The software industry is expected to remain steady despite the economic challenges. Moreover, the growing demand for software and related services due to the increased adoption of digital business initiatives is driving growth in the industry.
Therefore, it could be ideal to invest in Salesforce, Inc. (CRM) and PDF Solutions, Inc. (PDFS), which have high growth potential. These stocks are rated B, translating to a Buy in our proprietary rating system.
The recent economic data shows that after months of high inflation, prices are now cooling down. Both consumer and producer prices have slowed down to their lowest levels since the beginning of the pandemic crisis.
While cooling inflationary pressures might help the Fed pivot from the year-long monetary tightening, it has also led to heightened recessionary tensions.
Bank of America CEO Brian Moynihan predicts the United States will enter a recession later this year. Moynihan said he anticipates the economy to contract in each quarter by between 0.5% and 1%, resulting in a “very slight recession in the scheme of things.”
However, that does not mar the prospects of the ever-growing software industry. The demand for software this year is expected to be very strong as enterprises push forward with digital business initiatives.
According to the latest forecast by Gartner, worldwide IT spending is projected to increase 5.1% year-over-year to $ 4.60 trillion this year.
Moreover, according to Deloitte’s 2022 Global Intelligent Automation survey, organizations are increasingly deploying intelligent automation technologies, including RPA, optical character recognition, AI, low-code tools, and process mining, to realize broad benefits that include improved productivity, increased accuracy, better customer experience, and cost reduction.
Take a look at the stocks mentioned above:
Salesforce, Inc. (CRM)
CRM provides customer relationship management technology that brings companies and customers together worldwide.
The company’s service offerings include Sales to store data, monitor leads and progress, forecast opportunities, gain insights through analytics and relationship intelligence, and deliver quotes, contracts, and invoices; and Service that enables companies to deliver trusted and highly personalized customer service and support at scale.
On March 29, CRM announced that The RealReal, Inc. (REAL), a leading online marketplace for resale luxury goods has optimized and streamlined the overall consignor and shopper journey with CRM, creating a fully-personalized, intuitive digital selling and shopping experience. This should boost CRM’s topline.
On March 7, CRM introduced Einstein GPT, the first-ever generative AI CRM technology in the world. At an immense scale, it offers AI-generated content to enhance interactions across various areas, such as sales, service, marketing, commerce, and IT. By implementing Einstein GPT, Salesforce aims to revolutionize every customer experience using generative AI.
CRM’s revenue grew at a CAGR of 22.4% over the past three years. In addition, its total assets grew at a CAGR of 5% over the past five years.
Its trailing-12-month EBIT margin of 5.93% is 30.8% higher than the 4.53% industry average. Its trailing-12-month gross profit margin of 73.34% is 45.1% higher than the 50.54% industry average.
CRM’s total revenues increased 14.4% year-over-year to $8.38 billion in the fiscal fourth quarter, which ended January 31, 2023. Its gross profit increased 18.3% year-over-year to $6.28 billion. Also, income from operations came in at $357 million, compared to a loss from operations of $176 million in the previous-year quarter.
The company’s non-GAAP net income increased 96.4% year-over-year to $1.66 billion. Its non-GAAP net income per share increased 100% year-over-year to $1.68.
CRM’s revenue is expected to rise 10.2% year-over-year to $8.16 billion for the fiscal first quarter that ended April 2023. The company’s EPS for the same quarter is expected to increase 64.4% year-over-year to $1.61. Additionally, the stock has topped consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 36.5% over the past three months to close the last trading session at $198.50. It gained 49.7% year-to-date.
CRM’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.
CRM also has an A grade for Growth and Sentiment and a B for Quality. It is ranked #14 out of 135 stocks in the Software – Application industry.
Click here to access additional ratings for CRM’s Value, Stability, and Momentum.
PDF Solutions, Inc. (PDFS)
PDFS provides proprietary software and physical intellectual property products for integrated circuit designs, electrical measurement hardware tools, proven methodologies, and professional services in the United States, China, Japan, and internationally.
On March 9, PDFS and Voltaiq announced their collaboration to help battery manufacturers improve yield, reduce cost, and accelerate new factory ramp-ups.
This collaboration combines PDFS’s deep product and domain expertise for the analysis and control of semiconductor and electronics manufacturing with Voltaiq’s product and domain expertise in marshaling large-scale data from across the full battery product lifecycle to accelerate and optimize every part of battery development and production.
PDFS’s revenue grew at a CAGR of 20.2% over the past three years. In addition, its EBITDA grew at a CAGR of 5.2% over the past five years.
Its trailing-12-month gross profit margin of 67.75% is 34.1% higher than the 50.54% industry average.
PDFS’s total revenues increased 35.6% year-over-year to $40.52 million in the fiscal fourth quarter, which ended December 31, 2022. The company’s non-GAAP net income increased 164% year-over-year to $7.40 million, while non-GAAP net income per share rose 171.4% year-over-year to $0.19.
Analysts expect PDFS’ revenue to rise 19.1% year-over-year to $39.88 million for the fiscal first quarter that ended March 2023. The company’s EPS for the same quarter is expected to increase 58.3% year-over-year to $0.14. Additionally, the stock has topped consensus EPS and revenue estimates in each of the trailing four quarters.
The stock has gained 85.8% over the past six months to close the last trading session at $40.81. In addition to this, the stock gained 43.1% year-to-date.
PDFS’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.
PDFS also has an A grade for Growth and Sentiment and a B in Quality. It is ranked #12 in the same industry.
To access additional ratings for PDFS’s Stability, Value, and Momentum, click here.
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CRM shares were trading at $197.82 per share on Wednesday morning, down $0.68 (-0.34%). Year-to-date, CRM has gained 49.20%, versus a 8.46% 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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