The software industry is expanding in response to rising demand for advanced software and digitization. The demand of businesses to streamline their operations and improve efficiency through digital solutions is driving this growth. Also, the rise of cloud computing and mobile technology has accelerated the growth of the software sector.
Therefore, it could be wise for investors to buy fundamentally sound and profitable software stocks Magic Software Enterprises Ltd. (MGIC), NICE Ltd. (NICE), and Squarespace, Inc. (SQSP).
The software market in US is expected to reach $338.20 billion in revenue by 2023. Revenue is expected to grow at a CAGR of 4.2%, reaching a market volume of $414.70 billion by 2028.
According to Gartner’s most recent forecast, software will continue to be the fastest-growing industry, with spending of $911.66 billion in 2023, a 13.5% growth year-over-year.
In addition, the application development software market in the United States is expected to rise at a CAGR of 5.8% until 2028, reaching $113.70 billion. This expansion can be attributed to rising demand for mobile applications as well as the rapid adoption of emerging technologies such as AI and blockchain.
Investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 12.2% returns over the past six months and 33.6% over the past nine months.
With these favorable trends in mind, let’s delve into the fundamentals of three best Software – Application stocks, beginning with number 3.
Stock #3: Magic Software Enterprises Ltd. (MGIC)
Headquartered in Or Yehuda, Israel, MGIC offers application development, business process integration platforms, vertical software solutions, and professional services. The company operates through two segments, Software Solutions, and IT Professional Services.
MGIC’s forward EV/Sales multiple of 1.02 is 60.8% lower than the industry average of 2.61. Its forward Price/Sales multiple of 0.95 is 63.1% lower than the industry average of 2.58.
MGIC’s trailing-12-month EBIT margin of 10.59% is 130.6% higher than the industry average of 4.59%. Its trailing-12-month ROCE of 16.40% is significantly higher than the industry average of 1.16%.
For the second quarter that ended June 30, 2022, MGIC’s revenues increased marginally year-over-year to $137.60 million. Its non-GAAP gross profit grew 9.1% from the year-ago value to $41.60 million. Also, its non-GAAP net income attributable to MGIC’s shareholders increased 15.6% from the year-ago value to $13.50 million, while non-GAAP EPS grew 16.7% year-over-year to $0.28.
Analysts expect MGIC’s revenue to increase marginally year-over-year to $575.60 million for the year ending December 2023. Its EPS is expected to grow 3.4% year-over-year to $1.10 for the same period. It surpassed EPS estimates in three of four trailing quarters. Shares of MGIC has lost marginally intraday to close the last trading session at $11.14.
MGIC’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MGIC also has an A grade for Stability and a B for Value and Sentiment. It is ranked #14 out of 132 stocks in the Software – Application industry. Click here for the additional POWR Ratings for Growth, Momentum and Quality for MGIC.
Stock #2: NICE Ltd. (NICE)
Based in Ra’anana, Israel, NICE together with its subsidiaries, provides cloud platforms for AI-driven digital business solutions worldwide.
NICE’s forward EV/EBIT of 14.61x is 18.1% lower than the industry average of 17.84x. Its forward Price/Book multiple of 3.35 is 16.1% lower than the industry average of 4.
NICE’s trailing-12-month ROCE of 10.16% is 778.4% higher than the 1.16% industry average. Its trailing-12-month net income margin of 13.48% is 562.6% higher than the 2.03% industry average.
For the fiscal second quarter ended June 30, 2023, NICE’s total revenue were $581.11 million, up 9.5%year-over-year. Its non-GAAP net income increased 14.9% from the year-ago value to $141.51 million. The company’s non-GAAP EPS grew 14.5% from the prior-year quarter to $2.13. Also, its non-GAAP gross profit came in at $391.40 million, up 7% year-over-year.
The consensus revenue estimate of 2.36 billion for the year ending December 2023 represents a 8.4% increase year-over-year. Its EPS is expected to grow 11.7% year-over-year to $8.51 for the same period. It surpassed EPS estimates in all four trailing quarters. NICE’s shares have gained marginally intraday to close the last trading session at $172.75.
NICE overall B rating equates to a Buy in our POWR Ratings system. It also has a B grade for Quality.
It is ranked #13 in the same industry. Beyond what is stated above, we’ve also rated NICE for Momentum, Sentiment, Stability, Growth and Value. Get all NICE ratings here.
Stock #1: Squarespace, Inc. (SQSP)
SQSP operates a platform for businesses and independent creators to build an online presence, grow their brands, and manage their businesses across the internet. Its suite of products ranges from websites, e-commerce, marketing tools, and hospitality services. Also, it offers tools for scheduling with Acuity and managing social media presence with Bio Sites and Unfold.
SQSP’s trailing-12-month levered FCF margin of 21.61% is 193.1% higher than the 7.37% industry average. Its trailing-12-month ROTC of 10.48% is 342.7% higher than the 2.37% industry average.
SQSP’s revenue grew 16.4% year-over-year to $247.53 million in the second quarter that ended June 30, 2023. Its gross profit was $204.36 million, an increase of 16.3% year-over-year.
The company’s operating income rose 309.8% from the prior-year period to $36.67 million. Additionally, SQSP’s adjusted EBITDA came in at $73.38 million, up 68.2% year-over-year.
Street expects SQSP’s revenue to increase 14.7% year-over-year to $994.62 million for the year ending December 2023. Its EPS is expected to grow 92.4% year-over-year to $1.05 for the same period. Over the past year, the stock has gained 35.9% to close the last trading session at $29.02.
SQSP’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 #11 in the same industry. It has an A grade for Growth, and Quality and a B for Sentiment. To see additional SQSP’s ratings for Value, Momentum and Stability, click here.
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NICE shares were trading at $172.32 per share on Tuesday afternoon, down $0.43 (-0.25%). Year-to-date, NICE has declined -10.39%, versus a 11.73% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
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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