Amid the high inflation and the Fed’s aggressive interest rate hikes since last year,  software stocks had faced intense selling. The tech-heavy Nasdaq Composite took a hard hit last year as it entered into the bear market.

However, with rising demand and adoption of AI tools and cloud-based software solutions across various sectors, the software industry is well-poised for long-term growth. In this scenario, investors could consider investing in the software stocks VMware, Inc. (VMW), F5, Inc. (FFIV), and Yext, Inc. (YEXT). These stocks have the highest rating of A in our POWR Ratings system.

Before discussing the fundamentals of these stocks, let’s explore why the software industry is well-positioned for long-term growth.

The advent of new technology, including AI-powered tools and cloud-based solutions, enhances customer and user experience, allowing companies to bridge the existing gaps. The importance of software in today’s day and age can be gauged from the massive success of the AI-powered chatbot, ChatGPT.

Businesses are relying more on software-based cloud solutions for their operations. According to Gartner, worldwide IT spending is forecasted to rise 2.4% year-over-year, with the software segment growing 9.3% in 2023.

Moreover, according to Statista, the worldwide software market revenues are expected to grow at a CAGR of 5.7%, resulting in a market volume of $812.90 billion by 2027. So, investors could look to add these highest-rated fundamentally strong software stocks, VMW, FFIV, and YEXT, to their portfolios.

VMware, Inc. (VMW)

VMW provides software solutions in modern applications, cloud management and infrastructure, networking, security, and digital workspaces worldwide. It offers VMware multi-cloud solutions, including VMware vSphere, vSAN and VxRail, vRealize Cloud Management solutions, and VMware Cloud Foundation.

In terms of the trailing-12-month EBIT margin, VMW’s 16.34% is 254.5% higher than the 4.61% industry average. Its 9.84% trailing-12-month net income margin is 264.2% higher than the 2.70% industry average. Likewise, its 399.39% trailing-12-month Return on Common Equity is significantly higher than the 2.69% industry average.

VMW’s total revenue increased 5.2% year-over-year to $3.71 billion for the fourth quarter that ended February 3, 2023. Its non-GAAP net income increased 7% year-over-year to $915 million. The company’s non-GAAP EPS came in at $2.13, representing a 5.4% increase year-over-year.

VMW’s EPS and revenue for the quarter ending April 2023 are expected to increase 17.5% and 6.9% year-over-year to $1.50 and $3.30 billion, respectively. Over the past six months, the stock has gained 11.6% to close the last trading session at $122.28.

VMW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Quality and a B for Value, Stability, and Sentiment. Within the Software – Business industry, it is ranked first of 51 stocks. Click here to see the other POWR Ratings of VMW for Growth and Momentum.

F5, Inc. (FFIV)

FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides a range of professional services, including consulting, training, installation, maintenance, and other technical support services.

In January 2023, FFIV entered into a definitive agreement to acquire Lilac Cloud. Lilac Cloud offers cloud-based services for gaming, app downloads, event broadcasting, app security, and more. The acquisition will help FFIV improve its portfolio of app security and optimization tools.

In terms of the trailing-12-month EBIT margin, FFIV’s 14.38% is 212.1% higher than the 4.61% industry average. Its 79.35% trailing-12-month gross profit margin is 57.6% higher than the 50.35% industry average. Likewise, its 5.92% trailing-12-month Return on Total Assets is significantly higher than the 0.67% industry average.

For the fiscal first quarter ended December 31, 2022, FFIV’s total net revenues increased 1.9% year-over-year to $700.38 million. The company’s non-GAAP net income and non-GAAP EPS came in at $149.27 million and $2.47, respectively. Its net cash provided by operating activities rose 74.4% year-over-year to $157.63 million.

Analysts expect FFIV’s EPS and revenue for the quarter ending March 31, 2023 to increase 13.9% and 10.2% year-over-year to $2.43 and $699.18 million, respectively. It has an impressive earnings surprise history, surpassing the consensus EPS estimates in each of the trailing four quarters.

Over the past month, the stock has gained marginally to close the last trading session at $141.12.

FFIV’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy.

It is ranked #3 in the same industry. In addition, it has an A grade for Quality and a B for Growth and Value. To see the other ratings of FFIV for Momentum, Stability, and Sentiment, click here.

Yext, Inc. (YEXT)

YEXT organizes business facts to provide answers to consumer questions in North America and internationally. It operates the Yext platform, a cloud-based platform that allows its customers to provide answers to consumer questions, to control the facts about their businesses and the content of their landing pages, and to manage their consumer reviews, as well as provides customers to update their information and content.

In terms of the trailing-12-month gross profit margin, YEXT’s 74.07% is 47.1% higher than the 50.35% industry average. Its 8.98% trailing-12-month levered FCF margin is 47.8% higher than the 6.08% industry average. Likewise, its 0.70x trailing-12-month asset turnover ratio is 15.2% higher than the 0.61x industry average.

For the fiscal fourth quarter ended January 31, 2023, YEXT’s revenue increased by 1% to $101.90 million. The company’s non-GAAP net income came in at $6.29 million, compared to a non-GAAP net loss of $4.09 million in the prior-year quarter.

Its adjusted EBITDA increased 703.9% year-over-year to $10.90 million. Additionally, its non-GAAP net EPS came in at $0.05, compared to a non-GAAP net loss per share of $0.03 in the prior-year quarter.

YEXT’s EPS and revenue for the quarter ending October 2023 are expected to increase 150% and 1.6% year-over-year to $0.05 and $100.83 million, respectively. It has an impressive earnings surprise history, surpassing its consensus EPS estimates in each of the trailing four quarters.

Over the past six months, the stock has gained 107.4% to close the last trading session at $9.25.

YEXT’s POWR Ratings reflect its solid prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

It is ranked #2 in the Software – Business industry. It has an A grade for Quality and a B for Growth, Value, and Sentiment. In total, we rate YEXT on eight different levels. Beyond what we stated above, we have also given YEXT grades for Momentum and Stability. Get all YEXT ratings here.

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VMW shares were unchanged in premarket trading Monday. Year-to-date, VMW has declined -0.39%, versus a 4.46% rise in the benchmark S&P 500 index during the same period.

About the Author: Malaika Alphonsus

Malaika's passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in Economics and Psychology, she intends to assist investors in making informed investment decisions. More...

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