Because of the increasing reliance of enterprises on software solutions, the software industry is poised for significant growth. Technological advancements are strengthening the industry even more by encouraging innovation, improving development processes, and enabling the creation of immersive, interconnected experiences.

To that end, it could be wise to invest in fundamentally sound software stocks, Microsoft Corporation (MSFT), ServiceNow, Inc. (NOW), and RingCentral, Inc. (RNG), that hold the potential to generate solid returns. Let’s understand this in detail.

This year, the software industry is poised for robust growth as businesses prioritize spending on software-driven transformation initiatives to gain a competitive edge through increased productivity and automation.

The industry’s standout trend lies in software development companies’ escalated adoption of cloud-native solutions, empowering application development, team management, and communication. These infrastructure-independent solutions function seamlessly across various servers, ensuring effortless integration for any company.

Moreover, technologies such as AI, cybersecurity, blockchain, software outsourcing, and IoT are catalyzing the industry’s expansion by driving innovation, improving security measures, enhancing development processes, and unlocking the potential for immersive, interconnected experiences.

On that note, Gartner forecasts worldwide software spending to reach $911.66 billion in 2023, registering a 13.5% year-over-year increase. Meanwhile, according to Spherical Insights, the global enterprise software market is expected to grow at a CAGR of 11% and reach $519.88 billion by 2030.

Considering the industry’s ongoing expansion, solid software stocks MSFT, NOW, and RNG could be ideal investments for potential gains.

Let’s now delve into the fundamentals of these stocks.

Microsoft Corporation (MSFT)

Tech giant MSFT develops software, services, devices, and solutions. It operates through three segments, Productivity and Business Processes, which includes Office, Teams, and LinkedIn; Intelligent Cloud, offering public/private servers and cloud services; and More Personal Computing, encompassing Windows, Devices, Gaming, search, and ads.

On July 26, MSFT partnered with PayPal Holdings, Inc. (PYPL), integrating its Pay Later solution in multiple countries. These integrations are expected to provide flexible payment choices, fostering customer loyalty and potentially benefiting MSFT through increased sales and customer satisfaction.

Moreover, on June 29, MSFT and Moody’s Corporation (MCO) joined forces to offer advanced data, analytics, research, and risk solutions to financial services and global knowledge workers.

By merging MCO’s insights with Microsoft Cloud services such as Azure OpenAI Service, Fabric, and Teams, MSFT aims to provide next-gen solutions for improved business intelligence. This could drive customer adoption and revenue growth and enhance MSFT’s market position.

For the fiscal 2023 fourth quarter that ended June 30, MSFT’s gross margin grew 11.2% year-over-year to $39.39 billion. Its operating income rose 18.1% from the year-ago value to $24.25 billion. Also, the company’s net income and EPS increased 20% and 20.6% year-over-year to $20.08 billion and $2.69, respectively.

The consensus revenue estimate of $235.12 billion for the fiscal year (ending June 2024) reflects an 11% year-over-year improvement. Likewise, the consensus EPS estimate of $11.02 for the ongoing year indicates a 12.4% rise year-over-year. Moreover, the company topped the consensus EPS estimates in all four trailing quarters.

Over the past six months, the stock has gained 33.3% to close the last trading session at $330.72.

MSFT’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

MSFT has a B grade for Stability, Quality, and Sentiment. It has ranked #9 in the 49-stock Software – Business industry.

In addition to the POWR Ratings I’ve just highlighted, you can see MSFT’s ratings for Growth, Value, and Momentum here.

ServiceNow, Inc. (NOW)

NOW offers global enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services. The company’s Now platform enables workflow automation, artificial intelligence, machine learning, robotic process automation, data benchmarking, encryption, and collaboration and development tools.

On July 26, NOW and KPMG extended their partnership to transform finance, supply chain, and procurement operations. NOW foresees a $11 billion market by 2025 for procurement and sourcing, along with lucrative opportunities for integrated finance and supply chain solutions on a simplified platform.

NOW’s strategic alliance with KPMG could result in significant financial advantages. By co-developing AI-driven solutions, NOW would accelerate its customers’ business architecture, delivering heightened speed, productivity, and profitability across finance, supply chain, and procurement operations.

On May 17, NOW and NVIDIA Corporation (NVDA) announced a strategic partnership wherein NOW would utilize NVDA’s advanced software and infrastructure to develop custom large language models for its ServiceNow Platform. This would empower IT, customer service, employees, and developers to heighten workflow automation and boost productivity.

For the second quarter that ended June 30, 2023, NOW’s non-GAAP gross profit grew 22.7% year-over-year to $1.76 billion. Its non-GAAP income from operations rose 36.3% from the year-ago value to $544 million. Furthermore, the company’s non-GAAP net earnings and non-GAAP EPS came in at $486 million and $2.37, up 47.7% and 46.3% year-over-year, respectively.

NOW’s revenue is expected to grow 23% year-over-year to $8.91 billion for the fiscal year ending December 2023. The company’s EPS for the same period is estimated to be $9.95, indicating a 31.1% year-over-year improvement. Also, the company surpassed its consensus EPS estimates in all of the trailing four quarters.

The stock has gained 45.2% year-to-date to close the last trading session at $559.89.

NOW’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

NOW has an A grade for Growth and a B for Sentiment and Quality. It is ranked #13 out of 49 stocks within the Software – Business industry.

Click here to access additional NOW ratings (Stability, Value, and Momentum). 

RingCentral, Inc. (RNG)

RNG is a provider of enterprise cloud communications, video meetings, collaboration, and contact center Software-as-a-Service (SaaS) solutions. Its portfolio comprises RingCentral MVP, a UCaaS platform; Customer engagement solutions; and RingCentral Video, a video meeting solution with team messaging, enabling smart video meetings.

On June 27, RNG unveiled that it was the first global cloud provider to furnish fully compliant cloud phone services in India. The country’s impressive 5.5% average GDP growth over a decade and increasing corporate acceptance for hybrid work provide RNG with a significant opportunity to introduce its leading cloud solutions to this burgeoning market.

Furthermore, on May 8, RNG announced the next generation of RingCentral for Microsoft Teams 2.0. The integration of RNG’s premium cloud PBX capabilities within Teams, without requiring an extra application, would attract more customers.

Also, innovative features and compatibility with RingCentral Contact Center™ could strengthen RNG’s position in the market, driving revenue growth.

For the first quarter that ended March 31, 2023, RNG’s non-GAAP income from operations rose 89.1% year-over-year to $92.01 million. Its adjusted EBITDA grew 71.4% from the year-ago value to $112.30 million.  Also, its non-GAAP net income and non-GAAP EPS increased 95.1% and 94.9% year-over-year to $73.23 million and $0.76, respectively.

The consensus revenue estimate of $2.20 billion for the fiscal year (ending December 2023) reflects a 10.5% year-over-year improvement. Similarly, the consensus EPS estimate of $3.23 for the current year indicates a growth of 62.2% year-over-year. Furthermore, the company topped its consensus EPS estimates in all four trailing quarters.

Shares of RNG have gained 21.1% over the past month to close the last trading session at $39.13.

RNG’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of B, which equates to Buy in our pro­­­­­­­­­prietary rating system.

RNG has a B grade for Growth and Value. It has ranked #14 out of 49 stocks within the same industry.

Click here to access additional RNG ratings for Stability, Momentum, Quality, and Sentiment.

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MSFT shares were trading at $338.65 per share on Friday afternoon, up $7.93 (+2.40%). Year-to-date, MSFT has gained 41.87%, versus a 20.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Aanchal Sugandh

Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns. More...

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