The software industry is expected to thrive as industries continue to digitize. This expansion is driven by increased demand for software solutions that can streamline processes, boost efficiency, and improve customer experiences.
Therefore, it could be wise for investors to buy fundamentally sound software stock Vimeo, Inc. (VMEO) now. However, I think it would be wise to wait for a better entry point in Smartsheet Inc. (SMAR) for the reasons discussed.
Gartner predicts that global software spending will reach $1.04 trillion in 2024, an increase of 13.8% year-over-year. This expansion is being driven mostly by rising demand for cloud-based software solutions and digital transformation projects across industries.
The global software as a service (SaaS) industry is expected to be worth around $1.02 trillion by 2032, at a CAGR of 13.9%.This expansion can be attributed to the increasing use of cloud computing as well as the demand for cost-effective and scalable software solutions.
Also, the increased use of remote work and digital transformation activities across industries is increasing the demand for SaaS apps to improve productivity and collaboration.
Investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 21.7% returns over the past six months and 27.9% over the past nine months.
Let’s delve into the fundamentals of the featured stocks.
Stock to Buy:
Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
VMEO’s trailing-12-month gross profit margin of 77.77% is 59.6% higher than the industry average of 48.73%. Its trailing-12-month asset turnover ratio of 0.69x is 35.3% higher than the industry of 0.51x.
For the third quarter ended September 30, 2023, VMEO reported revenue of $106.825 million. Its gross profit stood at $84.45 million, up marginally year-over-year. Its net earnings came at $8.46 million, compared to a net loss of $21.42 million in the prior year quarter. Also, its EPS came in at $0.05, compared to a loss per share of $0.13 in the year-ago quarter.
Analysts expect VMEO’s revenue to increase 2.4% year-over-year to $423.49 million for the year ending September 2024. The stock has gained 3.5% year-to-date to close the last trading session at $3.55.
VMEO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
VMEO also has a B grade for Value, Sentiment and Quality. It is ranked first among 23 stocks in the B-rated Software – SAAS industry. Click here for the additional POWR Ratings for Growth, Stability and Momentum for VMEO.
Stock to Hold:
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. It serves the aerospace, automotive, biotechnology, consumer, e-commerce, education, finance, government, healthcare, IT services, marketing, media, non-profit, publishing, software, technology, and travel sectors.
SMAR’s trailing-12-month levered FCF margin of 25.54% is 254.6% higher than the industry average of 7.20% while, its trailing-12-month negative EBIT margin of 18.69% compares to the industry average of 4.78%.
SMAR’s total revenue for the fiscal second quarter that ended July 31, 2023, increased 26.2% year-over-year to $235.59 million, while its gross profit stood at $188.55 million, up 29% year-over-year.
However, its total current liabilities came in at $581.65 million for the period that ended July 31, 2023, compared to $574.66 million for the period that ended January 31, 2023.
The consensus revenue estimate of 951.49 million for the year ending January 2024 represents a 24.1% increase year-over-year. Its EPS is expected to come in at $0.55 for the same period. It surpassed EPS estimates in three of four trailing quarters. SMAR’s shares have gained 35.7% over the past year to close the last trading session at $40.33.
SMAR POWR Ratings reflect this optimistic outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system.
It has a C grade for Value, Stability, and Momentum. It is ranked #9 in the same industry. To see SMAR’s rating for Growth, Sentiment and Quality, click here.
What To Do Next?
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VMEO shares were trading at $3.51 per share on Monday afternoon, down $0.04 (-1.13%). Year-to-date, VMEO has gained 2.33%, versus a 16.45% 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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|SMAR||Get Rating||Get Rating||Get Rating|