Globally, the increased IT spending, coupled with the widespread adoption of software-as-a-service and increased cloud-based offerings, indicates the solid demand for IT services. So, investors could buy software stocks, Pegasystems Inc. (PEGA), EverCommerce Inc. (EVCM), and Karooooo Ltd. (KARO), for positive investments.
The global business software and services industry is being boosted by the increasing deployment of business software in various organizations and government sectors. The market is driven by the benefits it provides, which include increased profitability, lower inventory costs, and the capacity to make strategic decisions to strengthen market position.
The global business software and services market is poised to grow at a CAGR of 11.4% until 2032.
Furthermore, the application development market is projected to grow at a CAGR of 38.2% until 2030. Due to the desire for scalable and customized software and rising demand for cloud deployment across a variety of enterprises, the market is expected to continue to grow over the coming years.
In addition, the increasing adoption of cloud computing is expected to drive growth in the SaaS market. The shift of enterprises towards SaaS from an on-premises model owing to the high cost of on-premises software deployment is further projected to propel the market growth.
The global software as a Service (SaaS) market is projected to grow at a CAGR of 18.1% until 2032.
Considering these conducive trends, let's take a look at the fundamentals of the three best software stocks.
Pegasystems Inc. (PEGA)
PEGA develops, markets, licenses, hosts, and supports enterprise software applications in the United States, rest of the Americas, the United Kingdom, rest of Europe, the Middle East, Africa, and the Asia-Pacific.
In January 24, 2024, PEGA announced Pega GenAI Knowledge Buddy, an enterprise-grade, generative AI-powered assistant that will quickly and easily enable customers and employees to get specific answers synthesized by generative AI from content scattered across knowledge bases.
PEGA’s trailing-12-month gross profit margin of 71.94% is 48.6% higher than the 48.43% industry average. Its trailing-12-month levered FCF of 13.34% is 49.7% higher than the industry average of 8.91%.
In the third quarter, which ended on September 30, 2023, PEGA’s total revenue increased 23.6% year-over-year to $334.64 million. The company’s non-GAAP net income and non-GAAP EPS came in at $37.60 million and $0.44, compared to a non-GAAP net loss and non-GAAP loss per share of $27.50 million and $0.34 in the same quarter last year, respectively.
The consensus revenue came in at $415.34 million for the fiscal year ended December 2023 represents a 4.5% increase year-over-year. Its EPS is expected to increase 19.9% year-over-year to $0.98 for the same quarter.
PEGA’s shares have gained 14% over the past three months to close the last trading session at $48.74.
PEGA’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 are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
PEGA has an A grade for Growth and a B in Sentiment and Value. It is ranked #5 out of 43 stocks in the B-rated Software - Business industry.
Click here to see the additional POWR Ratings for PEGA (Momentum, Stability, and Quality).
EverCommerce Inc. (EVCM)
EVCM provides integrated software-as-a-service solutions for service-based small and medium sized businesses in the United States and internationally. The company's solutions include business management software that offers route-based dispatching, medical practice management, and gym member management solutions; billing and payment solutions comprising e-invoicing, mobile payments, and integrated payment processing.
EVCM’s trailing-12-month levered FCF margin of 15.16% is 70.1% higher than the industry average of 8.91%. Its trailing-12-month gross profit margin of 65.63% is 35.5% higher than the industry average of 48.43%.
In the fiscal third quarter that ended September 30, 2023, EVCM reported a 10.5% year-over-year surge in total revenues, reaching $174.74 million. This growth was mirrored in the subscription and transaction fees revenue, which also increased by 10.5% year-over-year, amounting to $132.64 million. Its adjusted gross profit rose 12.7% year-over-year to $113.27 million. Additionally, its adjusted EBITDA grew 38.6% from the prior-year quarter to $41.80 million.
Street expects revenue for the fiscal year ended December 2023 to increase 9.3% year-over-year to $678.34 million. Its EPS is expected to grow 29.2% year-over-year to $0.52 for the same year.
Shares of EVCM has gained 1.7% over the past three months to close the last trading session at $9.74.
EVCM’s POWR Ratings reflect its positive outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
The stock has an A grade for Growth and Sentiment and a B in Value and Stability. The stock is ranked #6 out of 20 stocks in the A-rated Software - SAAS industry.
Beyond what is stated above, we’ve also rated for Quality and Momentum. Get all EVCM ratings 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. It provides Cartrack Field Service, Business Intelligence, asset tracking, asset recovery services, etc.
In terms of the trailing-12-month Return on Common Equity, KARO’s 26.20% is significantly higher than the 1.67% industry average. Likewise, its 21.68% trailing-12-month Return on Total Capital is 723.2% higher than the 2.63% industry average.
For the fiscal third quarter ended November 30, 2023, KARO’s revenues increased 16% year-over-year to ZAR1.08 billion ($57.65 million). Its gross profit increased 18% year-over-year to ZAR687.31 million ($36.69 million). The company’s profit for the period increased 35.5% over the prior year quarter to ZAR199.33 million ($10.64 million).
Additionally, its adjusted EBITDA rose 28% year-over-year to ZAR427.87 million ($22.84 million). Also, its EPS came in at ZAR6.34, representing an increase of 34.9% year-over-year.
Analysts expect KARO’s revenue to increase 11.1% year-over-year to $55.58 million for the quarter ending February 2024. Its EPS is expected to increase 28.7% year-over-year to $0.33 for the same quarter.
The stock gained 2.3% over the past three months to close the last trading session at $24.55.
KARO’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.
The stock has an A grade for Stability, Quality, and Sentiment and a B in Value. It is ranked #4 in the 132-stock in the Software - Application industry.
To access KARO’s additional ratings for Growth and Momentum, Click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PEGA shares were trading at $49.70 per share on Thursday morning, up $0.96 (+1.97%). Year-to-date, PEGA has gained 1.72%, versus a 1.97% 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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