Given the Federal Reserve’s determination to continue raising interest rates until inflation falls below 2%, the danger of a recession has greatly increased. Moreover, the tech industry is expected to suffer amid persistent monetary tightening. Fed Chair Jerome Powell stated that the economy has yet to feel the cumulative effect of interest rate hikes.

However, with the Fed beginning to moderate the pace of rate hikes and given the industry’s prospects, software stocks may once again become appealing investment choices for investors. Gartner predicts that enterprise software spending will increase by 8.6% in 2023.

Moreover, demand for software goods and services is robust amid rapid digitalization. The cloud system management software market size is projected to grow at a CAGR of 28.6% from 2022-2029.

Given the backdrop, investors might buy quality software stocks Microsoft Corporation (MSFT) and Fortinet, Inc. (FTNT) for significant returns over the coming years. They have delivered steady returns over the past years and are expected to maintain momentum.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.

On December 14, MSFT and ViaSat, Inc. (VSAT) announced a new partnership to help deliver internet access to 10 million people around the globe, including 5 million across Africa. Both organizations collaborate to provide connectivity and digital literacy for improved education, healthcare, and economic opportunities.

On December 12, 2022, MSFT announced a 10-year partnership with the London Stock Exchange Group (LSEG) and took a 4% share in it, with LSEG agreeing to spend at least $2.80 billion on cloud-related technologies with MSFT over the decade. This might prove to be strategically beneficial for the company.

MSFT’s total revenues came in at $50.12 billion for the first quarter that ended September 30, 2022, up 10.6% year-over-year. Moreover, its gross margin came in at $34.67 billion, up 9.5% year-over-year. Also, its operating income came in at $21.52 billion, up 6.3% year-over-year.

Analysts expect MSFT’s revenue to increase 7.2% year-over-year to $212.46 billion in 2023. Its EPS is expected to increase 3.7% year-over-year to $9.55 in 2023. It surpassed EPS estimates in three of four trailing quarters. Over the past three months, the stock has gained 2.3% to close the last trading session at $244.43. It has gained 790.5% over the past ten years.

MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

MSFT has a B grade for Stability, Sentiment, and Quality. In the Software – Business industry, it is ranked #9 out of 53 stocks. Click here for the additional POWR Ratings for Value, Growth, and Momentum for MSFT.

Fortinet, Inc. (FTNT)

FTNT provides comprehensive, integrated, and automated cybersecurity solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It provides FortiGate hardware and software licenses for various security and networking services.

On December 14, 2022, FTNT announced the adoption of Fortinet Secure SD-WAN by five new managed security service providers (MSSP) to help deliver improved business outcomes and customer experiences. This is expected to help FTNT expand its portfolio.

Also, on November 28, 2022, FTNT launched a managed next-generation firewall service for Amazon Web Services. FortiGate CNF includes FortiGuard AI-driven Security Services for real-time detection and protection against malicious external and internal threats. The company is constantly evolving in the cybersecurity space.

FTNT’s revenue came in at $1.15 billion for the third quarter that ended September 30, 2022, up 32.6% year-over-year. Its net income came in at $231.6 million, up 42% year-over-year, while its EPS came in at $0.29, up 52.6% year-over-year.

Street expects FTNT’s revenue to increase 32.6% year-over-year to $4.43 billion in 2022. Its EPS is estimated to grow 43.7% year-over-year to $1.15 in 2022. It surpassed EPS estimates in all four trailing quarters. Over the past three months, the stock has gained marginally to close the last trading session at $50.01. It has gained 1,081.7% over the past ten years.

FTNT has an overall rating of B, which equates to a Buy in our POWR Ratings system.

It has an A grade for Quality and a B for Growth and Sentiment. FTNT is ranked first among 22 stocks in the Software – Security industry. Click here for the additional POWR Ratings for FTNT (Value, Stability, and Momentum).

MSFT shares were trading at $235.50 per share on Thursday afternoon, down $8.93 (-3.65%). Year-to-date, MSFT has declined -29.32%, versus a -19.47% 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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