3 Software Stocks to Buy for Smart Investments

The software industry has been under pressure due to the macroeconomic headwinds. However, the industry will likely grow steadily in the long run, thanks to the strong demand for its products and services. So, investors can consider buying quality software stocks VMware, Inc. (VMW), F5, Inc. (FFIV), and Yext, Inc. (YEXT).

According to Gartner, global government IT spending is expected to reach $589.80 billion in 2023, a 7.6% rise from 2022. In 2023, the software will continue to be the fastest-expanding sector. Also, global government software spending is estimated to reach $183.73 billion in 2023, representing a 13.5% increase over 2022.

Moreover, the business spend management software market is projected to grow at a CAGR of 11.9% until 2030. Increasing adoption and integration of cloud-based solutions and AI are anticipated to drive market growth.

In addition, software market revenue is expected to grow at 4.2% CAGR, resulting in a market volume of $414.70 billion by 2028.

Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 10.8% returns over the past three months and 15.4% over the past six months.

Let’s delve deeper into the fundamentals of the stocks mentioned above.

VMware, Inc. (VMW)

VMW provides enterprise-controlled multi-cloud services for all applications. Its portfolio includes cloud infrastructure, networking, security, cloud management, application modernization, and anywhere workspaces that allow its customers to build, manage, connect, and protect their workloads on VMW’s digital foundation.

On April 18, 2023, VMW announced VMware Cross-Cloud managed services, a collection of prescriptive solutions with increased partner and customer benefits that would allow highly experienced partners to develop their managed services operations.

This will increase partner profitability while also offering up new possibilities for development and expansion.

VMW’ forward EV/Sales multiple of 4.20 is 51.4% lower than the industry average of 2.77. Its forward Price/Book multiple of 12.87 is 248.7% lower than the industry average of 3.69.

VMW’s trailing-12-month ROCE of 399.39% is significantly higher than the industry average of 0.71%. Its trailing-12-month ROTA of 4.21% is significantly higher than the industry average of 0.31%.

For the fourth quarter that ended February 3, 2023, VMW’s total revenue increased 5.2% year-over-year to $3.71 billion. Its non-GAAP income before income taxes increased 13.1% from the year-ago value to $ 1.15 billion.

Moreover, the company’s non-GAAP net income increased 7% year-over-year to $915 million, while non-GAAP EPS came in at $2.13, up 5.4% year-over-year.

The consensus revenue estimate of $14.18 billion for the year ending January 2024 represents a 6.3% increase year-over-year. Its EPS is expected to grow at 6.8% year-over-year to $6.97 for the same period. VMW’s shares have gained 10.1% over the past three months to close the last trading session at $124.05.

VMW’s POWR Ratings reflect this promising outlook. The stock 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.

VMW also has an A grade for Quality and a B grade for Value, Stability, and Sentiment. It is ranked first among 50 stocks in the Software - Business industry. Click here for the additional POWR Ratings for Growth and Momentum for VMW.

F5, Inc. (FFIV)

FFIV provides multi-cloud application security and delivery solutions for the security, performance, and availability of network applications, servers, and storage systems. It also provides professional services, including consulting, training, installation, maintenance, and other technical support services.

FFIV’s forward EV/EBITDA multiple of 8.75 is 36.1% lower than the industry average of 13.69. Its forward EV/EBIT multiple of 9.79 is 43% lower than the industry average of 17.18.

FFIV’s trailing-12-month ROCE of 11.60% is significantly higher than the 0.71% industry average. Its trailing-12-month ROTA of 7.72% is significantly higher than the 0.26% industry average.

FFIV’s total revenues increased 10.9% year-over-year to $703.18 million for the second quarter that ended March 31, 2023. Its gross profit increased 7.8% from the year-ago value to $547.52 million. Furthermore, the company’s non-GAAP net income and EPS increased 44.8% and 18.8% year-over-year to $81.44 million and $2.53, respectively.

Analysts expect FFIV’s revenue to increase 4.1% year-over-year to $2.81 billion in September 2023. Its EPS is expected to grow 8.6% to $11.07 in September 2023. It surpassed EPS estimates in all four trailing quarters. The stock has gained 6.8% over the past month to close its last trading session at $142.65.

It’s no surprise that FFIV has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Growth and Value. It is ranked #2 in the same industry.

Beyond what is stated above, we’ve also rated FFIV for Sentiment, Momentum, and Stability. Get all FFIV ratings here.

Yext, Inc. (YEXT)

YEXT organizes business facts to provide answers to consumer questions in North America and internationally. It serves the healthcare, retail, and financial services industries.

YEXT’s forward EV/Sales multiple of 2.43 is 12.4% lower than the industry average of 2.77. Its forward Price/Sales multiple of 2.61 is 2.2% lower than the industry average of 2.66.

YEXT’s trailing-12-month gross profit margin of 74.04% is 50.4% higher than the 49.24% industry average. Its trailing-12-month levered FCF margin of 8.98x is 28.1% higher than the 7.01x industry average.

For the fourth quarter that ended January 31, 2023, YEXT’s revenue increased marginally to $101.90 million. Its adjusted EBITDA increased 703.9% year-over-year to $10.90 million.

Also, its non-GAAP net income and EPS came in at $6.29 million and $0.05, compared to a non-GAAP net loss and net loss per share of $4.09 million and $0.03 in the previous year’s quarter, respectively.

Street expects YEXT’s revenue to increase 6.1% year-over-year to $428.06 million in January 2025. Its EPS is expected to increase 15.1% year-over-year to $0.25 for the same period. It surpassed EPS estimates in all four trailing quarters. Over the past nine months, the stock has gained 93.6% to close the last trading session at $8.46.

YEXT’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.

It is ranked #3 in the same industry. It has an A grade for Quality and a B for Growth and Value. To see additional YEXT’s rating for Momentum, Stability, and Sentiment, click here.

What To Do Next?

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VMW shares were trading at $126.19 per share on Thursday morning, up $2.14 (+1.73%). Year-to-date, VMW has gained 2.79%, versus a 8.32% rise in the benchmark S&P 500 index during the same period.

Rashmi is passionate about capital markets, wealth management, and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master's degree in commerce, she aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.

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