The 5 Best Software Stocks for Your Portfolio The software industry is projected to undergo robust expansion this year, fueled by the adoption of AI and digitization at a rapid pace. Therefore, quality software stocks, The Descartes Systems...
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The software industry is projected to undergo robust expansion this year, fueled by the adoption of AI and digitization at a rapid pace. Therefore, quality software stocks, The Descartes Systems Group (DSGX), Smartsheet Inc. (SMAR), New Relic (NEWR), Vimeo, Inc. (VMEO), and Consensus Cloud Solutions (CCSI), could be solid portfolio additions now. Read on.
The burgeoning integration of AI and other cloud-based applications in business operations paves the way for the Software-as-a-Service (SaaS) sector's solid growth in the foreseeable future.
Therefore, investing in quality SaaS stocks The Descartes Systems Group Inc. (DSGX), Smartsheet Inc. (SMAR), New Relic, Inc. (NEWR), Vimeo, Inc. (VMEO), and Consensus Cloud Solutions, Inc. (CCSI) would be wise now.
Before delving into the fundamentals of these stocks, it's crucial first to understand what's happening in the SaaS industry.
The emergence of SaaS has proven to be one of the most ground-breaking developments in business software over the years, fundamentally reshaping how companies deploy and use these indispensable tools.
Enterprises are progressively acknowledging the benefits of hybrid and public cloud solutions, integrating them extensively to bolster overall business operations. Centralized, data-driven analytics tools are in high demand, catalyzing insightful and informed decision-making processes. The ongoing AI wave further strengthens the SaaS industry's prospects.
Within the extensive cloud computing domain, SaaS is taking precedence as the primary delivery model for various enterprise applications. These SaaS solutions offer businesses compelling advantages of reliable performance, ubiquitous accessibility, and cost efficiency, thus becoming significantly attractive to various companies. SaaS spending is projected to grow 17.9% to $197 billion in 2023.
As per Statista, the revenue in SaaS is predicted to expand at a CAGR of 7.9% to reach $344 billion by 2027.
Furthermore, the advent of a comparably revolutionary change, vertical SaaS, presents the potential to fortify the SaaS industry. This customized solution, meticulously crafted to satisfy specific industry requirements, promises to redefine the standard SaaS landscape.
Therefore, fundamentally robust SaaS stocks DSGX, SMAR, NEWR, VMEO, and CCSI could be worth adding to your portfolio.
The Descartes Systems Group Inc. (DSGX)
Headquartered in Waterloo, Canada, DSGX provides cloud-based logistics and supply chain management business process solutions that enhance the productivity, performance, and security of logistics-intensive businesses worldwide.
On July 17, DSGX announced that UK-based Stop Start Transport Limited, a provider of distribution, warehousing, and logistics services, is undertaking a digital transformation of its business by using DSGX's last mile delivery solution to unlock distribution capacity, enhance customer communications and enable more effective management of logistics data. This should bode well for DSGX.
On April 20, DSGX acquired substantially all assets of Localz Pty Ltd., a cloud-based customer engagement platform for day-of-service interaction and order management. The purchase price for the acquisition was approximately $5.9 million, net of cash acquired, which was funded from cash on hand.
DSGX's trailing-12-month net income margin of 21.43% is 978.1% higher than the industry average of 1.99%. Also, its trailing-12-month ROCE and ROTA of 10.11% and 7.90% are significantly higher than the industry averages of 0.63% and 0.06%, respectively.
DSGX's revenues for the fiscal first quarter that ended April 30, 2023, increased 17.4% year-over-year to $136.61 million, while its gross margin stood at $103.73 million, up 17.1% year-over-year. Its adjusted EBITDA increased 12.7% year-over-year to $57.70 million.
Additionally, its net income increased 27% year-over-year to $29.35 million, while its earnings per share came in at $0.34, representing a 25.9% rise from the prior-year quarter.
DSGX's revenue and EPS for the fiscal second quarter ending July 2023 are expected to increase 13.6% and 44.9% year-over-year to $139.75 million and $0.40, respectively. It surpassed the consensus revenue estimates in three of the trailing four quarters, which is impressive.
