Microsoft (MSFT), RingCentral (RNG) or Tyler Technologies (TYL): Which Software Stocks Are Definite Buys?

Amid rising automation of business processes across several end-use industries, a surge in the volume of enterprise data, and rapid adoption of emerging technologies, the demand for business software solutions is expected to soar, creating numerous revenue opportunities for companies dealing in software.

Given the industry’s promising growth outlook, investing in fundamentally sound software stocks Microsoft Corporation (MSFT) and RingCentral, Inc. (RNG) could be wise now. However, investors could hold Tyler Technologies, Inc. (TYL) and wait for a better entry point in this stock.

Companies across various industries, including retail, automotive, manufacturing, and healthcare, are racing toward digitalizing their internal operations and customer and supply-chain interactions to unlock value, provide new revenue, and drive innovation. Rapid digital transformation worldwide is one of the primary drivers of the enterprise software industry.

According to a report by Grand View Research, the global business software and services is projected to reach $1.15 trillion by 2030, growing at a CAGR of 11.9%. Along with digitalization, a surge in the volume of enterprise data and the growing deployment of enterprise software and services across IT infrastructure should drive the market’s growth.

Meanwhile, the U.S. business software and services market is expected to increase at a CAGR of 10.7% from 2023 to 2030.

Further, business expansion initiatives of several organizations globally are fueling the demand for enterprise software and services. The rapidly increasing use of cloud platforms, given several benefits like cost-effectiveness, flexibility, and mobility, has boosted demand for cloud-based software solutions among small and medium-sized companies.

The global cloud computing market is expected to witness a CAGR of 14.1% from 2023 to 2030 to reach $1.55 trillion by 2030.

The industry should also benefit from the growing adoption of new, innovative technologies among enterprises, such as artificial intelligence (AI), machine learning, blockchain, augmented reality (AR), hybrid architecture, and metaverse.

As per Gartner Digital Markets’ 2023 SMB Software Buying Trends Survey, emerging technology plays an integral part in the IT strategy of 57% of businesses, with most being comfortable early adopters of new technology.

Despite a challenging macroeconomic environment, global software spending will likely remain robust amid rapid digital business transformation. The worldwide software spending is projected to grow by 13.7% year-over-year to $922.75 billion in 2023, according to the forecast by Gartner.

With these favorable trends in mind, let’s take a look at the fundamentals of the three Software - Business stocks, starting with number 3.

Stock to Hold:

Stock #3: Tyler Technologies, Inc. (TYL)

TYL offers integrated information management solutions and services for the public sector. Its end-to-end solutions empower local, state, and federal government entities to operate efficiently and transparently with residents and each other. The company operates through Enterprise Software and Platform Technologies segments.

On August 29, TYL signed an agreement with Scarborough Public Safety in Maine for Tyler’s public safety solutions, including Enterprise Public Safety, Enforcement Mobile, and Fire Prevention Mobile. TYL’s solutions will improve response times and provide record tracking and effective emergency communication to Scarborough Public Safety.

This deal is expected to TYL’s footprint in the state of Maine, driving the company’s revenue stream and growth.

On August 8, TYL acquired Computing System Innovations, LLC (CSI), a company that provides the leading AI automation, redaction, and indexing solution for courts, recorders, and attorneys. With this acquisition, Tyler adds CSI’s AI-driven redaction and indexing solution to its portfolio, bringing automated data entry and document processing options to current clients.

Additionally, the company plans to leverage CSI’s AI and automation technology across other Tyler verticals such as Municipal & Schools, Property & Recording, and Platform Solutions.

TYL’s trailing-12-month EBITDA margin and net income margin of 16.67% and 8.64% are significantly higher than the respective industry averages of 9.15% and 2.03%. But the stock’s trailing-12-month gross profit margin of 43.18% is 10.4% lower than the industry average of 48.20%.

For the second quarter that ended June 30, 2023, TYL’s revenues increased 7.6% year-over-year to $504.28 million. Its non-GAAP operating income was $115.91 million, up 4.8% year-over-year. Its adjusted EBITDA rose 5.4% year-over-year to $125.50 million. Its non-GAAP net income and EPS grew 8.1% and 6.9% from the prior year’s quarter to $85.93 million and $2.01, respectively.

However, the company’s cash flows from operations were negative $19.20 million, compared to $76.70 million for the second quarter of 2022. Also, its free cash flow was negative $33.20 million, compared to $60 million for the previous year’s period.

Analysts expect TYL’s EPS for the third quarter (ending September 2023) to decrease 3.5% year-over-year to $1.99. However, the company’s revenue for the current quarter is expected to grow 5% year-over-year to $496.97 million. Moreover, the company has topped the consensus revenue and EPS estimates in three of the trailing four quarters.

For the fiscal year (ending December 2023), the company’s revenue and EPS are estimated to increase 5.9% and 2.4% from the previous year to $1.96 billion and $7.68, respectively.

Shares of TYL have gained 20.4% over the past six months to close the last trading session at $387.67. However, the stock has declined marginally over the past month.

TYL’s POWR Ratings reflect its mixed prospects. The stock has an overall C rating, equating to a Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

TYL has a C grade for Growth, Sentiment, Momentum, and Quality. It is ranked #27 out of 46 stocks in the Software - Business industry.

