Despite ongoing economic and geopolitical uncertainty, the software industry’s long-term prospects appear bright, driven by growing software spending among enterprises. The demand for enterprise software solutions is due to increased automation and streamlining of business operations across various end-user industries.

As the industry is set for solid growth and expansion, it could be wise to buy fundamentally sound software stocks Adobe Inc. (ADBE) and Squarespace, Inc. (SQSP). However, given its fundamental weakness and dim growth outlook, Robinhood Markets, Inc. (HOOD) is best avoided now.

Amid rapid digital transformation worldwide, businesses and individuals increasingly depend on software products and services. Automation of business processes across several end-use industries, including retail, healthcare, manufacturing, and transportation, is increasingly adopted by enterprises for cost and time savings, improved transparency, and lower error rates.

Across IT infrastructure, enterprise software and services are deployed to facilitate inventory cost reduction, enhanced decision-making, improved profitability, and better market position for businesses. As per a report by Grand View Research, the global business software and services market is expected to reach $1.15 trillion by 2030, growing at an 11.9% CAGR.

Meanwhile, the U.S. business software and services market is projected to grow at a CAGR of 10.7% during the forecast period from 2023 to 2030.

Furthermore, the software industry should primarily benefit from the rising usage of innovative technologies, such as AI, machine learning, quantum computing, IoT, blockchain, AR&VR, and metaverse. According to Gartner digital markets’ 2023 SMB tech trends survey, almost 90% of businesses view technology as a critical aspect for achieving organizations' goals.

Moreover, more than two-thirds of businesses plan to increase their investment in technology and software this year to drive efficiencies and cost savings. Also, emerging technology plays an integral part in the IT strategy of around 57% of buyers, and most businesses are comfortable early adopters of new technology.

According to the latest forecast by Gartner, software continues to be the highest-growing segment, with spending of $911.66 billion in 2023, an increase of 13.5% year-over-year.

The software segment is expected to see this double-digit growth as organizations increase utilization and reallocate spending to core applications and platforms that support efficient gains, including enterprise resource planning (ERP) and customer relationship management (CRM) applications. Also, vendor price increases will continue to bolster software spending.

While avoiding fundamentally weak software stock HOOD could be wise now, investors could add quality stocks ADBE and SQSP to their portfolio for solid returns.

Let’s discuss the fundamentals of these stocks in detail:

Stock to Sell:

Robinhood Markets, Inc. (HOOD)

HOOD operates a financial services platform in the United States. Its platform enables users to invest in stocks, exchange-traded funds (ETFs), options, gold, and cryptocurrencies. The company offers various learning and education solutions comprising Snacks, Learn, Newsfeeds, In-App Education, and Crypto Learn and Earn.

On August 8, HOOD announced being investigated for its trading execution, the latest in a string of regulatory and legal proceedings faced by the online brokerage.

“The New York Attorney General is conducting an investigation into brokerage execution quality. We are cooperating with this investigation,” HOOD said in a recent filing.

On June 9, the company dropped three crypto tokens, including Cardano, Polygon, and Solana, from its trading platform. In a Twitter thread, HOOD cited the SEC’s actions as reasons for the delisting, saying the Coinbase and Binance lawsuits “introduced a cloud of uncertainty” around the tokens.

HOOD’s trailing-12-month net income margin of negative 49.58% compares to the industry average of 25.70%. And its trailing-12-month ROCE and ROTA of negative 11.64% and negative 2.89% compare unfavorably to the industry averages of 11.20% and 1.14%, respectively.

For the second quarter that ended June 30, 2023, HOOD’s net revenues increased 52.8% year-over-year to $486 million. However, the company’s transaction-based revenues decreased 4.7% year-over-year to $202 million. Its monthly active users (MAU) dropped to 10.8 million, one million fewer than the prior quarter and 3.2 million less than a year ago.

In addition, as of June 30, 2023, the company’s cash and cash equivalents were $5.83 billion versus $6.34 billion as of December 31, 2022. Also, its current liabilities increased to $21.36 billion, compared to $16.25 billion as of December 31, 2022.

Analysts expect HOOD’s revenue for the fiscal year (ending December 2023) to increase 39.8% year-over-year to $1.90 billion. However, the company is expected to report a loss per share of $0.51 for the current year.

