As digital transformation projects proliferate throughout many industries, there is an increasing need for custom software solutions to meet particular company requirements. Therefore, the application development software market is projected to grow at a CAGR of 14.7% by 2030.

Additionally, the growing popularity of cloud-based software and rising concern to automate business processes are continuously increasing the demand for IT services worldwide. Cloud-based IT services have been experiencing rapid growth among SMEs since 2022 and are expected to capture more than 80% of the market share by 2025.

Against this backdrop, let’s compare two software stocks to analyze which stock offers greater value: Open Text Corporation (OTEX - Get Rating) and International Business Machines Corporation (IBM - Get Rating).

The Case for Open Text Corporation Stock

With a $7.23 billion market cap, Open Text Corporation (OTEX - Get Rating) engages in the provision of information management products and services. The company offers content services, including content collaboration and intelligent capture, as well as records management, collaboration, e-signatures, and archiving.

OTEX’s stock has plunged 19.6% over the past three months to close the last trading session at $27.19.

In terms of forward non-GAAP P/E, OTEX is trading at 7.43x, 69.7% lower than the industry average of 24.56x. Likewise, the stock’s forward Price/Sales multiple of 1.34 is 57.2% lower than the industry average of 3.14. Also, its forward EV/EBITDA of 7.16x is 53.3% lower than the industry average of 15.32x.

OTEX’s cloud services and subscriptions for the fiscal first quarter that ended on September 30, 2024, rose 1.3% year-over-year to $457 million. Similarly, the company’s net income and EPS are at $84 million and $0.32 per share, up 4.3% and 6.7% over the prior-year quarter, respectively.

Street expects OTEX’s EPS and revenue for the year ending June 30, 2024, to increase 13.6% and 2.4% year-over-year to $4.15 and $5.44 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters.

OTEX’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

The stock has an A grade for Value and a B for Growth. OTEX is ranked #16 out of 125 stocks in the Software – Application industry.

In addition to the POWR Ratings I’ve just highlighted, you can see OTEX’s ratings for Momentum, Stability, Quality, and Sentiment here.

The Case for International Business Machines Corporation Stock

Valued at $201.02 billion by market cap, International Business Machines Corporation (IBM - Get Rating) is engaged in addressing the hybrid cloud and Artificial Intelligence (AI) opportunity with a platform-centric approach focused on providing client value through a combination of technology and business expertise. It operates through four segments: Software; Consulting; Infrastructure; and Financing. 

Shares of IBM have surged 18.9% over the past six months but declined 6.8% over the three months to close the last trading session at $217.40.

In terms of forward non-GAAP P/E, IBM is trading at 21.28x, 13.3% lower than the industry average of 24.56x. However, the stock’s forward Price/Sales multiple of 3.20 is 2.1% higher than the industry average of 3.14.

IBM’s revenue for the third quarter (ended September 30, 2024) increased marginally year-over-year to $14.97 billion. It reported a gross profit of $8.42 billion, indicating a 4.9% growth from the year-ago value.

Its adjusted EBITDA for the quarter rose 8.6% year-over-year to $3.8 billion. In addition, the company’s non-GAAP income from continuing operations increased 6.1% year-over-year to $2.16 billion, while its non-GAAP EPS from continuing operations grew 4.5% from the prior year’s quarter to $2.30.

Analysts expect IBM’s revenue for the fiscal year (ended December 2024) to grow marginally year-over-year to $62.82 billion, while its EPS for the same period is expected to increase 6.2% year-over-year to $10.21.

IBM’s fundamentals are reflected in its POWR Ratings. The stock has an overall C rating, translating to Neutral in our proprietary rating system.

IBM has a C grade for Value, Sentiment, and Stability. It is ranked #35 out of 79 stocks in the Technology – Services industry.

Click here for the additional POWR Ratings for IBM (Growth, Momentum, and Quality).

Open Text vs.International Business Machines: Which Software Stock Offers Greater Value?

The U.S. software industry is expected to continue its growth, driven by strong demand for cloud computing, AI, and cybersecurity solutions. Increased digital transformation across various sectors will further bolster industry expansion.

Leading software companies OTEX and IBM stand to capitalize on the optimistic industry outlook. However, OTEX’s lower valuation might make it the better software stock pick.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software – Application industry here and the Technology – Services industry here.

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IBM shares were trading at $217.48 per share on Tuesday afternoon, up $0.08 (+0.04%). Year-to-date, IBM has declined -1.07%, versus a -0.42% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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