Click here for the additional POWR Ratings for TYL (Stability and Value).

Stocks to Buy:

Stock #2: RingCentral, Inc. (RNG)

RNG provides AI-powered global enterprise cloud communications, video meetings, collaboration, and contact center Software-as-a-Service (SaaS) solutions. The company’s product offerings include RingCentral Message Video Phone (MVP), RingCentral Contact Center, RingCentral Engage Digital, RingCentral Engage Voice, and RingCentral Video.

On August 31, RNG announced that Republic Airways, one of the largest regional airlines in the U.S., selected RingCentral MVP® (Message Video Phone™) and RingCentral Contact Center™ to enhance the experience for its pilots, flight crews, and operations teams through more effective communication and collaboration. This deal should bode well for RNG.

On August 8, RNG launched RingCX™, a native, intelligent contact center. RingCX is an easy-to-deploy and use solution that combines RingCentral’s flagship unified communications (including message, video, phone, SMS, and fax) with contact center and generative AI capabilities.

This next-generation, AI-first solution delivers a complete omnichannel experience and transforms customer journeys. The new launch might boost the company’s sales and extend its market reach.

On August 7, RNG announced the launch of RingSense for Phone. By leveraging generative AI, RingSense for Phone allows organizations to turn their voice conversation data into powerful insights that will improve productivity and unlock business outcomes. Also, the company added new feature enhancements to RingSense for Sales.

RNG’s trailing-12-month gross profit margin of 69% is 43.1% higher than the industry average of 48.20%. Likewise, the stock’s trailing-12-month levered FCF margin of 16.01% is 125% higher than the 7.11% industry average.

During the second quarter that ended June 30, 2023, RNG’s revenue increased 10.8% year-over-year to $539.31 million, and its gross profit rose 14% from the year-ago value to $374.89 million. Its non-GAAP income from operations grew 89.3% year-over-year to $104.44 million. The company’s non-GAAP adjusted EBITDA was $124.98 million, an increase of 71.8% year-over-year.

Furthermore, the company’s non-GAAP net income came in at $80.01 million and $0.83 per share, up 87.1% and 77.8% from the prior year’s quarter, respectively.

Analysts expect RNG’s EPS to increase 58.6% year-over-year to $3.16 for the fiscal year (ending December 2023). The company’s revenue for the current year is expected to grow 10.5% from the prior year to $2.20 billion. Moreover, RNG surpassed the EPS estimates in each of the trailing four quarters, which is impressive.

Over the past month, RNG’s stock has gained 2.4% to close the last trading session at $31.23.

RNG’s POWR Ratings reflect this robust outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system.

RNG has a B grade for Growth and Value. It is ranked #15 in the same industry.

To access additional POWR Ratings of RNG for Momentum, Stability, Sentiment, and Quality, click here.

Stock #1: Microsoft Corporation (MSFT)

MSFT, one of the largest tech companies in the world, engages in developing and supporting software, services, devices, and solutions. The company operates through three segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.

On September 5, MSFT and G42, a technology group based in Abu Dhabi, UAE that invents visionary AI, embarked on the next phase of their ongoing strategic collaboration and introduced a multi-faceted plan to make available sovereign cloud offerings, co-innovate and deliver advanced AI capabilities, and expand the existing data center infrastructure in the UAE.

This partnership is expected to benefit both companies significantly.

On July 26, MSFT and PayPal Holdings, Inc. (PYPL) announced Microsoft’s integration of PayPal’s Pay Later solution in the U.S., the United Kingdom, Australia, Germany, France, Spain, and Italy. Additionally, customers across the U.S. will soon have the option to pay with Venmo in the Microsoft Store.

These new integrations are expected to provide customers with more flexible payment choices and help boost customer loyalty. This partnership should drive MSFT’s growth and revenue stream.

For the fourth quarter that ended June 30, 2023, MSFT’s total revenue grew 8.3% year-over-year to $56.19 billion, and its gross margin increased 11.2% year-over-year to $39.39 billion. Its operating income rose 18.1% from the year-ago value to $24.25 billion. The company’s net income and EPS grew 20% and 20.6% from the prior-year quarter to $20.08 billion and $2.69, respectively.

The consensus revenue estimate of $235.91 billion for the fiscal year (ending June 2024) reflects an 11.3% year-over-year improvement. Similarly, the consensus EPS estimate of $11.01 for the ongoing year indicates a 12.2% rise year-over-year. In addition, the company surpassed the consensus EPS estimates in all four trailing quarters.

The stock has gained 33.1% over the past six months and 41.1% year-to-date to close the last trading session at $337.94.

MSFT’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.

MSFT has a B grade for Stability, Quality, and Sentiment. It is ranked #13 in the 46-stock Software - Business industry.

In addition to the POWR Ratings I’ve just highlighted, you can see MSFT’s ratings for Growth, Value, and Momentum here.

What To Do Next?

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MSFT shares fell $2.44 (-0.72%) in premarket trading Tuesday. Year-to-date, MSFT has gained 41.02%, versus a 17.95% 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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