The rising use of software in most businesses and the growing popularity of flexible software solutions are expected to drive growth in the software industry. So, investors could consider A-rated software stocks VMware, Inc. (VMW), Informatica Inc. (INFA), and Pegasystems Inc. (PEGA). These stocks are A-rated in our proprietary rating system.

The software market is driven by the rapid increase in enterprise data volume and the automation of business processes across end-use industries such as retail, manufacturing, healthcare, and transportation. The increased deployment of enterprise software and services across IT infrastructure to facilitate better decision-making and improve market position for businesses is also expected to benefit the market.

The global business software and services market is expected to expand at a CAGR of 11.9% until 2030.

Moreover, deploying 5G services in various sectors amplifies the need for robust security measures to safeguard data and mitigate cyber threats. This trend is projected to fuel the growth of the network security market.

The total security software revenue is projected to reach $51.46 billion by 2029, growing at a CAGR of 13.9%.

In addition, the increasing adoption of cloud computing, the growing popularity of subscription-based models, and the need for cost-effective and flexible software solutions are expected to drive growth in SaaS market. The global software as a Service (SaaS) market is projected to grow at a CAGR of 18.1% until 2032.

Considering these conducive trends, let’s take a look at the fundamentals of the three best software stocks.

VMware, Inc. (VMW)

VMW provides software solutions in the areas of modern applications, cloud management and infrastructure, networking, security, and workspaces in the United States and internationally.

On November 7, 2023, VMW and Google Cloud (GOOG) announced an expanded partnership to deliver Google Cloud’s AlloyDB Omni database on VMware Cloud Foundation, starting with on-premises private clouds. The powerful combination of AlloyDB Omni, a PostgreSQL-compatible database that runs anywhere and offers built-in support for generative AI, and the highly performant, more secure, reliable VMW Cloud Foundation, will enable enterprises to modernize their more demanding databases and applications.

The solution will allow customers to simplify their management of PostgreSQL, modernize their existing databases, and help accelerate their Al journey with a powerful, proven platform for building transformative generative AI applications.

VMW’s trailing-12-month cash per share of 15.77x is 722.4% higher than the 1.92x industry average.

For the fiscal second quarter ended August 4, 2023, VMW’s total revenue increased 6.1% from the previous year’s quarter to $3.41 billion. Its non-GAAP operating income increased 6.2% from the year-ago value to $819 million. The company’s adjusted net income and non-GAAP EPS came in at $644 million and $1.49, representing increases of 18.8% and 16.4%, respectively, from the prior-year quarter.

VMW’s shares have gained 22% over the past six months to close the last trading session at $143.48.

VMW’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 are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

VMW has an A grade for Quality and B in Value. It is ranked #4 out of 45 stocks in the B-rated Software – Business industry.  

Click here to see the additional POWR Ratings for VMW (Momentum, Growth, Sentiment, and Stability).

Informatica Inc. (INFA)

INFA develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at enterprise scale in the United States.

INFA’s trailing-12-month levered FCF margin of 25.08% is 198.3% higher than the industry average of 8.41%. Its trailing-12-month gross profit margin of 79.33% is 63% higher than the industry average of 48.67%.

INFA’s total revenues for the fiscal third quarter ended September 30, 2023, increased 9.8% year-over-year to $408.56 million. Its software revenues increased 21.8% from the year-ago quarter to $262.03 million. The company’s non-GAAP net income grew 53.2% from the same quarter last year to $80.62 million, and non-GAAP EPS increased 50% year-over-year to $0.27.

The consensus revenue estimate of $1.58 billion for the year ending December 2023 represents a 5.1% increase year-over-year. Its EPS is expected to grow 14.3% year-over-year to $0.89 for the same year. It surpassed EPS and revenue estimates in three of four trailing quarters.

Shares of INFA has gained 55.6% over the past six months to close the last trading session at $28.98.

INFA’s POWR Ratings reflect its positive outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

The stock has an A grade for Growth and a B in Stability, Sentiment, and Quality. The stock is ranked #2 out of 23 stocks in the A-rated Software – SAAS industry.

Beyond what is stated above, we’ve also rated for Value and Momentum. Get all INFA ratings here.

Pegasystems Inc. (PEGA)

PEGA develops, markets, licenses, hosts, and supports enterprise software applications. The company provides Pega Platform, an intelligent automation software for clients’ processes and workflows, and Pega Infinity, a software platform that unifies customer engagement and digital process automation.

On December 15, 2023, PEGA announced a quarterly cash dividend of $0.03 per share, payable on January 16, 2024. The company’s annual dividend of $0.12 translates to a 0.24% yield on the prevailing prices, while its four-year average dividend yield is 0.18%.

PEGA’s trailing-12-month gross profit margin of 71.94% is 47.8% higher than the 48.67% industry average. Its trailing-12-month levered FCF margin of 13.34x is 58.7% higher than the 8.41x industry average.

In the third quarter, which ended on September 30, 2023, PEGA’s total revenue increased 23.6% year-over-year to $334.64 million. The company’s non-GAAP net income and non-GAAP EPS came in at $37.60 million and $0.44, compared to a non-GAAP net loss and non-GAAP loss per share of $27.50 million and $0.34 in the same quarter last year, respectively.

Street expects PEGA’s revenue to increase 4.3% year-over-year to $1.37 billion for the year ending December 2023. Its EPS is expected to grow at 136.3% year-over-year to $1.70 for the same year.

The stock gained 45.8% year-to-date to close the last trading session at $49.93.

PEGA’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.

The stock has an A grade for Growth and a B in Sentiment and value. It is ranked #5 in the 43-stock in the B-rated Software – Business industry.

To access PEGA’s additional ratings for Quality, Stability, and Momentum, Click here.

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VMW shares were trading at $143.00 per share on Monday morning, up $0.52 (+0.36%). Year-to-date, VMW has gained 16.49%, versus a 24.80% rise in the benchmark S&P 500 index during the same period.

About the Author: Nidhi Agarwal

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More...

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