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Evaluating 2024 Buying Potential of 3 Software Stocks

The software industry flourishes with intensified digitization, a prominent shift toward cloud-based solutions, and growing demand across various verticals. Hence, let us analyze leading software stocks Microsoft (MSFT), Brightcove (BCOV), and Cloudflare (NET) to evaluate their buying potential for 2024. Read more…

The software industry exhibits robust dynamics characterized by notable market expansion, growing dependence on cloud-based solutions, and a transformative wave of digitalization, contributing to its resilience and evolution.

Therefore, while investors could consider investing in quality software stocks Microsoft Corporation (MSFT) and Brightcove Inc. (BCOV) in 2024, Cloudflare, Inc. (NET) could be best kept on the watchlist.

The robust demand for business software and services, propelled by surging enterprise data and automation trends, has accelerated with increased cloud adoption and technological innovation.

The COVID-19-induced shift to remote work amplifies reliance on these services, boosting the industry’s demand. The global business software and services market is expected to expand at a CAGR of 11.9% from 2023 to 2030.

In addition, rising cyber threats, driven by the surge in e-commerce, smart devices, and cloud adoption, propel demand for advanced cybersecurity solutions. The industry is experiencing growth as businesses adapt to remote work models and governments enforce stringent data security regulations, fostering increased spending on cybersecurity solutions.

The global cyber security market size is projected to grow at a CAGR of 12.3% from 2023 to 2030.

Furthermore, the application development software market is driven by growing demand across industries, rising automation, and robust interest in customizable and scalable software. The global application development software market is estimated to grow at a CAGR of 27.4% and reach $1.63 trillion by 2030.

Given such conducive trends, let’s look into the fundamentals of the featured software stocks.

Stocks to Buy:

Microsoft Corporation (MSFT)

MSFT is a global tech behemoth known for products like Microsoft Office, Windows, and Azure. It offers a range of services, devices, and solutions in areas like productivity, cloud computing, and personal computing. The company sells its products through various channels worldwide.

On December 11, MSFT and The American Federation of Labor and Congress of Industrial Organizations (AFL-CIO) announced a new partnership to address AI's impact on workers, focussing on sharing AI trends, incorporating worker perspectives, and shaping policies.

The partnership includes a neutral framework for worker organizing, and MSFT will provide AI education and gather direct worker feedback, reflecting a proactive approach to worker concerns.

On November 29, MSFT and the UNFCCC partnered to create an AI-powered platform for tracking global carbon emissions under the Paris Agreement. MSFT's platform aims to simplify data validation, enhance transparency, and support efficient reporting by the 196 Parties involved.

The collaboration includes a $3 million commitment from MSFT to support the implementation of climate action mechanisms outlined in the Paris Agreement.

The company distributes an annual dividend of $3, which translates to a yield of 0.80% on the current market price. It has raised its dividend payouts at a CAGR of 10.1% over the past three years. Moreover, MSFT has raised its dividend payouts consistently for the past 19 years.

MSFT’s trailing-12-month gross profit margin of 69.44% is 42.7% higher than the industry average of 48.67%. Its 43.01% trailing-12-month EBIT margin is 801.2% higher than the 4.8% industry average.

During the first quarter, which ended September 30, 2023, MSFT reported total revenue of $56.52 billion, up 12.8% year-over-year. The company's operating income and net income increased 25% and 27% from the prior year's quarter to $26.90 billion and $22.29 billion, respectively. Moreover, its EPS grew 27% from the previous year's quarter to $2.99.

MSFT’s revenue and EPS are expected to grow 15.7% and 18.6% year-over-year to $61.03 billion and $2.75 for the second quarter ending December 2023, respectively. The company surpassed the EPS estimates in each of the trailing four quarters, which is impressive.

MSFT’s shares increased 52.6% over the past year and 56.1% year-to-date to close the last trading session at $374.38.

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

MSFT has an A grade for Sentiment and a B for Stability and Quality. Within the B-rated Software - Business industry, it is ranked #11 of 44 stocks.

