The market has witnessed increased volatility due to tensions in the Middle East, sticky inflation, a tight job market, and concerns that the Federal Reserve will not cut interest rates in June. Amidst the volatility, investors could add fundamentally strong software stocks Squarespace, Inc. (SQSP), EverCommerce Inc. (EVCM), and Riskified Ltd. (RSKD) to their watchlist, given their massive growth potential.

The software industry is thriving due to technological advances, digital transformation initiatives, and the shift to cloud-based applications, which improve efficiency, operational efficiency, and flexibility. This year, worldwide software spending is expected to total $1.03 trillion in 2024, an increase of 12.7% from 2023.

The global Software as a Service (SaaS) market is growing due to rising public cloud adoption, low-cost deployment, CRM SaaS solutions, remote work trends, subscription-based models, and scalable software. The worldwide SaaS market is projected to grow at a CAGR of 7.3% to reach $374.50 billion by 2028.

Additionally, the demand for AI, IoT, cloud-based solutions, mobile applications, and digital competitiveness is expected to rise, driven by businesses prioritizing efficiency and innovation. As a result, the market for application development software is anticipated to expand.  The global application development software market is projected to grow at a CAGR of 14.7% to reach $543.60 billion by 2030.

Moreover, investors’ interest in software stocks is evident from the SPDR S&P Software & Services ETF (XSW) 23.2% returns over the past year. With these encouraging market trends in mind, let’s delve into the fundamentals of the three software stocks.

Squarespace, Inc. (SQSP)

SQSP offers domains, websites, marketing, and social media management tools. The company provides commerce solutions, which include tools for selling digital content, classes, appointments, reservations, physical goods, and more.

SQSP’s trailing-12-month gross profit margin of 79.50% is 62.4% higher than the industry average of 48.96%. Its 24.59% trailing-12-month levered FCF margin is 164.5% higher than the 9.29% industry average. Additionally, its 13.93% trailing-12-month Return on Total Capital is 460.2% higher than the 2.49% industry average.

In the fiscal fourth quarter that ended December 31, 2023, SQSP’s revenue and gross profit increased 18.3% and 6.6% year-over-year to $270.72 million and $201.07 million, respectively.

For the same quarter, adjusted EBITDA and unlevered free cash flow stood at $64.70 million and $65.02 million, respectively, up 2.5% and 56.6% from the prior-year quarter.

Analysts expect SQSP’s revenue for the quarter ended March 31, 2024, to increase 16.6% year-over-year to $276.34 million. The company’s EPS for the quarter ending June 30, 2024, is expected to grow 36.5% year-over-year to $0.33. Shares of SQSP have gained 22.9% over the past six months to close the last trading session at $36.59.

SQSP’s POWR Ratings reflect this promising outlook. It 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.

SQSP has an A grade for Quality. Within the B-rated Software – Application industry, it is ranked #42 out of 133 stocks. To see the additional ratings of SQSP for Growth, Value, Momentum, Stability, and Sentiment, click here.

EverCommerce Inc. (EVCM)

EVCM delivers integrated software solutions for global service-based SMBs, facilitating efficient management and growth across diverse industries with billing, customer engagement, and marketing technology.

EVCM’s trailing-12-month EBITDA margin of 15.48% is 64.5% higher than the 9.41% industry average. Its trailing-12-month levered FCF margin of 14.44% is 55.4% higher than the 9.29% industry average. Additionally, its 65.80% trailing-12-month gross profit margin is 34.4% higher than the 48.96% industry average.

EVCM’s revenue for the fourth quarter that ended December 31, 2023, increased 4.7% year-over-year to $169.44 million. The company’s adjusted gross profit grew 5.7% from the year-ago value to $114.04 million. Furthermore, the company’s adjusted EBITDA increased 22.4% year-over-year to $43.08 million.

For the quarter that ended June 30, 2024, EVCM’s EPS and revenue are expected to increase 148.3% and marginally year-over-year to $0.14 and $170.59 million, respectively. Over the past month, the stock has declined 10.3% to close the last trading session at $8.75.

EVCM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.

It is ranked #9 out of 19 stocks in the A-rated Software – SAAS industry. It has an A grade for Growth and a B for Value and Stability. To see additional EVCM ratings for Momentum, Sentiment, and Quality, click here.

Riskified Ltd. (RSKD)

Headquartered in Tel Aviv, Israel, RSKD and its subsidiaries develop and offer an e-commerce risk management platform that allows online merchants to create trusted relationships with consumers in the United States, Europe, the Middle East, Africa, the Asia-Pacific, and the Americas.

RSKD’s trailing-12-month gross profit margin of 51.25% is 4.7% higher than the industry average of 48.96%.

During the fiscal fourth quarter that ended December 31, 2023, RSKD’s revenue and gross profit increased 6% and 17.1% year-over-year to $84.07 million and $48.52 million, respectively.

Also, for the same quarter, its non-GAAP net income came in at $13.01 million, or $0.07 per share, up 167.2% and 133.3% year-over-year, respectively.

Street expects RSKD’s revenue for the quarter ended March 31, 2024, to increase 9.1% year-over-year to $75.18 million. For the fiscal year ending December 31, 2024, RSKD’s revenue and EPS are expected to grow 10.6% and 195.4% year-over-year to $329.15 million and $0.15.

The company surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 29.6% to close the last trading session at $5.08.

It’s no surprise that RSKD has an overall B rating, equating to a Buy in our POWR Ratings system.

It has a B grade for Sentiment. It is ranked #43 in the Software – Application industry. Beyond what is stated above, we’ve also rated RSKD for Growth, Value, Momentum, Stability, and Quality. Get all RSKD ratings here.

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SQSP shares were trading at $36.02 per share on Monday morning, down $0.57 (-1.56%). Year-to-date, SQSP has gained 9.12%, versus a 8.05% 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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