The stock market has been quite volatile as traders digest a slew of earnings reports and their implications on the U.S. economy. However, I think it could be wise to invest in quality software stocks in Adobe Inc. (ADBE) and Xperi Inc. (XPER), which have been outperforming and are Buy-rated in our proprietary rating system.
Despite recession concerns, the software industry is expected to continue to expand and drive innovation.
The software industry continues to be a catalyst for change and innovation, and the rising competition should boost the industry’s growth. Despite ongoing concerns about economic uncertainty, revenue in the software market in the US is expected to grow at a CAGR of 4.2% to $414.70 billion by 2028.
Moreover, increased corporate investment in cloud computing, digital transformation, big data analytics, and artificial intelligence drive revenues. Furthermore, the global software market is expected to grow at a CAGR of 8.7% from 2022 to 2028.
In recent years, the global artificial intelligence market has experienced substantial growth, and this trend is set to continue in the future. In addition, the increasing adoption of digitization in various industries, such as automotive, banking and finance, and manufacturing, is expected to be a significant driver of the software industry.
Let’s discuss why the above-mentioned stocks could be ideal buys:
Adobe Inc. (ADBE)
ADBE operates as a diversified software company worldwide. It operates through three segments: Digital Media; Digital Experience; and Publishing and Advertising.
On March 23, ADBE and BlackBerry Limited (BB) announced that they have partnered to deliver a secure forms solution for mobile. The software solution, which combines BlackBerry UEM and ADBE Experience Manager Forms, is designed for popular mobile device platforms, and meets the rigorous security standards required by regulated industries.
ADBE’s forward non-GAAP PEG multiple of 1.67 is marginally lower than the industry average of 1.68.
Its trailing-12-month asset turnover ratio of 0.68x is 12.3% higher than the 0.61x industry average. Its trailing-12-month gross profit margin of 87.66% is 73.5% higher than the 50.54% industry average.
ADBE’s total revenue increased 9.2% year-over-year to $4.66 billion in the fiscal first quarter, which ended March 3, 2023. The company's non-GAAP net income increased 9% year-over-year to $1.75 billion, while non-GAAP net income per share rose 12.8% year-over-year to $3.80.
Analysts expect ADBE’s revenue for the fiscal second quarter ending May 2023 to increase 8.8% year-over-year to $4.77 billion. The company’s EPS is expected to grow 13% year-over-year to $3.79 for the same quarter. Additionally, it has topped consensus EPS estimates in each of the trailing four quarters, which is impressive.
The stock has gained 28.9% over the past six months to close the last trading session at $377.55. In addition to this, the stock gained 12.2% year-to-date.
ADBE’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.
ADBE also has an A grade for Quality and a B in Sentiment. It is ranked #23 of 135 stocks in the Software - Application industry.
To access additional ratings for ADBE’s Stability, Growth, Value, and Momentum, click here.
Xperi Inc. (XPER)
XPER provides software and services in the United States. It offers Pay-TV solutions, including UX solutions that allows service providers to customize elements of the interactive program guide for their customers and to upgrade the programming features and services.
On March 23, XPER’s subsidiary, DTS, Inc., a global leader in next-generation audio, imaging and sensing technology, announced the global launch of the DTS AutoStage Broadcaster Portal, giving radio broadcasters access to data on listener engagement. This should help the company expand its reach and expertise.
XPER’s forward EV/Sales multiple of 0.67 is 75.5% lower than the industry average of 2.74. its forward P/S multiple of 0.79 is 70.6% lower than the industry average of 2.70.
Its trailing-12-month asset turnover ratio of 0.68x is 12.3% higher than the 0.61x industry average. Its trailing-12-month gross profit margin of 75.52% is 49.4% higher than the 50.54% industry average.
XPER’s revenues increased 8.6% year-over-year to $135.53 million during the fourth quarter that ended December 31, 2022. Non-GAAP net income attributable to the company came in at $3.71 million, while its non-GAAP earnings per share attributable to the company came in at $0.08.
Street expects XPER’s revenue for the fiscal year December 2023 to come in at 529.93 million, indicating a 5.5% year-over-year growth.
The stock has gained 19.1% year-to-date to close the last trading session at $10.
It is no surprise that XPER has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system.
XPER is graded B in Growth, Sentiment, and Quality. It is ranked #3 in the same industry.
In addition to the grades stated above, XPER’s grades for Stability, Momentum, and Value can be seen here.
Consider This Before Placing Your Next Trade…
We are still in the midst of a bear market.
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ADBE shares fell $2.05 (-0.54%) in premarket trading Wednesday. Year-to-date, ADBE has gained 12.19%, versus a 8.72% 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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