In this article, I evaluated two software stocks, Microsoft Corporation (MSFT) and HubSpot, Inc. (HUBS), to determine which has the potential for better returns. We believe MSFT is the better investment this week for reasons explained throughout this piece.

The COVID-19 pandemic positively impacted the business software and services industry. Enterprises worldwide rapidly accelerated their investments in digital transformation to become more modern and agile, gain a competitive edge, enhance customer satisfaction, drive operational efficiency, and boost business profitability.

Worldwide digital transformation spending is expected to reach 3.4 trillion by 2026, as per Statista.

Companies across multiple end-use industries, including healthcare, retail, IT& telecom, and manufacturing, are increasingly implementing advanced digital technologies, including Artificial Intelligence (AI), the Internet of Things (IoT), big data analytics, and cloud computing into business operations such as automation, communication, and customer service.

These business expansion initiatives of several enterprises globally should drive demand for software solutions. For instance, the growing use of cloud platforms, given several benefits like cost-effectiveness, flexibility, scalability, and mobility, has fueled demand for cloud-based software services among small and medium-sized businesses.

Gartner forecast worldwide public cloud end-user spending to total $597.30 billion in 2023, an increase from $491 billion in 2022. Cloud computing propels the next phase of digital business as companies pursue disruption through emerging technologies such as generative AI, Web3, and the metaverse.

Overall, the global software spending is projected to grow by 13.7% year-over-year to $922.75 billion this year. The software segment will witness double-digit growth as enterprises boost utilization and reallocate spending to core applications and platforms that support efficiency gains, like enterprise resource planning (ERP) and customer relationship management (CRM) applications.

As per a report by Grand View Research, the global business software and services market is estimated to reach $1.15 trillion by 2030, expanding at a CAGR of 11.9%. Meanwhile, the U.S. business software and services market is expected to grow at a CAGR of 10.7% from 2023 to 2030.

The software industry’s promising growth prospects should bode well for MSFT and HUBS.

HUBS is a clear winner in six-month price performance, with 14.8% returns compared to MSFT’s 12.6% gain. HUBS climbed 63.2% over the past nine months compared to MSFT’s 44.6% gain. In addition, HUBS’ 65.6% gain over the past year is higher than MSFT’s gain of 40.2%.

However, here are the reasons why we think MSFT could perform better in the near term:

Latest Developments

On September 19, MSFT’s board of directors declared a quarterly dividend of $0.75 per share, reflecting an increase of 10% over the previous quarter’s dividend. The dividend is payable on December 14 to shareholders of record on November 16. The increase in the quarterly dividend reflects the company’s strong financial position.

MSFT’s annual dividend of $3 translates to a yield of 0.96% on the current price level, while its four-year average dividend yield is 0.94%. Its dividend payouts have grown at a CAGR of 10.1% over the past five years. Additionally, the company has raised its dividend for 18 consecutive years.

On September 8, at INBOUND 2023, HUBS announced the launch of HubSpot AI, its portfolio of AI-powered features for marketing, sales, and service teams, and the relaunch of Sales Hub, the sales solution for modern sales teams.

Also, the company expanded its relationship with LinkedIn, where sellers can be more efficient in prospecting, building relationships, and closing deals by syncing HUBS’ Smart CRM with LinkedIn Sales Navigator, with a private beta. By introducing these new features and functionality, HUBS continues progressing as the #1 customer platform for scaling companies.

Recent Financial Results

For the fourth quarter that ended June 30, 2023, MSFT’s total revenue grew 8.3% year-over-year to $56.19 billion, and its gross margin increased 11.2% from the previous year’s quarter to $39.39 billion. The company’s operating income rose 18.1% from the year-ago value to $24.25 billion.

Furthermore, MSFT’s net income and EPS came in at $20.08 billion and $2.69, representing increases of 20% and 20.6% year-over-year, respectively. As of June 30, 2023, the company’s cash and cash equivalents stood at $34.70 billion, compared to $13.93 billion as of June 30. 2022.

HUBS’ revenues increased 25.5% year-over-year to $529.14 million for the second quarter that ended June 30, 2023. Its gross profit rose 28.9% from the year-ago value to $441.85 million. Also, the company’s non-GAAP operating income was $74.24 million, up 152.6% from the prior year’s period.

