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3 Software Stocks Where Savvy Investors Invest Smartly

The software industry is witnessing a remarkable surge, propelled by the ever-increasing demand for digital solutions and the seamless integration of AI. Amid this backdrop, fundamentally sound software stocks ServiceNow (NOW), GoDaddy (GDDY), and RingCentral (RNG) seem to have emerged as smart choices for savvy investors. Learn more…

The rising demand for digital solutions across various sectors has boosted the software industry’s remarkable growth. Moreover, integrating Artificial Intelligence (AI) within software applications unlocks new possibilities.

In this context, savvy investors seem to be keenly eyeing quality software stocks ServiceNow, Inc. (NOW), GoDaddy Inc. (GDDY), and RingCentral, Inc. (RNG) as prudent investment choices, recognizing the immense potential and promising growth prospects.

Before diving deeper into the fundamentals of these stocks, let’s discuss why the software industry is well-positioned for growth.

Enterprises have recognized the immense value of digitalization in revolutionizing their operations. To facilitate this transformation, software companies are at the forefront, offering a wide array of services and solutions, including cloud computing and cybersecurity.

The demand for cloud-based software services such as Software-as-a-Service (SaaS) and Infrastructure-as-a-Service (IaaS) is witnessing an unprecedented surge as they empower businesses to streamline their operations and optimize efficiency.

According to a report, end-user spending on public cloud services is expected to reach nearly $600 billion in 2023. Approximately $208 billion is predicted to be on Software-as-a-Service (SaaS), while Infrastructure-as-a-Service (IaaS) follows closely at $156.20 billion.

Notably, the global market for AI software is poised for remarkable growth, given the escalating demand for software-centric solutions and services coupled with the rapid adoption of AI tools and solutions. By 2032, the market is projected to reach an astonishing $1.09 trillion, exhibiting a CAGR of 23%.

Moreover, the software industry stands poised to harness the power of cutting-edge technologies such as Augmented Reality (AR), Virtual Reality (VR), the Internet of Things (IoT), etc., further propelling its growth trajectory.

Given the rising penetration of e-commerce, the increasing development of smart cities, the emergence of start-ups, and the rising adoption of IoT, the global IT services industry market is projected to reach $4.91 trillion in 2027, exhibiting a CAGR of 8%.

Furthermore, with businesses increasing adoption of digitalization, the global business software market is expected to register a CAGR of 11.2%, reaching $987.61 billion by the next five years.

Let’s take a closer look at the featured stocks.

ServiceNow, Inc. (NOW)

NOW provides enterprise cloud computing solutions that define, structure, consolidate, manage, and automate services for enterprises worldwide. It operates the Now platform for workflow automation, artificial intelligence, machine learning, process mining, performance analytics, electronic service catalogs, portals, etc.

On July 26, NOW announced an expanded partnership with KPMG to reimagine finance, supply chain, and procurement operations with a joint investment to codevelop new offerings combining AI, lowcode capabilities, and deep industry expertise.

In addition, NOW and Cognizant Technology Solutions Corporation (CTSH) announced a strategic partnership in June to accelerate the adoption of AIdriven automation across industries and the path toward building a $1 billion combined business.

Such collaborations should help the company maximize productivity and profitability across its operations.

On the same day, the company announced further generative AI capabilities with case summarization and texttocode, its approach to commercialization with new premium SKU offerings, and the introduction of its AI Lighthouse program with NVIDIA Corporation (NVDA) and Accenture plc (ACN) to assist customers across industries in the design, development, and implementation of new generative AI use cases.

On May 17, NOW partnered with NVDA to create advanced generative AI capabilities that are tailored for enterprise use and can revolutionize business processes by enabling faster and more intelligent workflow automation.

By leveraging NVDA’s software, services, and accelerated infrastructure, NOW is actively working on developing customized large language models. Through this collaboration, the company aims to enhance its already extensive AI functionality by incorporating generative AI across various enterprise areas.

In terms of trailing-12-month net income margin and ROCE, NOW’s 17.76% and 25.61% are significantly higher than the industry averages of 2.01% and 0.62%, respectively. Likewise, its trailing-12-month levered FCF margin of 34.40% is 402.7% higher than the industry average of 6.84%.

NOW’s total revenues increased 22.7% year-over-year to $2.15 billion in the second quarter (ended June 30, 2023), while its non-GAAP gross profit rose 22.7% from the year-ago value to $1.76 billion.

Its non-GAAP income from operations income increased 36.3% from the prior-year quarter to $544 million. The company’s non-GAAP net income amounted to $486 million and $2.37 per share, representing 47.7% and 46.3% year-over-year increases, respectively.

Analysts expect NOW’s EPS and revenue for the current quarter (ending September 30, 2023) to increase 29.7% and 24% year-over-year to be $2.54 and $2.27 billion, respectively. The company has an impressive earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.

