2 Buy the Dip Software Stocks for May 2021

NASDAQ: MSFT | Microsoft Corp. News, Ratings, and Charts

MSFT – Investors have been rotating away from tech stocks over the past couple of months to cyclical stocks to capitalize on an economic recovery. However, because the remote working culture continues globally—given its benefits—tech players Microsoft (MSFT) and Cadence (CDNS) are expected to grow significantly in the near term. So, we think it could be wise to buy the dip in these stocks.

The technology industry has taken a backseat amid a fast-paced global macroeconomic recovery in which countries are focused on infrastructure spending and direct fiscal stimulus to boost their economies. The bullish recovery outlook for the U.S.  has led to an increase in benchmark Treasury yields, which has in-part contributed to the tech sell off.

The economic recovery has incentivized investors to focus on outdoor stocks amid the proposed American Jobs plan spending. However, the tech industry is likely to regain momentum soon because most businesses are adopting cost-effective hybrid working models to maximize productivity. Companies have been buying state-of-the-art software to run their operations efficiently from remote locations. According to statistics, global software revenue is expected to grow at a 7.4% CAGR to total a $772.4 billion market by 2025.

Thus, we believe the current tech sell-off has created solid entry opportunities in quality software stocks such as  Microsoft Corp (MSFT) and Cadence Design Systems, Inc. (CDNS).

Click here to check out our Software Industry Report for 2021

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports a wide range of software products, services and devices. The company operates in the following segments: Productivity and Business Processes, Intelligent Cloud and More Personal Computing.

MSFT’s revenue for the first quarter, ended March 31, increased 19% year-over-year to $41.71 billion. Its gross profit improved 19.1% from the same period last year to $28.70 billion, while its operating income rose 31.4% from the year-ago value to $17.10 billion. MSFT’s net income came in at $15.50 billion, representing a 4.4% year-over-year increase. Its EPS increased 45.4% from the prior-year quarter to $2.05.

The company’s EPS for the third quarter (ending September 31, 2021) is expected to increase 71.4% year-over-year to $1.95. Also, MSFT surpassed consensus EPS estimates in each of the trailing four quarters. Its  revenue for the next quarter is expected to increase 18.9% year-over-year to $42.48 billion.

On April 29,  MSFT acquired Kinvolk GmbH, which facilitates smooth operations of Kubernetes. This should allow Azure users to enjoy the benefits of container-optimized workloads and operating systems, lean application modernization, easier operations, and platform resiliency. As a result, MSFT is expected to have  a higher profit margin. The stock has gained 40.7% over the past year to close Friday’s trading session at $252.65.

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

The stock has a B grade for Stability, Sentiment, and Quality. MSFT is ranked #13 of 121 stocks in the Software-Application industry.

Click here to access MSFT’s ratings for Quality, Value, and Momentum as well.

Cadence Design Systems, Inc. (CDNS)

CDNS provides software, hardware, services, and reusable integrated circuit (IC) design blocks worldwide. The company offers functional verification services, including emulation and prototyping hardware.

The company’s revenue came in at $736 million, indicating a 19.1% increase year-over-year for the quarter ended March 30. Its gross profit rose 20% from the year-ago value to $652.10 million. Its net income stood at $187.20 million, up 51% from the same period last year. Its EPS increased 51.1% from the prior-year quarter to $0.68.

The company’s EPS for the current quarter (ending June 30, 2021) is expected to increase 15.2% year-over-year to $0.76. Its  quarterly revenue is expected to increase 12.6% year-over-year to $718.89 million over this period. Furthermore, it surpassed  consensus EPS estimates in each of the trailing four quarters.

On April 27,  CDNS announced its expansion plans in collaboration with Arm to speed hyperscale computing and 5G communications SoC development. This should allow CDNS to dominate the hyperscale computing and 5G communications market, thereby increasing its  customer base. The stock has gained 62.4% over the past year to close Friday’s trading session at $130.49.

It’s no surprise that CDNS has an overall B rating, which equates to Buy in our POWR Ratings system. The stock has an A grade for Quality, and a B grade for Sentiment. CDNS is ranked #19 in the same industry.

Click here to see the additional POWR Ratings for CDNS (Momentum, Value, Growth, and Stability).

Click here to check out our Software Industry Report for 2021


MSFT shares fell $0.37 (-0.15%) in after-hours trading Monday. Year-to-date, MSFT has gained 13.50%, versus a 12.22% rise in the benchmark S&P 500 index during the same period.


About the Author: Ananyo Guha Niyogi


Ananyo’s ardent interest in capital markets, wealth management, and financial regulatory issues, led him to a career as an investment analyst. His goal is to educate individual investors by making complex financial issues easy to understand. More...


More Resources for the Stocks in this Article

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