How Much Momentum Is Left in These Promising Software Stocks? Digital transformation initiatives, the shift to cloud-based solutions, and the adoption of emerging technologies like generative AI are expected to bolster the software industry's growth. Therefore, it could be wise...

Digital transformation initiatives, the shift to cloud-based solutions, and the adoption of emerging technologies like generative AI are expected to bolster the software industry's growth. Therefore, it could be wise to take advantage of the momentum in fundamentally strong software stocks SAP SE (SAP), DocuSign (DOCU), and Sapiens International (SPNS). Let's discuss….

Continued digital transformation initiatives and a growing shift to cloud platforms are amplifying the demand for software solutions. Moreover, the integration of advanced technologies like generative AI into software applications should bolster the software industry's prospects.

Amid this backdrop, it could be wise to buy fundamentally strong software stocks SAP SE (SAP), DocuSign, Inc. (DOCU), and Sapiens International Corporation N.V. (SPNS). These stocks have been showing strong momentum lately and will likely maintain the same in the near term.

Before diving deeper into the fundamentals of these stocks, let's discuss what's shaping the software industry's prospects.

Technology stocks faced the brunt of rising interest rates last year. However, the industry made a rousing comeback, with the tech-heavy Nasdaq Composite rising 41.2% year-to-date. The rally has been fueled by the hype around generative AI and the Federal Reserve's signal of rate cuts next year.

The Fed maintained its benchmark interest rate between 5.25% and 5.50%, the highest in 22 years. However, the central bank signaled that it would likely cut interest rates by 75 basis points next year, up from its previous forecast of 50 basis points. Falling interest rates will likely boost the performance of growth stocks, including the ones from the software space.

The software industry plays a crucial role in the functioning of various sectors. The industry helps drive innovation, improve efficiency, and power digital transformation. Software spending is projected to grow 12.9% over the prior year to $916.24 billion this year and 13.8% year-over-year to $1.04 trillion in 2024.

Traditional software applications have been replaced by cloud-based software applications, which provide advances like data ownership, flexibility, scalability, accessibility, security and privacy. Rising digitization initiatives are leading to a surge in demand for cloud-based software applications. The global Software as a Service (SaaS) market is projected to grow at a CAGR of 18.7% to reach $908.21 billion by 2030.

In the 2024 Gartner CIO and Technology Executive Survey, 80% of CIOs reported that they plan to increase cyber/information security spending in 2024. CIOs are also focusing on investing in Business Intelligence/data analytics and cloud platforms, with 78% and 73% of CIOs expressing interest in increasing spending on these technologies, respectively.

Additionally, the integration of generative AI into software applications will further enhance the software industry's long-term growth prospects. Goldman Sachs estimates that the total addressable market (TAM) of the generative AI software is approximately $150 billion.

Investors' interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF's (IGV) 56.8% returns year-to-date.

Let's take a closer look at their fundamentals.

SAP SE (SAP)

Headquartered in Walldorf, Germany, SAP provides enterprise application software products worldwide. The company operates through Applications, Technology & Services, Qualtrics, Business Network, and Sustainability segments.

On September 7, 2023, SAP announced that it agreed to acquire LeanIX, an enterprise architecture management (EAM) software company. The acquisition enables SAP to expand its business transformation portfolio, giving customers access to the full suite of tools required for continuous business transformation and facilitating AI-enabled process optimization.

On March 13, 2023, SAP announced that it had agreed to sell its 423 million shares of Qualtrics International Inc. for $7.70 billion to Silver Lake and Canada Pension Plan Investment Board (CPP Investments). The sale aligns with SAP's strategy to streamline its portfolio and focus on its core cloud growth and profitability.

In terms of the trailing-12-month EBITDA margin, SAP's 19.12% is 103.1% higher than the 9.42% industry average. Likewise, its 15.91% trailing-12-month EBIT margin is 232.6% higher than the industry average of 4.78%. Furthermore, the stock's 2.44% trailing-12-month Capex/Sales is 4.3% higher than the industry average of 2.34%.

For the fiscal third quarter ended September 30, 2023, SAP's total revenue increased 3.6% year-over-year to €7.74 billion ($8.48 billion). Its operating profit rose 10.7% over the prior year quarter to €1.72 billion ($1.88 billion). The company's profit after tax increased 132.5% year-over-year to €1.27 billion ($1.39 billion). Also, its EPS came in at €1.08, representing an increase of 89.5% year-over-year.

For the quarter ending December 31, 2023, SAP's EPS and revenue are expected to increase 54.3% and 0.6% year-over-year to $1.68 and $9.24 billion, respectively. The stock has gained 46.5% year-to-date to close the last trading session at $151.14. SAP's stock is trading above its 50-day and 200-day moving averages of $145.62 and $135.68, respectively.

