The global software market is expected to expand significantly due to rising demand for software solutions and the rapid adoption of cloud computing and artificial intelligence. Amid this backdrop, it could be wise to add fundamentally strong tech stocks Adobe Inc. (ADBE), Informatica Inc. (INFA) and SolarWinds Corporation (SWI) to your portfolio now.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
According to Granter, the software spending is expected to grow by 13.8% in 2024. The global software market is estimated to grow at a 12.2% CAGR until 2029.
This growth is driven by the increasing demand for software solutions across various industries. Factors such as digital transformation initiatives, cloud adoption, and the need for advanced analytics are fueling the software market's growth globally.
Additionally, the US software market revenue is expected to hit $338.20 billion this year. Also, the sector’s revenue is expected to grow at a 4.2% CAGR over the next five years to $414.70 billion by 2028.
The software industry is expected to benefit from the increased use of AI in software development, resulting in intelligent, efficient systems and ongoing technological upgrades, providing an excellent investment opportunity for long-term growth.
Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 34.6% gains over the past nine months.
In light of these encouraging trends, let’s look at the fundamentals of the three above-mentioned software stocks.
Adobe Inc. (ADBE)
ADBE provides professionals, communicators, businesses, and consumers with various products and services to create, manage, deliver, measure, optimize, engage, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media; Digital Experience; and Publishing and Advertising.
ABDE’s trailing-12-month net income margin of 27.12% is significantly higher than the 1.77% industry average. Its trailing-12-month ROCE of 33.97% is significantly higher than the 0.99% industry average.
ADBE’s total revenue for the fiscal third quarter that ended September 1, 2023, increased 10.3% year-over-year to $4.89 billion. Its non-GAAP operating income increased 15.8% year-over-year to $2.26 billion. The company’s non-GAAP net income increased 17.7% year-over-year to $1.88 billion.
In addition, its non-GAAP net income per share came in at $4.09, representing an increase of 20.3% year-over-year.
Street expects ADBE’s revenue to increase 10.1% year-over-year to $19.38 billion for the year ending November 2023. Its EPS is expected to grow 16.2% year-over-year to $15.93 for the same period. It surpassed EPS estimates in all four trailing quarters. Over the past year, the stock has gained 87.3% to close the last trading session at $619.72.
ADBE’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.
ADBE also has an A grade for Quality and a B for Stability. It is ranked #25 out of 132 stocks in the Software – Application industry. Click here to see the additional POWR Ratings for Growth, Value, Sentiment, and Momentum for ADBE.
Informatica Inc. (INFA)
INFA develops an artificial intelligence-powered platform that connects, manages, and unifies data across multi-cloud, hybrid systems at enterprise scale in the United States.
INFA’s forward Price/Book multiple of 3.42 is 10.2% lower than the industry average of 3.81. Its forward EV/EBIT multiple of 18.46 is 3.4% lower than the industry average of 19.10.
INFA’s trailing-12-month levered FCF margin of 25.08% is 204.4% higher than the industry average of 8.24%. Its trailing-12-month gross profit margin of 79.33x is 62.3% higher than the industry average of 48.88x.
INFA’s total revenues for the fiscal third quarter ended September 30, 2023, increased 9.8% year-over-year to $408.56 million. Its software revenues increased 21.8% from the year-ago quarter to $262.03 million.
The company’s non-GAAP net income grew 53.2% from the same quarter last year to $80.62 million, and non-GAAP EPS increased 50% year-over-year to $0.27.
The consensus revenue estimate of $1.58 billion for the year ending December 2023 represents a 5.1% increase year-over-year. Its EPS is expected to grow 14.4% year-over-year to $0.89 for the same period. It surpassed EPS estimates in three of four trailing quarters. Shares of INFA has gained 47.3% over the past six months to close the last trading session at $24.53.
It is no surprise that INFA has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Growth and a B for Stability, Sentiment and Quality. It is ranked #2 out of 23 stocks in the A-rated Software - SAAS industry.
Beyond what is stated above, we’ve also rated INFA for Value and Momentum. Get all INFA ratings here.
SolarWinds Corporation (SWI)
SWI provides information technology (IT) management software products. The company offers a portfolio of solutions to technology professionals for monitoring, managing, and optimizing networks, systems, desktops, applications, storage, databases, website infrastructures, and IT service desks.
SWI’s forward non-GAAP P/E of 13.59x is 40.3% lower than the industry average of 22.78x. Its forward EV/EBITDA of 9.16x is 36.4% lower than the industry average of 14.40x.
SWI’s trailing-12-month EBIT margin of 27.07% is 477.1% higher than the 4.69% industry average. Its trailing-12-month EBITDA margin of 35.84% is 295.4% higher than the 9.07% industry average.
For the fiscal third quarter that ended September 30, 2023, SWI’s total revenue stood at $189.59 million, up 5.7% year-over-year. Its non-GAAP gross profit and non-GAAP operating income increased 5.4% and 19.7% from the year-ago quarter to $172.13 million and $81.16 million, respectively.
Its non-GAAP net income and non-GAAP earnings per share increased 20.3% and 15% year-over-year to $38.01 million and $0.23, respectively.
Analysts expect SWI’s revenue to grow at 4.3% year-over-year to $750.40 million for the year ending December 2023. Its EPS is expected to grow 2% year-over-year to $0.85 for the same period. It has surpassed EPS estimates in three of four trailing quarters. The stock has gained 35.9% over the past year to close the last trading session at $11.52.
SWI’s robust 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 #3 out of 45 stocks in the B-rated Software - Business industry. It has a B grade for Growth, Value, and Sentiment. To see additional SWI’s ratings for Stability, Momentum and Quality, 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.
ADBE shares were trading at $619.72 per share on Thursday morning, up $8.73 (+1.43%). Year-to-date, ADBE has gained 84.15%, versus a 20.30% 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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