Focus on Software: Top Picks This Week

The software industry worldwide is witnessing a remarkable expansion, propelled by the rising demand for digital transformation across diverse industry sectors. Moreover, the industry is primed for robust development with the integration of cutting-edge technology.

Therefore, fundamentally robust software stocks Workday, Inc. (WDAY), GoDaddy Inc. (GDDY), and Smartsheet Inc. (SMAR) could be solid buys now.

The software industry plays a vital role in economic advancement and shows promising potential for persistent escalation in the upcoming years. Gartner forecasts worldwide software spending to reach $1.03 trillion in 2024, up 12.7% from the previous year. Furthermore, the global software market is expected to reach $1.79 trillion, growing at a CAGR of 11.7% by 2032.

As per Gartner, there is also an imminent surge anticipated within IT services in 2024, and for the first time, this sector is set to become the largest segment of IT expenditure. An 8.7% growth is anticipated in 2024, taking the IT services spending to an estimated $1.50 trillion. This increase can be attributed largely to businesses investing in improvements to their organizational efficiency and optimization projects.

The forecasted IT spending growth could act as a stimulus for digital transformation across various industries. The rapid digitalization within organizations, coupled with the increasing adoption of advanced technologies such as AI, Cloud, and IoT, encourages progression. Additionally, the need to analyze voluminous business data and swiftly integrate multichannel touchpoints into a unified platform also contributes significantly to the escalating growth and profitability of the software industry.

The business software market is projected to grow at an 11.2% CAGR to reach $1.10 trillion by 2029.

Furthermore, SaaS solutions offer compelling advantages like reliable performance, universal accessibility, and cost-effectiveness, which render them a preferred selection for many businesses. The global SaaS market could reach 1.02 trillion, growing at a CAGR of 13.9% by 2032.

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

Workday, Inc. (WDAY)

WDAY provides enterprise cloud applications in the U.S. and internationally. Its applications help its customers plan, execute, analyze, and extend to other applications and environments and manage their business and operations.

On February 8, WDAY partnered with Insperity, Inc., a leading provider of human resources and business performance solutions, to jointly develop, brand, market, and sell a preeminent full-service HR solution for small and midsize businesses.

The combination of WDAY’s best-in-class technology platform and Insperity’s unmatched service experience will yield an industry-first solution to increase the likelihood, degree, and speed of success for growing companies.

WDAY’s trailing-12-month cash from operations of $1.85 billion is significantly higher than the industry average of $79.77 million. Its trailing-12-month gross profit and levered FCF margins of 74.73% and 24.31% are 53.3% and 167.2% higher than the industry averages of 48.76% and 9.10%, respectively.

For the fiscal third quarter that ended October 31, 2023, WDAY’s total revenues and non-GAAP operating income increased 16.7% and 47.1% year-over-year to $1.87 billion and $462.10 million, respectively. Moreover, its free cash flows stood at $390.83 million, up 11.7% from the year-ago quarter.

For the same quarter, non-GAAP net income and non-GAAP net income per share increased 62.8% and 61.1% from the prior-year quarter to $1.13 billion and $4.27, respectively.

Street expects WDAY’s revenue and EPS for the fiscal first quarter ending April 2024 to increase 16.3% and 14.7% year-over-year to $1.96 billion and $1.50, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 63.7% over the past nine months to close the last trading session at $299.09. Over the past year, it has gained 60.1%.

WDAY’s POWR Ratings reflect its positive prospects. The stock has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Growth and a B for Sentiment and Quality. Within the 131-stock Software – Application industry, it is ranked #17.

To see additional POWR Ratings for Value, Momentum, and Stability for WDAY, click here.

GoDaddy Inc. (GDDY)

GDDY engages in the design and development of cloud-based products in the U.S. and internationally. It operates through two segments: Applications and Commerce and Core Platform. 

On February 5, GDDY partnered with Ethereum Name Service (ENS), a pioneer in blockchain-based naming systems, to enable domain name users to link their domains to ENS effortlessly, with no additional costs or technical experience required. This collaboration signifies a major step toward bridging the gap between the Domain Name System (DNS) and blockchain technology.

Year-to-date through October 31, 2023, GDDY repurchased 17.30 million shares of its common stock for an aggregate purchase price of $1.30 billion, with an average price per share of $72.85. Cumulatively, these repurchases represent an approximate 20% reduction in fully diluted shares from those outstanding at the inception of the current $4 billion buyback authorization.

GDDY’s trailing-12-month cash from operations of $957.90 million is significantly higher than the industry average of $79.77 million. Its trailing-12-month EBIT and levered FCF margins of 13.22% and 18.82% are 179.2% and 106.9% higher than the industry averages of 4.74% and 9.10%, respectively.

For the fiscal third quarter that ended September 30, 2023, GDDY’s total revenue and operating income increased 3.5% and 28.8% year-over-year to $1.07 billion and $167.10 million, respectively. Moreover, its free cash flow stood at $280.20 million, up 5.5% from the year-ago quarter.

For the same quarter, net income attributable to GDDY and net income attributable to GDDY per share of class A common stock increased 31% and 41.3% from the prior-year quarter to $130.70 million and $0.89, respectively.

Street expects GDDY’s revenue and EPS for the fiscal first quarter ending March 2024 to increase 6.6% and 228.6% year-over-year to $1.10 billion and $0.99, respectively.

The stock has gained 59.4% over the past nine months to close the last trading session at $112.31. Over the past six months, it has gained 58.9%.

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

GDDY has a B grade for Growth, Sentiment, and Quality. It is ranked #6 within the B-rated 43-stock Software – Business industry.

Click here for the additional POWR Ratings for GDDY (Value, Momentum, and Stability).

Smartsheet Inc. (SMAR)

SMAR provides enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. It serves 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 cash from operations of $118.37 million is 48.4% higher than the industry average of $79.77 million. Its trailing-12-month gross profit and levered FCF margins of 79.79% and 26.69% are 63.6% and 193.4% higher than the industry averages of 48.76% and 9.10%, respectively.

For the fiscal third quarter that ended October 31, 2023, SMAR’s total revenue and gross profit increased 23.2% and 26.9% year-over-year to $245.92 million and $198.88 million, respectively. Moreover, its free cash flow stood at $11.41 million, compared to a free cash flow of negative $4.65 million in the year-ago quarter.

For the same quarter, non-GAAP net income came at $22.59 million, compared to a non-GAAP net loss of $1.89 million in the prior-year quarter. Also, non-GAAP net income per share stood at $0.16, compared to a non-GAAP loss per share of $0.01 in the year-ago quarter.

For the fourth quarter of fiscal year 2024, the company currently expects total revenue of $254 million to $256 million, representing year-over-year growth of 20% to 21%. Non-GAAP operating income is expected between $21 million and $23 million, while non-GAAP net income per share is projected to come between $0.17 and $0.19.

Street expects SMAR’s revenue and EPS for the fiscal first quarter ending April 2024 to increase 19.9% and 5.1% year-over-year to $263.62 million and $0.20, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters.

The stock has gained 16.6% over the past six months to close the last trading session at $46.54. Over the past three months, it has gained 15.4%.

SMAR’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

SMAR has a B grade for Growth, Sentiment, and Quality. Within the B-rated 20-stock Software – SAAS industry, it is ranked #7.

Beyond what we’ve stated above, we have also rated the stock for Value, Momentum, and Stability. Get all ratings of SMAR here.

What To Do Next?

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WDAY shares were unchanged in premarket trading Tuesday. Year-to-date, WDAY has gained 8.34%, versus a 5.40% rise in the benchmark S&P 500 index during the same period.

From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.

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