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

It is ranked #5 out of 131 stocks in the Software - Application industry. It has a B grade for Growth, Stability, Sentiment, and Quality. Click here to see SAP's other ratings for Value and Momentum.

DocuSign, Inc. (DOCU)

DOCU provides electronic signature solutions in the United States and internationally. The company offers a DocuSign e-signature solution that enables the sending and signing of agreements on various devices. It provides Contract Lifecycle Management (CLM), Gen for Salesforce, Identify, Standards-Based Signatures, and Monitor.

On July 25, 2023, DOCU announced the launch of its enhanced identity verification offering, Liveness Detection for ID Verification. It is part of DOCU's Identify portfolio, and this new feature uses AI-enabled biometric checks to confirm that signers are who they are, are physically present at the signing, and their IDs are valid.

On July 25, 2023, DOCU announced a partnership with Onfido to introduce a new feature to their Identify portfolio. This feature, known as Liveness Detection for ID Verification, uses AI technology to enhance the verification process. It securely confirms signers' identities, presence, and valid IDs, preventing fake documents and identity spoofing. This offers a single-platform solution for secure agreements.

In terms of the trailing-12-month levered FCF margin, DOCU's 36.42% is 326.9% higher than the 8.53% industry average. Likewise, its 79.38% trailing-12-month gross profit margin is 62.4% higher than the 48.88% industry average. Furthermore, its 7.20% trailing-12-month Return on Common Equity is 548.4% higher than the 1.11% industry average.

DOCU's total revenues for the third quarter ended October 31, 2023, rose 8.5% year-over-year to $700.42 million. Its net cash provided by operating activities increased 402.8% over the prior-year quarter to $264.18 million. Its non-GAAP income from operations increased 27.4% year-over-year to $187.41 million.

Additionally, its non-GAAP net income rose 38.7% year-over-year to $163.80 million. Also, its non-GAAP EPS came in at $0.79, representing an increase of 38.6% year-over-year.

Street expects DOCU's revenues for the quarter ending January 31, 2024, to increase 6% year-over-year to $698.90 million, respectively. Its EPS for fiscal 2024 is expected to increase 41.5% year-over-year to $2.87. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 37.3% to close the last trading session at $59.63.

DOCU's stock is trading above its 50-day and 200-day moving averages of $44.72 and $49.67, respectively.

DOCU's POWR Ratings reflect this positive outlook. It has an overall rating of B, which translates to a Buy in our proprietary rating system.

It is ranked #4 out of 21 stocks in the A-rated Software - SAAS industry. It has an A grade for Growth and a B for Value and Quality. Click here to see DOCU's Momentum, Stability, and Sentiment ratings.

Sapiens International Corporation N.V. (SPNS)

Headquartered in Holon, Israel, SPNS provides software solutions for the insurance and financial services industries in North America, the European Union, the United Kingdom, Israel, and internationally. It offers Sapiens CoreSuite and Sapiens IDITSuite, Sapiens UnderwritingPro, Sapiens ApplicationPro, Sapiens IllustrationPro, and Sapiens ConsolidationMaster.

On December 12, 2023, SPNS announced that a leading European automotive brand went live with its IDITSuite and Sapiens Cloud and Application Management Services for the company's self-guarantee and warranty insurance lines of business.

In terms of the trailing-12-month levered FCF margin, SPNS' 8.89% is 4.3% higher than the 8.53% industry average. Likewise, its 18.06% trailing-12-month EBITDA margin is 91.8% higher than the 9.42% industry average. Furthermore, its 0.78x trailing-12-month asset turnover ratio is 26% higher than the 0.62x industry average.

For the fiscal third quarter ended September 30, 2023, SPNS' revenue increased 9.8% year-over-year to $130.71 million. Its non-GAAP gross profit rose 10.7% over the prior-year quarter to $59.26 million. The company's non-GAAP operating income increased 15.1% year-over-year to $24.06 million. In addition, its non-GAAP net income attributable to SPNS rose 13.1% year-over-year to $19.08 million.

Analysts expect SPNS' EPS and revenue for the quarter ending December 31, 2023, to increase 6.2% and 9.4% year-over-year to $0.34 and $130.74 million, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 58.1% to close the last trading session at $28.33.

SPNS' stock is trading above its 50-day and 200-day moving averages of $26.07 and $25.67, respectively.

SPNS' POWR Ratings reflect solid prospects. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

Within the B-rated Software – Business industry, it is ranked #3 out of 43 stocks. It has an A grade for Momentum and a B for Growth, Value, Stability, and Sentiment. To see SPNS' rating for Quality, click here.

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SAP shares were unchanged in premarket trading Thursday. Year-to-date, SAP has gained 48.26%, versus a 24.30% 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.

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