The software market has been experiencing significant growth worldwide due to the increasing demand for digital transformation across various industries. While Progress Software Corporation (PRGS) could be an ideal buy, I think CrowdStrike Holdings, Inc. (CRWD) and Datadog, Inc. (DDOG) might be best kept on hold for reasons discussed in this article.
The increasing adoption of digitalization in businesses across the globe is expected to be the major factor driving the global software market growth. As organizations recognize the transformative potential of digital technologies, they are investing heavily in software solutions to streamline operations, enhance customer experiences, and remain competitive in an ever-evolving marketplace.
The global software market is expected to grow at a CAGR of 12.2% until 2029.
Moreover, the rise in adopting public and hybrid cloud-based solutions in organizations increases system reliability. Additionally, more enterprises are shifting to a hybrid cloud that makes use of on-premises solutions in accordance with public cloud solutions, thus boosting growth in the software market.
The global Software as a Service (SaaS) market is projected to grow at a CAGR of 18.7% until 2030.
Moreover, the growing data generation and increasing complexity of technologies have resulted in organizations’ heavy dependence on cloud services for operations and data management. Therefore, the cloud security software market is estimated to grow at a CAGR of 17.6% until 2028.
However, the industry faces intense competition and stringent financial and credit conditions, which could lead to volatility in fundamentally weak stocks.
Considering these trends, let’s take a look at the fundamentals of the three software stocks mentioned above.
Stock to Buy:
Progress Software Corporation (PRGS)
PRGS develops, deploys, and manages business applications. OpenEdge, Sitefinity, Kemp LoadMaster, Developer Tools, and DataDirect Connect are some of the company’s applications. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.
On November 2, 2023, PRGS had announced the release of Progress Sitefinity 15. PRGS introduces additional generative AI (GenAI) functionality across the platform with this version, allowing marketers to produce tailored content at scale. Also, Sitefinity Integration Hub’s innovative no-code data connectivity instantly integrates to top MarTech platforms, allowing for unified customer profiles.
The new generative AI (GenAI) support in Progress Sitefinity 15 empowers marketers to not only create personalized content at scale but also optimize it based on real-time insights.
PRGS’ trailing-12-month net income margin of 11.65% is 396.5% higher than the 2.35% industry average. Its trailing-12-month ROCE of 19.35% is significantly higher than the 1.27% industry average.
PRGS’ revenue for the third quarter ended August 31, 2023, increased 15.7% year-over-year to $174.99 million. Its non-GAAP income from operations increased 13.8% year-over-year to $68.39 million. Its non-GAAP net income rose 10.6% year-over-year to $48.75 million. Also, its non-GAAP EPS came in at $1.08, representing an increase of 8% year-over-year.
The consensus revenue estimate of $694.23 million for the year ended November 2023 represents a 13.7% increase year-over-year. Its EPS is expected to grow 2.5% year-over-year to $4.23 for the same year. It surpassed EPS estimates in all four trailing quarters.
The stock has gained 3% over the past month to close the last trading session at $55.54.
PRGS’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. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
PRGS also has a B grade for Quality. It is ranked #19 of 130 stocks in the A-rated Software - Application industry.
To access additional ratings for PRGS’s Value, Growth, Sentiment, Value, and Momentum, click here.
Stocks to Hold:
CrowdStrike Holdings, Inc. (CRWD)
CRWD provides cloud-delivered protection across endpoints and cloud workloads, identity, and data. It offers corporate workload security, security and vulnerability management, managed security services, IT operations management, threat intelligence services, identity protection, and log management.
On December 14, 2023, CRWD announced the general availability of CrowdStrike Falcon Data Protection, liberating customers from legacy data loss prevention (DLP) products with a modern, frictionless approach to data security that prevents adversary exfiltration and accidental leakage.
With this latest offering for the AI-native CrowdStrike Falcon XDR platform, customers can consolidate costly and ineffective DLP point products with CRWD’s single, revolutionary lightweight agent.
CRWD’s trailing-12-month gross profit margin of 74.62% is 53.3% higher than the 48.67% industry average. Whereas, its trailing-12-month EBITDA margin of 0.19% is 98% lower than the 9.42% industry average.
CRWD’s total revenue increased 35.3% year-over-year to $786.01 million in the fiscal third quarter that ended October 31, 2023. Non-GAAP net income attributable to CRWD increased 107.4% year-over-year to $199.20 million. However, its total operating expenses increased 22.7% year-over-year to $587.85 million.
CRWD’s revenue is expected to increase 31.7% year-over-year to $839.09 million for the fiscal fourth quarter ending January 2024. Its EPS is expected to increase 75.2% year-over-year to $0.82 for the same quarter. Also, it has surpassed revenue and EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 48% over the past three months to close the last trading session at $252.68.
CRWD’s neutral prospects are reflected in its POWR Ratings. The stock has an overall C rating, equating to a Hold in our proprietary rating system.
CRWD has a C grade for Momentum. It is ranked #12 in the Software - Security industry.
Click here to see the additional POWR Ratings for CRWD (Sentiment, Growth, Quality, Stability, and Value).
Datadog, Inc. (DDOG)
DDOG operates an observability and security platform for cloud applications in North America and internationally. The company’s products include infrastructure and application performance monitoring, log management, digital experience monitoring, continuous profiler, database monitoring, network monitoring, incident management, observability pipelines, cloud cost management, universal service.
On November 27, 2023, DDOG announced expanded security and observability support for AWS serverless applications built on AWS Lambda and Step Functions services. The functionality announced at AWS re:Invent helps AWS Lambda and Step Functions users detect security threats, get a high-level overview of how their state machine is performing at a single point in time and monitor services instrumented with OpenTelemetry.
While DDOG’s trailing-12-month gross profit margin of 80.01% is 64.4% higher than the 48.67% industry average, its trailing-12-month CAPEX/Sales of 1.36% is 41.9% lower than the 2.33% industry average.
DDOG’s revenue increased 25.4% year-over-year to $547.53 million in the fiscal third quarter that ended September 30, 2023. However, its total operating expenses rose 19.8% from the previous-year quarter to $448.45 million. Its net income per share came in at $0.07 as compared to negative $0.08 in the previous-year quarter.
Street expects DDOG’s revenue to increase 21.1% year-over-year to $568.27 million for the fiscal fourth quarter ending December 2023. Its EPS is expected to increase 68% year-over-year to $0.44 in the same quarter. Also, it has surpassed revenue and EPS estimates in each of the trailing four quarters.
The stock has gained 23.7% over the past three months to close the last trading session at $120.65.
The stock has an overall C rating, equating to a Neutral in our proprietary rating system.
DDOG also has a C grade for Momentum and Sentiment. It is ranked #24 in the B-rated Software - Business industry.
Click here to see the additional POWR Ratings for WIT (Growth, Stability, Value, and Quality).
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:
PRGS shares were unchanged in premarket trading Friday. Year-to-date, PRGS has gained 11.43%, versus a 24.79% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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