying, securing, and managing applications across various architectures. Its offerings include F5 BIG-IP appliances, F5 NGINX Software Solutions, F5 Distributed Cloud WAAP, and F5 Distributed Cloud Bot Defense.
FFIV’s forward non-GAAP P/E multiple of 13.89 is 37.1% lower than the industry average of 22.09. Its forward EV/EBIT multiple of 10.63% is 40.1% lower than the industry average of 17.75.
FFIV’s trailing-12-month ROCE of 13.34% is significantly higher than the industry average of 1.01%. Its trailing-12-month ROTC of 9.98% is 368.7% higher than the industry average of 2.13%.
In the fiscal third quarter that ended June 30, 2023, FFIV’s total revenue increased 4.2% from the prior-year quarter to $702.64 million, while its gross profit increased 3.2% year-over-year to $560.96 million.
The company’s adjusted net income and non-GAAP EPS came in at $193.65 million and $3.21, representing increases of 25.2% and 24.9%, respectively, from the prior-year quarter.
Analysts expect FFIV’s revenue to increase 4.2% year-over-year to $2.81 billion for the year ending September 2023. Its EPS is expected to grow 12.1% year-over-year to $11.42 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 13.3% over the past nine months to close the last trading session at $158.66.
It’s no surprise that FFIV has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Growth and Value. It is ranked first in the same industry.
Beyond what is stated above, we’ve also rated FFIV for Stability, Sentiment and Momentum. Get all FFIV ratings here.
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FFIV shares were trading at $159.17 per share on Monday morning, up $0.51 (+0.32%). Year-to-date, FFIV has gained 10.91%, versus a 13.91% 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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