Despite ongoing economic uncertainty, the software industry is well-positioned to grow and expand significantly in the years ahead. Therefore, quality software stocks Microsoft Corporation (MSFT), ServiceNow, Inc. (NOW), and Verint Systems Inc. (VRNT) could be wise additions to your portfolio now.

Gartner predicts worldwide software spending will exceed $891.39 billion this year, up 12.3% year-over-year.

The global software market is expected to grow at an 11.5% CAGR until 2030. The primary market drivers are an increase in enterprise data volume, expanding business operations automation, and increasing digitization. Furthermore, growing network security and privacy concerns are boosting the industry.

In addition, the worldwide business software market is predicted to grow at an 11.2% CAGR until 2028, reaching $987.61 billion, driven by increasing digitalization, technological advancements in the cloud, and the growing need to analyze vast amounts of business data.

Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 15.8% returns over the past three months.

Let’s delve deeper into the fundamentals of the featured stocks.

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 June 29, 2023, MSFT and Moody’s Corporation (MCO) established a new strategic alliance to provide next-generation data, analytics, research, collaboration, and risk solutions for financial services and global knowledge workers.

The partnership creates innovative offerings that enhance insights into corporate intelligence and risk assessment, powered by Microsoft AI and anchored by Moody’s proprietary data, analytics, and research, based on a combination of Moody’s robust data and analytical capabilities and the power and scale of Microsoft Azure OpenAI Service.

MSFT’s trailing-12-month ROTA and levered ROCE of 18.16% and 38.60% are significantly higher than the industry averages of 0.02% and 0.50%, respectively.

For the third quarter that ended March 31, 2023, MSFT’s revenue increased 7.1% year-over-year to $52.86 billion, and its gross margin increased 8.8% from the year-ago value to $36.73 billion. Its operating income came in at $22.35 billion, up 9.8% year-over-year.

The company’s net income increased 9.4% year-over-year to $18.30 billion, while its EPS was $2.45, an increase of 10.4% from the prior-year period.

The consensus revenue estimate of $235.69 billion for the year ending June 2024 represents a 11.5% increase year-over-year. Its EPS is expected to grow 13.9% year-over-year to $10.99 for the same period. It surpassed EPS estimates in three of four trailing quarters. MSFT’s shares have gained 63.1% over the past year to close the last trading session at $335.05.

MSFT’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to 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 for Sentiment, Stability, and Quality. Within the Software – Business industry, it is ranked #13 out of 50 stocks. Click here for the additional POWR Ratings for Growth, Momentum, and Value for MSFT.

ServiceNow, Inc. (NOW)

NOW is engaged in providing enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. It operates the Now platform for workflow automation, artificial intelligence, machine learning, process mining, performance analytics, electronic service catalogs, portals, etc.

On June 28, 2023, NOW and Cognizant (CTSH) formed a strategic alliance to accelerate the adoption of AI-powered automation across industries. The new agreement is anticipated to help Cognizant and ServiceNow accelerate their way to a $1 billion combined business.

On May 17, NOW partnered with NVIDIA Corporation (NVDA) to create advanced generative AI capabilities that are tailored for enterprise use and can revolutionize business processes by enabling faster and more intelligent workflow automation.

NOW is constantly working on constructing bespoke big language models using NVDA’s software, services, and accelerated infrastructure. The company hopes to expand its already extensive AI functionality by embracing generative AI across numerous enterprise domains through this cooperation.

NOW’s trailing-12-month ROCE of 8.34% is significantly higher than the industry average of 0.50%. Its trailing-12-month ROTA of 2.94% is significantly higher than the industry average of 0.02%.

NOW’s total revenues increased 21.7% year-over-year to $2.09 billion in the first quarter that ended March 31, 2023, while its non-GAAP gross profit increased 22% from the year-ago value to $1.74 billion. The company’s non-GAAP net income amounted to $483 million and $2.37 per share, representing increases of 37.2% and 37% year-over-year, respectively.

Analysts expect NOW’s revenue to increase 22% year-over-year to $8.84 billion for the year ending December 2023. Its EPS is expected to grow 25.3% year-over-year to $9.51 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 42.2% over the past nine months to close the last trading session at $548.08.

NOW’s POWR Ratings reflect its robust outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked #11 in the same industry. It has an A grade for Growth and a B for Sentiment and Quality. To see additional NOW’s ratings for Momentum, Value and Stability, click here.

Verint Systems Inc. (VRNT)

VRNT provides customer engagement solutions worldwide. It offers various applications for forecasting and scheduling, which accommodate the work needed to meet and exceed customer expectations.

VRNT’s trailing-12-month EBIT margin of 9.05% is 110.1% higher than the 4.31% industry average. Its trailing-12-month ROTA of 0.80% is significantly higher than the 0.02% industry average.

VRNT’s gross profit increased 5% year-over-year to $148.16 million in the fiscal first quarter that ended April 30, 2023. The company’s operating income increased significantly from its prior-year quarter to $8.77 million. Its total operating expenses decreased marginally from the prior-year quarter to $139.39 million.

Street expects VRNT’s revenue to increase 3.2% year-over-year to $934.47 million for the year ending January 2024. Its EPS is expected to grow 5.1% year-over-year to $2.65 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 2.6% over the past nine months to close the last trading session at $35.23.

VRNT has an overall B rating, equating to a Buy in our POWR Ratings system. It has a B grade for Value and Growth. It is ranked #12 in the same industry.

Beyond what is stated above, we’ve also rated VRNT for Momentum, Stability, Sentiment, and Quality. Get all VRNT ratings here.

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MSFT shares were trading at $341.27 per share on Friday morning, up $6.22 (+1.86%). Year-to-date, MSFT has gained 42.97%, versus a 16.61% 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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