Shares of HOOD have declined 18.7% over the past month to close the last trading session at $10.19.

HOOD’s bleak fundamentals are reflected in its POWR Ratings. The stock has an overall rating of D, translating to a Sell in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

HOOD has a D grade for Value, Stability, and Quality. Within the Software - Application industry, it is ranked #115 out of 136 stocks.

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

Stocks to Buy:

Adobe Inc. (ADBE)

ADBE operates as a diversified software company globally. The company operates through three segments: Digital Media; Digital Experience; and Publishing and Advertising.

On August 16, ADBE announced the general availability of the all-new Adobe Express for desktop web. The latest version of the AI-first, all-in-one content creation app with Firefly beta generative AI capabilities will revolutionize creative expression, making it fast, easy, and fun for users of all skill levels to design and share standout content.

With groundbreaking innovations and generative AI at the core of Express, the company is expected to extend its user base and drive its revenue stream.

On July 12, it was announced that ADBE’s Firefly, the company’s family of creative, generative AI models, could now support text prompts in more than 100 languages, empowering users to generate high-quality images, create text effects, streamline workflows, and improve productivity in their language of choice.

Also, the service would be localized in 20 languages with versions in French, German, Japanese, Spanish, and Brazilian Portuguese available now. This announcement might broaden ADBE’s Firefly’s reach to millions of new users, boosting the company’s growth and profitability.

ADBE’s trailing-12-month gross profit margin of 87.77% is 82.1% higher than the industry average of 48.20%. Likewise, the stock’s trailing-12-month EBITDA margin and net income margin of 37.03% and 26.34% are significantly higher than the industry averages of 8.96% and 2.01%, respectively.

During the second quarter that ended June 2, 2023, ADBE’s total revenue increased 9.8% year-over-year to $4.82 billion. Its gross profit rose 10.3% from the year-ago value to $4.24 billion. Also, the company’s non-GAAP operating income grew 10.4% year-over-year to $2.18 billion.

Furthermore, the company’s non-GAAP net income increased 13.2% from the prior-year quarter to $1.79 billion. Its non-GAAP net income per share came in at $3.91, an increase of 16.7% year-over-year.

Street expects ADBE’s revenue for the fiscal year (ending November 2023) to increase 9.8% year-over-year to $19.33 billion. The company’s EPS for the ongoing year is expected to grow 14.7% from the prior year to $15.73. Moreover, ADBE has surpassed the consensus EPS estimates in each of the trailing four quarters, which is impressive.

ADBE’s stock has gained 40.9% over the past six months and 15% over the past year to close the last trading session at $514.49. Also, the stock gained 52.7% 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.

ADBE has an A grade for Quality and a B in Sentiment. It is ranked #26 of 136 stocks in the Software - Application industry.

To access additional ratings for ADBE’s Stability, Growth, Value, and Momentum, click here.

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.

On June 15, SQSP entered into a definitive asset purchase agreement with Google, whereby Squarespace will acquire the assets associated with the Google Domains business. This purchase comprises nearly 10 million domains hosted on Google Domains spread across millions of customers.

“Domains are a critical part of web infrastructure and an essential piece of every business's online presence. We look forward to serving these new customers as we have served millions using our domain products and are committed to ensuring a seamless transition,” said SQSP’s Anthony Casalena, founder & CEO.

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. The company’s unlevered free cash flow increased 50.6% from the year-ago value to $54.77 million.

Analysts expect SQSP’s revenue for the fiscal year (ending December 2023) to grow 14.7% from the previous year to $994.64 million. The consensus EPS estimate of $1 for the current year indicates an 84.2% rise year-over-year. Additionally, the company topped the consensus revenue estimates in each of the trailing four quarters.

The stock has gained 30.4% over the past six months and 35.6% over the past year to close the last trading session at $30.31.

SQSP’s POWR Ratings reflect a promising outlook. The stock has an overall rating of B, which equates to Buy in our proprietary rating system.

SQSP has a grade A for Growth and Quality. Within the same industry, it is ranked #12.

Click here to access SQSP’s additional POWR Ratings (Value, Stability, Momentum, and Sentiment).

What To Do Next?

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ADBE shares rose $8.57 (+1.67%) in premarket trading Thursday. Year-to-date, ADBE has gained 52.88%, versus a 15.83% rise in the benchmark S&P 500 index during the same period.

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.

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