Despite the high-interest rate environment, the software application industry looks well-positioned to grow significantly due to the increasing shift to cloud platforms and the integration of highly demanded technologies, such as generative AI, into traditional software applications.
Before diving deeper into their fundamentals, let’s discuss what’s happening in the software space.
Rising digital transformation initiatives by enterprises are leading to a surge in demand for cloud-based software applications. Enterprises are swiftly transitioning from traditional to cloud-based software applications for enhanced efficiency.
Software spending is expected to grow 12.9% year-over-year to $916.24 billion this year and 13.8% to $1.04 trillion in 2024. The growing adoption of emerging technologies like generative AI is expected to be pivotal in driving demand for software applications.
Software application companies with subscription-based business models are expected to benefit strongly from the integration of generative AI into their applications. Goldman Sachs expects the total addressable market (TAM) of the generative AI software to be approximately $150 billion.
Gartner’s John-David Lovelock said, “In 2023 and 2024, very little IT spending will be tied to GenAI. However, organizations are continuing to invest in AI and automation to increase operational efficiency and bridge IT talent gaps.”
“The hype around GenAI is supporting this trend, as CIOs recognize that today’s AI projects will be instrumental in developing an AI strategy and story before GenAI becomes part of their IT budgets starting in 2025,” he added.
Considering these conducive industry trends, let’s evaluate the three Software – Application picks, beginning with the third choice.
Stock #3: JFrog Ltd. (FROG)
FROG provides DevOps platform in the United States, Israel, and internationally. The company’s products include JFrog Artifactory, JFrog Pipelines, JFrog Xray, JFrog Distribution, and JFrog Advanced Security. Its products include JFrog Artifactory Edge, JFrog Mission Control, JFrog Insight, and JFrog Connect.
On September 13, 2023, FROG unveiled the industry’s first end-to-end platform for accelerating the build and release of secure software.
FROG’s co-founder and CEO, Shlomi Ben Haim, said, “JFrog has been strategically investing heavily in the development of comprehensive, DevOps-centric security solutions aimed at addressing future threats. JFrog automates DevSecOps processes uniquely at the binary level, and our customers affirm that this is the most effective approach to safeguarding their software supply chain.”
In terms of the trailing-12-month gross profit margin, FROG’s 77.56% is 57% higher than the 49.41% industry average. Likewise, its 25.70% trailing-12-month levered FCF margin is 241.8% higher than the industry average of 7.52%.
For the fiscal third quarter ended September 30, 2023, FROG’s total subscription revenue increased 23.1% year-over-year to $88.64 million. Its net cash provided by operating activities rose 406.6% over the prior-year quarter to $25.98 million. The company’s non-GAAP gross profit increased 22.3% year-over-year to $74.15 million.
Its non-GAAP operating income increased 866.7% year-over-year to $11.89 million. In addition, its non-GAAP net income rose 846.1% year-over-year to $16.61 million. Also, its non-GAAP EPS came in at $0.15, representing an increase of 650% year-over-year.
Street expects FROG’s EPS and revenue for the quarter ending December 31, 2023, to increase 211.7% and 21.6% year-over-year to $0.12 and $93.07 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 34.3% to close the last trading session at $27.46.
FROG’s POWR Ratings reflect its solid prospects. 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.
It is ranked #41 out of 132 stocks in the Software – Application industry. It has a B grade for Growth, Sentiment, and Quality. Click here to see the other ratings of FROG for Value, Momentum, and Stability.
Stock #2: ZoomInfo Technologies Inc. (ZI)
ZI provides go-to-market intelligence and engagement platform for sales and marketing teams. The company’s cloud-based platform provides information on organizations and professionals to help users identify target customers and decision-makers, obtain continually updated predictive lead and company scoring, monitor buying signals and other attributes of target companies, craft messages, and engage through automated sales tools.
On September 28, 2023, ZI announced its powerful generative AU tool within Chorus, its conversation intelligence solution, that automatically drafts follow-up emails after meetings.
In terms of the trailing-12-month net income margin, ZI’s 11.10% is 221.9% higher than the 3.45% industry average. Likewise, its 24.03% trailing-12-month EBITDA margin is 31.3% higher than the industry average of 18.30%. Furthermore, the stock’s 1.92% trailing-12-month Return on Total Assets is 31.4% higher than the industry average of 1.46%.
ZI’s revenues for the third quarter that ended September 30, 2023, increased 9.1% year-over-year to $313.80 million. Its adjusted operating income rose 6.6% over the prior-year quarter to $126.20 million. The company’s adjusted net income increased 8.5% year-over-year to $105 million. Also, its adjusted EPS came in at $0.26, representing an increase of 8.3% year-over-year.
For the quarter ending December 31, 2023, ZI’s revenue is expected to increase 2.9% year-over-year to $310.59 million. Its fiscal 2023 EPS is expected to increase 13.5% year-over-year to $1. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past month, the stock has declined 22.7% to close the last trading session at $13.09.
ZI’s POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
Within the same industry, it is ranked #39. It has a B grade for Growth and Quality. To see the additional ratings of ZI for Value, Momentum, Stability, and Sentiment, click here.
Stock #1: Yalla Group Limited (YALA)
Headquartered in Dubai, the United Arab Emirates, YALA operates a social networking and entertainment platform primarily in the Middle East and North Africa region. It provides mobile applications, including Yalla, a voice-centric group chat platform; and Yalla Ludo, a casual gaming application. The company’s platform offers group chatting and games services; and sells virtual items, as well as provides upgrade services.
In terms of the trailing-12-month gross profit margin, YALA’s 63.24% is 30% higher than the 48.63% industry average. Likewise, its 24.34% trailing-12-month levered FCF margin is 218.6% higher than the industry average of 7.64%. Furthermore, the stock’s 20.17% trailing-12-month Return on Common Equity is 398% higher than the industry average of 4.05%.
For the fiscal second quarter ended June 30, 2023, YALA’s average MAUs rose 14.3% year-over-year to 34.19 million. Its number of paying users increased 26.6% over the prior-year quarter to 13.40 million. The company’s revenues increased 4.1% year-over-year to $79.25 million.
In addition, its non-GAAP operating income rose 0.7% year-over-year to $29.43 million. Its non-GAAP net income attributable to YALA’s shareholders rose 21.1% year-over-year to $34.97 million. In addition, its non-GAAP EPS came in at $0.19, representing an increase of 18.8% year-over-year.
Analysts expect YALA’s revenue for the quarter ended September 30, 2023, to increase 4.4% year-over-year to $83.60 million. Its EPS for fiscal 2023 is expected to increase 21.7% year-over-year to $0.73. Over the past year, the stock has gained 60.9% to close the last trading session at $5.68.
YALA’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to Buy in our proprietary rating system.
It is ranked #33 in the Software – Application industry. It has a B grade for Value and Sentiment. Click here to see the other ratings of YALA for Growth, Momentum, Stability, and Quality.
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ZI shares were unchanged in premarket trading Tuesday. Year-to-date, ZI has declined -56.53%, versus a 15.19% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...
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