In addition to the POWR Ratings stated above, one can access MSFT’s additional Growth, Value, and Momentum ratings here.

Brightcove Inc. (BCOV)

BCOV provides cloud-based streaming services globally, including Video Cloud for online video streaming. The company offers solutions for live streaming, over-the-top video experiences, video encoding, and business intelligence on viewers. It caters to diverse industries, including media, entertainment, retail, and education.

On November 7, BCOV partnered with Socialive, offering enterprises enhanced remote video production capabilities. The collaboration integrates features for greater control over internal video content, addressing communication needs in distributed workforces and providing robust livestream tools.

BCOV’s trailing-12-month gross profit margin of 61.37% is 26.1% higher than the industry average of 48.67%. Its 2.46% trailing-12-month CAPEX / Sales is 5.5% higher than the 2.33% industry average.

During the third quarter ended September 30, 2023, BCOV’s total revenue stood at $50.98 million. The company's total operating expenses decreased 2% year-over-year to $34.01 million. It reported non-GAAP net income and adjusted EBITDA of $2.13 million and $5.55 million, up 8.9% and 12.3% from the prior-year quarter, respectively.  

The company anticipates its revenue to range from $200 million to $202 million and adjusted EBITDA to be between $10.40 million and $12.40 million for the fiscal year 2023.

Analysts expect BCOV’s revenue and EPS to grow 1.4% and 200% year-over-year to $51.70 million and $0.03, respectively, for the second quarter ending June 2024. The stock declined marginally intraday to close the last trading session at $2.30.

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

It has a B grade for Value, Stability, and Sentiment. Within the Software - Application industry, it is ranked #34 of 131 stocks.

To see BCOV’s additional POWR Ratings for Growth, Momentum, and Quality, click here.

Stock to Hold:

Cloudflare, Inc. (NET)

NET is a global cloud services provider offering integrated security, performance, and network solutions to businesses worldwide. The company’s services include web application firewall, content delivery, and zero-trust solutions across various platforms.

On October 19, NET expanded operations in Mexico to strengthen its presence in Latin America, showcasing a growing team, increased infrastructure investment, and a focus on customers. The company's Mexico-based team will support customer acquisition, brand awareness, and talent recruitment.

With a significant Latin American network, NET has strategically placed its infrastructure in the region since 2014 and aims to address cybersecurity threats in various sectors.

NET’s trailing-12-month gross profit margin of 75.89% is 55.9% higher than the industry average of 48.67%. However, its 0.48x trailing-12-month asset turnover ratio is 23% lower than the 0.62x industry average.

In the third quarter ended September 30, 2023, NET’s revenue grew 32.2% year-over-year to $335.60 million. The company reported non-GAAP gross profit and net income of $264.21 million and $55.26 million, up 33.2% and 189.3% from the previous year's quarter. Its non-GAAP net income per share increased 166.7% from the prior year’s quarter to $0.16.

However, its total operating expenses rose 24.8% from the year-ago quarter to $296.75 million.

For the fiscal year 2023, the company anticipates total revenue from $1.286 to $1.287 billion. The non-GAAP income from operations and net income per share are expected to be between $110 million and $111 million, and $0.45 million and $0.46 million, respectively.

Street expects NET’s revenue and EPS to grow 28.4% and 98.6% year-over-year to $352.61 million and $0.12 for the fourth quarter ending December 2023, respectively. The company surpassed the EPS estimates in each of the trailing four quarters.

NET’s shares have gained 61.5% over the past year and 73% year-to-date to close the last trading session at $78.19.

NET’s POWR Ratings reflect a mixed outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system.

The stock has a C grade for Momentum, Sentiment, and Quality. Within the Software - Security industry, it is ranked #18 among 23 stocks.

Click here for NET’s additional Value, Growth, and Stability ratings.

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

3 Stocks to DOUBLE This Year >

MSFT shares rose $2.79 (+0.75%) in premarket trading Wednesday. Year-to-date, MSFT has gained 58.78%, versus a 22.99% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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