The stock has gained 12.4% over the past six months to close the last trading session at $80.25. Over the past month, the stock gained 2.2%.
DSGX's positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
The stock has an A grade for Stability and B for Sentiment and Quality. Within the Software – SAAS industry, it is ranked #10 out of 25 stocks.
To see the additional ratings of DSGX for Growth, Value, and Momentum, click here.
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.
On June 29, SMAR was a customer's choice in the 2023 Gartner Peer Insights "Voice of Customer' in the collaborative work management market. SMAR received the highest ranking (4.6 out of 5) and the highest percentage of customers willing to recommend the platform (98%).
SMAR's trailing-12-month gross profit margin of 78.74% is 61.8% higher than the industry average of 48.66%. Also, its trailing-12-month asset turnover ratio of 0.78x is 28.8% higher than the industry average of 0.61x.
SMAR's total revenue for the fiscal first quarter that ended April 30, 2023, increased 30.6% year-over-year to $219.89 million, while its gross profit stood at $174.01 million, up 32.7% year-over-year. Its net cash provided by operating activities came in at $34.57 million, compared to net cash used in operating activities of $5.05 million.
Additionally, non-GAAP net income and net income per share stood at $25.05 million and $0.18, compared to non-GAAP net loss and net loss per share of $23.75 million and $0.18, respectively, in the year-ago quarter. Also, its cash, cash equivalents, and restricted cash increased 23.1% year-over-year to $295.56 million.
SMAR's revenue for the fiscal second quarter ending July 2023 is expected to increase 23% year-over-year to $229.55 million, while its EPS is expected to come in at $0.07. It surpassed the consensus revenue and EPS estimates in each of the trailing four quarters.
The stock gained 4.1% intraday to close the last trading session at $42.88. Over the past year, the stock gained 40.6%.
SMAR's POWR Ratings reflect a robust outlook. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
The stock has a B grade for Growth, Sentiment, and Quality. Within the same industry, it is ranked #9.
Click here to see the SMAR's additional ratings for Value, Momentum, and Stability,
New Relic, Inc. (NEWR)
NEWR is a software-as-a-service company that delivers a software platform for customers to collect telemetry data and derive insights from that data in a unified front-end application. It offers a suite of products on its open and extensible cloud-based platform, which enables users to collect, store, and analyze telemetry data.
On July 10, NEWR announced that it was named a Leader in the 2023 Gartner Magic Quadrant for Application Performance Monitoring and Observability. For the 11th consecutive time, NEWR is recognized for its Completeness of Vision and Ability to Execute.
On June 26, NEWR launched New Relic APM 360, the industry's next application performance monitoring (APM) evolution that goes beyond incident troubleshooting insights for select experts to daily performance, security, and development insights for all engineers. This would lay the foundation for the company to redefine the APM landscape.
NEWR's trailing-12-month gross profit margin of 73.59% is 51.2% higher than the industry average of 48.66%. Also, its trailing-12-month asset turnover ratio of 0.65x is 7.1% higher than the industry average of 0.61x.
NEWR's revenue came in at $242.49 million for the fiscal fourth quarter that ended March 31, 2023, up 17.9% year-over-year, while its gross profit increased 31.2% year-over-year to $186.10 million. Its non-GAAP income from operations stood at $26.09 million, compared to a loss from operations of $15.95 million in the year-ago quarter.
Moreover, its non-GAAP net income came in at $29.41 million compared to a net loss of $16.01 million in the year-ago quarter, while its non-GAAP net income per share came in at $0.42 compared to a net loss per share of $0.24.
For the fiscal second quarter ending September 2023, NEWR's revenue and EPS are expected to increase 10.3% and 178.2% year-over-year to $250.26 million and $0.36, respectively. Also, it surpassed consensus revenue and EPS estimates in each of the four trailing quarters.
The stock gained 1.5% intraday to close the last trading session at $71.82. Over the past year, the stock gained 39%.
It's no surprise NEWR has an overall rating of B which equates to a Buy in the POWR Ratings system.
NEWR has an A grade for Growth and a B for Quality. Within the Software – SAAS industry, it is ranked #7.
