The software industry is expected to expand due to continued digital transformation, consistent innovations, increased use of artificial intelligence, and cloud migration. Given the industry’s growth prospects, investors could consider buying fundamentally sound software stocks RingCentral, Inc. (RNG), PDF Solutions, Inc. (PDFS) and Karooooo Ltd. (KARO) for solid returns.

The software industry, which includes enterprise software, cloud computing, cybersecurity, and artificial intelligence, is experiencing a surge in demand due to consistent digital transformation and the need to meet evolving customer needs.

The software industry contributes around $1.4 trillion to the U.S. economy annually. Gartner forecasts software spending to increase 13.8% year-over-year to $1.04 trillion in 2024. This growth is expected to be driven by the increasing demand for cloud-based software solutions and digital transformation initiatives across industries.

Moreover, according to Statista, software market revenue is expected to hit $659 billion this year. The sector’s revenue is expected to grow at a 5.4% CAGR over the next five years to $858.10 billion by 2028.

Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 21.1% gain over the past six months.

Considering these conducive trends, let’s look at the fundamentals of the three software stocks.

RingCentral, Inc. (RNG)

RNG is a provider of enterprise cloud communications, video meetings, collaboration, and contact center Software-as-a-Service (SaaS) solutions. Its portfolio comprises RingCentral MVP, a UCaaS platform; Customer engagement solutions; and RingCentral Video, a video meeting solution with team messaging, enabling smart video meetings.

RNG’s forward non-GAAP P/E multiple of 9.62 is 57.3% lower than the industry average of 22.54. Its forward Price/Cash Flow multiple of 7.23% is 66.2% lower than the industry average of 21.38.

RNG’s trailing-12-month gross profit margin of 69.65% is 43.1% higher than the industry average of 48.67%. Its trailing-12-month asset turnover ratio of 0.96x is 55.2% higher than the industry average of 0.62x.

For the third quarter that ended September 30, 2023, RNG’s non-GAAP income from operations rose 55.6% year-over-year to $106.83 million. Its adjusted EBITDA grew 47% from the year-ago value to $127.80 million. Also, its non-GAAP net income and non-GAAP EPS increased 43.4% and 41.8% year-over-year to $76.07 million and $0.78, respectively.

Analysts expect RNG’s revenue to increase 10.7% year-over-year to $2.20 billion for the year ending December 2023. Its EPS is expected to grow 60.6% year-over-year to $3.20 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 21.2% over the past month to close the last trading session at $30.75.

RNG’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

RNG also has a B grade for Value and Quality. It is ranked #11 out of 44 stocks in the B-rated Software - Business industry. Click here for the additional POWR Ratings for Growth, Sentiment, Stability and Momentum for RNG.

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 internationally.

PDFS’ trailing-12-month ROTA of 0.96% is 261.9% higher than the 0.26% industry average. Its trailing-12-month CAPEX/Sales of 6.44% is 176.6% higher than the 2.33% industry average.

PDFS’ total revenues for the third quarter (ending September 30, 2023) increased marginally year-over-year to $42.35 million. Its total current assets came in at $184.32 million for the period that ended September 30, 2023, compared to $193.41 million for the period that ended December 31, 2022. Also, its total liabilities came in at $282.45 million, compared to $278.67 million for the same period.

Street expects PDFS’ revenue to increase 11.4% year-over-year to $165.42 million for the year ending December 2023. Its EPS is expected to grow 21.7% year-over-year to $0.73 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 13.8% over the past month to close the last trading session at $30.40.

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

It is ranked #35 out of 132 stocks in the Software - Application industry. It has an A grade for Sentiment. To see additional PDFS ratings for Growth, Value, Momentum, Stability and Quality, click here.

Karooooo Ltd. (KARO)

Headquartered in Singapore, KARO provides mobility software-as-a-service (SaaS) platforms for connected vehicles in South Africa, the rest of Africa, Europe, the Asia-Pacific, the Middle East, and the United States. The company offers Fleet Telematics, LiveVision, MiFleet, and Karooooo Logistics.

KARO’s forward non-GAAP P/E multiple of 20.89 is 7.3% lower than the industry average of 22.54. Its forward EV/EBITDA multiple of 8.46% is 42.8% lower than the industry average of 14.80.

KARO’s trailing-12-month ROTA of 16.48% is significantly higher than the 0.26% industry average. Its trailing-12-month ROCE of 25.98% is significantly higher than the 1.01% industry average.

KARO’s revenue for the second quarter ended August 31, 2023, rose 21.1% year-over-year to ZAR1.04 billion ($55.70 million). Its gross profit rose 16% year-over-year to ZAR660.54 million ($35.37 million). The company’s profit for the period increased 14.6% over the prior-year quarter to ZAR178.21 million ($9.54 million).

Its EPS came in at ZAR5.61, representing an increase of 13.8% year-over-year. Additionally, its adjusted EBITDA rose 9.5% year-over-year to ZAR413.26 million ($22.13 million).

KARO’s revenue is expected to increase 13.4% year-over-year to $217.08 million for the year ending February 2024. Its EPS is expected to grow 11.7% year-over-year to $1.18 for the same period. Shares of KARO have gained 9.7% over the past six months to close the last trading session at $24.57.

It’s no surprise that KARO 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 Value, Stability and Sentiment. It is ranked #6 in the Software - Application industry.

Beyond what is stated above, we’ve also rated KARO for Growth and Momentum. Get all KARO ratings here.

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RNG shares were unchanged in premarket trading Monday. Year-to-date, RNG has declined -13.14%, versus a 20.73% 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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