In addition, the company’s non-GAAP net income came in at $69.98 million and $1.34 per share, increases of 212.1% and 204.5% year-over-year, respectively. Its cash and cash equivalents were $457.22 million as of June 30, 2023, versus $331.02 million as of December 31, 2022.

Past And Expected Financial Performance

MSFT’s revenue and EBITDA have grown at respective CAGRs of 14% and 16.1% over the past three years. Its net income and EPS have increased at CAGRs of 17.8% and 18.9%, respectively. Additionally, the company’s total assets have grown at a CAGR of 11% over the same time frame, while its levered free cash flow has improved at an 11.3% CAGR.

Analysts expect MSFT’s revenue and EPS for the fiscal year (ending June 2024) to increase 11.3% and 12.2% year-over-year to $235.86 billion and $11.01, respectively. Likewise, the company’s revenue and EPS for the fiscal year 2025 are expected to grow 13.3% and 15% from the previous year to $267.32 billion and $12.66, respectively.

Over the past three years, HUBS’ revenue has grown at a CAGR of 36.6%. Also, the company’s total assets and levered free cash flow have increased at CAGRs of 14.7% and 83.7%, respectively, over the same period.

For the fiscal year ended December 2023, HUBS’ revenue and EPS are expected to grow 22.5% and 90.4% year-over-year to $2.12 billion and $5.29, respectively. Also, analysts expect the company’s revenue and EPS for the fiscal year 2024 to increase 21.3% and 21.8% year-over-year to $2.57 billion and $6.45, respectively.

Profitability

MSFT’s trailing-12-month revenue is 109.2 times what HUBS generates. Moreover, MSFT is more profitable, with a trailing-12-month EBIT margin of 41.77% compared to HUBS’ negative 5.99%. Also, MSFT’s trailing-12-month EBITDA margin and net income margin of 48.14% and 34.15% are higher than HUBS’ negative 4.65% and negative 10.51%, respectively.

In addition, MSFT’s trailing-12-month ROE, ROA, and ROTC of 38.82%, 19.17%, and 20.85% are higher than HUBS’ negative 20.91%, negative 4.56%, and negative 4.16%, respectively. MSFT’s trailing-12-month levered FCF margin of 22.31% compared to HUBS’ 18.08%.

Valuation

In terms of trailing-12-month non-GAAP P/E, MSFT is currently trading at 33.62x, 70.1% lower than HUBS, which is trading at 112.44x. MSFT’s forward EV/EBITDA multiple of 20.65 is lower than HUBS’ 65.56. Also, MSFT’s trailing-12-month Price to Book and Price/Cash Flow of 11.89x and 27.98x are lower than HUBS’ 22.47x and 79.33x, respectively.

Thus, MSFT is relatively more affordable.

POWR Ratings

MSFT has an overall rating of B, which equates to a Buy in our proprietary POWR Ratings system. Conversely, HUBS has an overall rating of C, translating to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. MSFT has a grade of B for Stability, in sync with its 60-month beta of 0.90. On the other hand, HUBS has a C grade for Stability, consistent with its 60-month beta of 1.59.

Of the 44 stocks in the B-rated Software – Business industry, MSFT is ranked #12, while HUBS is ranked #19.

Beyond what we’ve stated above, we have also rated both stocks for Sentiment, Growth, Momentum, Quality, and Value. Click here to view MSFT Ratings. Get all HUBS ratings here.

The Winner

Amid rapid digitalization worldwide, enterprises across multiple end-use sectors are accelerating the adoption of cutting-edge technologies in their business processes, fueling demand for software solutions and providing high-growth opportunities for industry players.

Therefore, software stocks MSFT and HUBS are expected to benefit considerably from the industry’s bright prospects. However, HUBS’ relatively low profitability, elevated valuation, and bleak near-term prospects make its rival, MSFT, the better buy this week.

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 – Business industry here.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

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MSFT shares rose $1.61 (+0.49%) in premarket trading Wednesday. Year-to-date, MSFT has gained 37.87%, versus a 14.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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