Beyond what we have highlighted above, one can see NEWR's additional POWR Ratings for Value, Momentum, Stability, and Sentiment here.
Vimeo, Inc. (VMEO)
VMEO provides video software solutions worldwide. The company provides video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
On June 21, VMEO and Rev, the world's most accurate speech-to-text platform, announced their partnership. The integration would automatically create accessible, searchable videos for all users, allowing them to meet compliance standards right from within the VMEO hub. This should bode well for VMEO.
On June 20, VMEO announced the launch of a first-of-its-kind AI-powered video creation suite. The company's new AI tools enable anyone to record videos in one take and edit in seconds, generate a script from a text prompt, record your screen using a built-in teleprompter, and delete unwanted content such as filler words and long pauses.
Its trailing-12-month gross profit margin of 76.60% is 53.9% higher than the industry average of 49.76%. Its trailing-12-month asset turnover ratio of 0.71x is 43.4% higher than the 0.49x industry average.
For the fiscal first quarter that ended March 31, 2023, VMEO's revenue stood at $103.58 million, while its gross profit came in at $79.91 million. The company's total operating expenses declined 23.3% year-over-year to $82.72 million.
Its adjusted EBITDA came in at $3.20 million, compared to a negative $10.40 million in the previous-year quarter. Moreover, its free cash flow stood at $4.9 million, compared to a negative $27.30 million in the year-ago quarter.
Analysts expect VMEO's revenue for the fiscal third quarter ending September 2023 to be $100.99 million. Additionally, it has topped consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 21.9% year-to-date to close the last trading session at $4.18. Over the past three months, it has gained 19.4%.
VMEO's POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
VMEO has a B grade for Value, Sentiment, and Quality. It is ranked #4 within the same industry.
Click here to access additional ratings for VMEO's Growth, Momentum, and Stability.
Consensus Cloud Solutions, Inc. (CCSI)
CCSI provides information delivery services with a software-as-a-service platform worldwide. Its products and solutions include eFax, an online faxing solution, as well as MyFax, MetroFax, Sfax, SRfax, and other brands.
On May 18, CCSI announced a strategic partnership with Hyland Software Inc., leveraging its digital cloud fax solution, eFax Corporate, with Hyland's OnBase to support the seamless patient data integration between healthcare applications. This could improve processes, increase care coordination, and lead to better and safer patient care.
CCSI's trailing-12-month EBIT and net income margins of 40.39% and 19.10% are 865.7% and 861.2% higher than the industry averages of 4.18% and 1.99%, respectively. Its trailing-12-month ROTA of 10.50% is significantly higher than the 0.06% industry average.
CCSI's revenue increased 2.4% year-over-year to $91.45 million in its fiscal first quarter that ended March 31, 2023, while its gross profit stood at $73.95 million. Its adjusted non-GAAP net income and adjusted non-GAAP income per share came to $21.99 million and $1.10, respectively.
Moreover, CCSI's adjusted EBITDA came in at $44.24 million for the same quarter. The company's cash and cash equivalents grew 18.5% year-over-year to $111.27 million. Also, as of March 31, 2023, its total current assets stood at $155.52 million, compared to $136.53 million as of December 31, 2022.
Street expects the company's revenue and EPS to increase 6.3% and 18.3% year-over-year to $95.89 million and $1.34, respectively, for its fiscal fourth quarter ending December 2023.
The stock has gained 4.7% over the past month to close the last trading session at $33.19. Moreover, over the past five days, it has gained 8.1%.
CCSI's promising prospects are reflected in its POWR Ratings. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
CCSI has a B grade for Value and Quality. It is ranked #8 within the Software – SAAS industry.
In addition to what we've stated above, one can see CCSI's POWR Ratings for Growth, Momentum, Stability, and Sentiment here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these "death trap" stocks are lurking in your portfolio:
DSGX shares were unchanged in premarket trading Tuesday. Year-to-date, DSGX has gained 15.22%, versus a 18.65% rise in the benchmark S&P 500 index during the same period.
About the Author: Sristi Suman Jayaswal
The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy.Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.
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