The Software-as-a-Service (SaaS) industry is poised for strong development in the near future because to the growing integration of AI and other cloud-based technologies in company processes. The demand for scalable, affordable solutions that may improve productivity and optimize company processes is what is fueling this expansion.

Given the backdrop, it could be worth watching Palantir Technologies Inc. (PLTR) and Smartsheet Inc. (SMAR).

According to Statista, the software market in U.S. is expected to reach $338.20 billion in revenue in 2023. Also, the revenue is predicted to grow at a 4.2% CAGR until 2028, resulting in a market volume of $414.70 billion.

The SaaS market is expected to increase at a 19.2% CAGR until 2027. This expansion can be attributed to the increasing use of cloud computing and the increased demand for cost-effective and scalable software solutions. Also, the flexibility and accessibility provided by SaaS models are fueling their popularity among enterprises of all sizes.

Moreover, according to Gartner, worldwide software spending is projected to grow 13.7% in 2023.

Investor’s interest in software stocks is evident from the SPDR S&P Software & Services ETF’s (XSW) 14.3% returns over the past six months.

In light of these encouraging trends, let’s look at the fundamentals of the mentioned Software – SAAS stocks, starting with number 2.

Stock #2: Palantir Technologies Inc. (PLTR)

PLTR builds and deploys software platforms for the intelligence community in the United States to help in counterterrorism investigations and operations. The company’s offerings include Palantir Gotham, Palantir Foundry, and Palantir Apollo.

On August 9, 2023, PLTR and Azule Energy, a leading Angolan energy provider, entered a multi-year partnership to deploy cutting-edge software to optimize Azule Energy’s upstream production.

PLTR’s Palantir Foundry would help Azule Energy manage its current 200,000 barrels of daily oil production and support its growth goal of 250,000 barrels per day. The partnership is expected to increase PLTR's industry presence, so driving the company's profitability and growth.

PLTR’s trailing-12-month gross profit margin of 79.15% is 62.7% higher than the industry average of 48.66%. Its trailing-12-month levered FCF margin of 21.32% is 195.9% higher than the industry average of 7.20%.

PLTR’s revenue increased 12.8% year-over-year to $533.32 million in the second quarter that ended June 30, 2023. The company’s adjusted income from operations stood at $135.04 million, up 25.2% year-over-year. Also, its adjusted EBITDA rose 27.2% from the year-ago value to $143.43 million.

Street expects PLTR’s revenue to increase 16.2% year-over-year to $2.21 billion for the year ending December 2023. Its EPS is expected to grow at 278.6% year-over-year to $0.23 for the same period. Over the past nine months, the stock has gained 115.4% to close the last trading session at $15.83.

PLTR’s POWR Ratings reflect this steady outlook. The stock has an overall rating of C, translating to a Neutral in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

PLTR has a B grade for Growth and Quality. Within the B-rated Software – SAAS industry, it is ranked #19 out of 24 stocks. To see additional PLTR’s ratings for Value, Momentum, Stability, and Sentiment, click here.

Stock #1: Smartsheet Inc. (SMAR)

SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. It serves the aerospace, automotive, biotechnology, consumer, e-commerce, education, finance, government, healthcare, IT services, marketing, media, non-profit, publishing, software, technology, and travel sectors.

SMAR’s trailing-12-month net income margin of 79.19% is 62.8% higher than the industry average of 48.66%. Its trailing-12-month levered FCF margin of 25.54% is 254.6% higher than the industry average of 7.20%.

SMAR’s total revenue for the fiscal second quarter that ended July 31, 2023, increased 26.2% year-over-year to $235.59 million, while its gross profit stood at $188.55 million, up 29% year-over-year.

Its total current assets came in at $760.38 million for the period that ended July 31, 2023, compared to $710.09 million for the period that ended January 31, 2023.

The consensus revenue estimate of 951.68 million for the year ending January 2024 represents a 24.1% increase year-over-year. Its EPS is expected to come in at $0.55 for the same period. It surpassed EPS estimates in three of four trailing quarters. SMAR’s shares have gained 10.7% over the past year to close the last trading session at $41.93.

SMAR POWR Ratings reflect this optimistic outlook. The stock has an overall rating of C, equating to a Neutral in our proprietary rating system.

It has an B grade for Growth, Sentiment, and Quality. It is ranked #9 in the same industry. To see SMAR’s rating for Value, Momentum, Stability, click here.

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PLTR shares were trading at $15.27 per share on Friday afternoon, down $0.56 (-3.54%). Year-to-date, PLTR has gained 137.85%, versus a 17.00% rise in the benchmark S&P 500 index during the same period.

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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