NOW’s shares have gained 39.5% year-to-date to close the last trading session at $541.50.

NOW’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. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

It has an A grade for Growth and a B for Sentiment and Quality. Among the 48 stocks in the Software – Business industry, it is ranked #14. Click here to see the other ratings of NOW for Value, Momentum, and Stability.

GoDaddy Inc. (GDDY)

GDDY designs and develops cloud-based products and operates through two segments: Applications and Commerce and Core Platform. It offers applications products, including Websites + Marketing, a mobile-optimized online tool that enables customers to build websites and e-commerce-enabled online stores.

On August 15, GDDY introduced Instant Video, a new AI-powered feature within the GoDaddy Studio app, to help small business owners create engaging videos and easily meet the growing need for video-based digital marketing and social commerce at no additional cost. This could add to the company’s topline.

On May 31, the company launched three new products and services that unlock the power of generative AI to help entrepreneurs accomplish vital but time-consuming tasks to grow their businesses. With these new tools, small businesses can effectively generate online store product descriptions, Customer service messages, and Instagram and Facebook ads, helping them attract new customers.

In the same month, GDDY and Microsoft Corporation (MSFT) formed a new partnership to facilitate small businesses success. As part of this collaboration, they introduced a solution that enables small businesses to accept payments seamlessly within live Microsoft Teams meetings with their customers.

MSFT chose GDDY as one of the three commerce providers for this launch, recognizing GDDY Payments’ strong growth and position as a leading payments provider in the United States.

For the second quarter that ended June 30, 2023, GDDY’s total revenue increased 3.2% year-over-year to $1.05 billion. Its non-GAAP normalized EBITDA grew 2.4% from the year-ago value to $264.60 million.

The company’s attributable net income amounted to $83.10 million and $0.54 per share, respectively, for the same period. Also, its non-GAAP unlevered free cash flow increased 3.4% from the year-ago value to $283.60 million.

The consensus EPS estimate of $0.71 for the third quarter (ending September 30, 2023) represents a 13.3% improvement year-over-year. The consensus revenue estimate of $1.06 billion for the ongoing quarter represents a 3.1% increase from the same period last year.

The stock has lost 3.4% over the past three months to close the last trading session at $69.95.

It’s no surprise that GDDY has an overall rating of B, which equates to Buy in our proprietary rating system. It has a B grade for Value and Quality. Out of 48 stocks in the same industry, it is ranked #16.

In addition to the POWR Ratings we’ve stated above, we also have GDDY’s ratings for Growth, Momentum, Stability, and Sentiment. Get all GDDY ratings here.

RingCentral, Inc. (RNG)

RNG is a provider of global enterprise cloud communications, video meetings, collaboration, and contact center Software-as-a-Service (SaaS) solutions. Its offerings include RingCentral MVP; Customer engagement solutions, including RingCentral Contact Center, RingCentral Engage Digital and Voice; and RingCentral Video.

On May 18, Vodafone Portugal and RNG unveiled “One Net TeamCollaboration with RingCentral,” a powerful, integrated communications solution that combines RNG’s messaging and video collaboration capabilities with Vodafone’s fixed and mobile voice communications functionality to the Portuguese market.

Given the hybrid work practices, the new solution is expected to be widely adopted by Portuguese companies to enhance their productivity with maximum agility and reliability. Further, it should expand RNG’s footprint in Portugal.

RNG’s trailing-12-month levered FCF margin of 16% is 133.9% higher than the 6.84% industry average. Also, its trailing-12-month gross profit margin of 69% is 43.1% higher than the industry average of 48.20%.

In the fiscal second quarter that ended June 30, 2023, RNG’s revenue increased 10.8% year-over-year to $539.31 million, while its gross profit grew 14% from the year-ago value to $374.89 million. Its non-GAAP income from operations increased 89.3% year-over-year to $104.44 million.

The company’s non-GAAP net income amounted to $80.01 million and $0.83 per share, representing increases of 87.1% and 77.8% from the prior-year period, respectively. Also, its non-GAAP adjusted EBITDA stood at $124.98 million, up 71.8% year-over-year.

Street expects RNG’s EPS to increase 40% year-over-year in the third quarter (ending September 30, 2023) to $0.77. Its revenue for the current quarter is expected to reach $554.24 million, registering an 8.9% year-over-year growth. Moreover, it topped the EPS estimates in each of the trailing four quarters, which is promising.

Over the past three months, the stock has lost 5.8% to close the last trading session at $29.22.

RNG’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system.

It also has a B grade for Growth and Value. Within the same industry, it is ranked #15. To see additional POWR Ratings of RNG for Momentum, Stability, Sentiment, and Quality, click here.

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NOW shares were trading at $549.69 per share on Monday afternoon, up $8.19 (+1.51%). Year-to-date, NOW has gained 41.57%, versus a 14.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Shweta Kumari

Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.


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