The rapid evolution of technology and changing consumer behavior are fueling a growing need for flexible and adaptive software solutions. Consequently, the software industry's constant innovation and disruptive technologies provide ample opportunity for companies within this space to thrive.

Against the backdrop, this article sheds light on the fundamentals of three promising software stocks, PDF Solutions, Inc. (PDFS), Brightcove Inc. (BCOV), and Semrush Holdings, Inc. (SEMR), which might yield potential gains this year.

In today's world, software applications are irreplaceable, fulfilling diverse roles essential for modern living. Whether it's optimizing workflows, offering entertainment, or aiding in groundbreaking research, these applications have become vital instruments that profoundly influence our work, communication, education, and overall interaction with the world.

On top of it, the incorporation of generative AI into the creation of software applications is positioned to advance the industry’s growth. Generative AI amplifies the software application’s capacity to learn, adapt, generate innovative ideas, and improve automated, dynamic decision-making processes, potentially revolutionizing the experiences of customers, users, product owners, architects, and developers.

Apart from the growing significance of AI within the industry, other technological breakthroughs, such as the rising prominence of blockchain technology for secure and transparent transactions, as well as Virtual Reality (VR), Augmented Reality (AR), quantum computing, edge computing, and the Internet of Things (IoT), underscore the immense potential of the industry in the forthcoming years.

Fueled by the diverse usage of software applications in modern society and the integration of advanced technologies in the industry, the revenue in the global software market is projected to reach a remarkable $698.80 billion this year and further escalate to $858.10 billion by 2028, demonstrating a 5.3% CAGR spanning 2024 to 2028.

Meanwhile, Gartner’s most recent projections indicate robust double-digit growth in the software segment for 2024, with global software spending projected to hit $1.03 trillion, reflecting a noteworthy year-over-year surge of 12.7%.

In light of such encouraging forecasts and trends, owning shares of PDFS, BCOV, and SEMR might be beneficial. That said, let’s now dive deeper into the fundamentals of these Software - Application stocks in detail, beginning with the third choice.

Stock #3: PDF Solutions, Inc. (PDFS)

PDFS provides proprietary software and physical intellectual property products for integrated circuit designs, electrical measurement hardware tools, proven methodologies, and professional services in the United States, China, Japan, and internationally.

On September 5, 2023, PDFS introduced a freemium option for its Exensio Analytics Platform, granting users access to limited offline features. This allows for insights into yield and test operations via a thin client architecture, enabling analysis of a subset of offline data.

The platform offers interactive tools for quick issue identification, root cause analysis, and template creation for outlier detection and prevention. Powered by a robust big data structure, it facilitates fast, scalable storage, analysis, and automated data management.

PDFS’ trailing-12-month gross profit margin of 69.53% is 42.4% higher than the industry average of 48.84%. Its trailing-12-month levered FCF margin of 14.93% is 66.5% higher than the 8.97% industry average. Furthermore, the stock’s trailing-12-month CAPEX/Sales of 6.44% is 172.8% higher than the 2.36% industry average.

For the fiscal third quarter, which ended on September 30, 2023, PDFS’ total revenues increased 6.3% year-over-year to $42.35 million, while its non-GAAP gross profit rose 3.6% from the prior-year quarter to $29.76 million. Moreover, the company’s non-GAAP net income improved 5.4% from the year-ago value to $7.99 million. In addition, its non-GAAP EPS remained flat year-over-year at $0.20.

Analysts predict PDFS’ revenue for the fiscal fourth quarter (ended December 2023) to increase marginally year-over-year to $40.72 million, while its EPS for the same quarter is expected to come in at $0.15. Furthermore, its EPS is projected to improve by 20% per annum over the next five years.

The company has an excellent surprise history, surpassing its revenue and EPS estimates in each of the trailing four quarters.

Over the past month, PDFS’ shares have gained 12.4% to close the last trading session at $33.95.

PDFS’ POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.  

It has an A grade for Sentiment. In the 131-stock Software - Application industry, it is ranked #43. Click here to see PDFS ratings for Growth, Value, Momentum, Stability, and Quality.    

Stock #2: Brightcove Inc. (BCOV)

BCOV provides cloud-based streaming services. Its flagship product includes Video Cloud, an online video streaming platform that enables its customers to distribute high-quality video to internet-connected devices. The company also offers Brightcove Live, Brightcove Beacon, Brightcove Player, and Brightcove Audience Insights.

On November 3, 2023, BCOV extended its collaboration with Socialive, a prominent enterprise video content creation platform, to offer clients enhanced remote video production capabilities.

This partnership is expected to bolster BCOV’s live-streaming solution by integrating Socialive's features and granting customers increased control over the creation, administration, and distribution of internal live and on-demand video content.

On October 18, 2023, BCOV announced the addition of Acquia, a prominent digital experience provider, to its customer base. Through the integration of BCOV’s award-winning technology, Acquia aims to enhance marketing strategies by delivering high-quality video experiences and harnessing the potential of video for its clients.

BCOV’s trailing-12-month gross profit margin of 61.37% is 25.7% higher than the industry average of 48.84%. Its trailing-12-month asset turnover ratio of 0.90x is 46.5% higher than the 0.61x industry average. Furthermore, the stock’s trailing-12-month CAPEX/Sales of 2.46% is 4.3% higher than the 2.36% industry average.

In the fiscal third quarter, which ended on September 30, 2023, BCOV’s total revenues amounted to $50.98 million, while its non-GAAP gross profit stood at $32.49 million. During the same quarter, the company’s non-GAAP net income rose 8.9% from the year-ago value to $2.13 million. Meanwhile, its non-GAAP net income per share remained flat year-over-year at $0.05.

Street expects revenue for the fourth quarter (ended December 2023) to increase 1.8% year-over-year to $50.13 million, while its EPS for the same quarter is projected to come in at $0.02. Moreover, its EPS is forecasted to improve by 15% annually over the next five years.

The stock gained marginally intraday to close the last trading session at $2.27.

BCOV’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.

It has a B grade for Value and Sentiment. Within the same industry, it is ranked #38. Click here to see the other ratings of BCOV for Growth, Momentum, Stability, and Quality.  

Stock #1: Semrush Holdings, Inc. (SEMR)

SEMR develops an online visibility management software-as-a-service platform in the United States, the United Kingdom, and internationally. It enables companies to identify and reach the right audience for their content through the right channels.

SEMR’s trailing-12-month gross profit margin of 82.73% is 69.4% higher than the industry average of 48.84%. Furthermore, the stock’s trailing-12-month asset turnover ratio of 0.98x is 60.3% higher than the 0.61x industry average.

For the fiscal third quarter, which ended on September 30, 2023, SEMR’s revenue increased 19.6% year-over-year to $78.72 million, while its gross profits rose 23% from the prior-year quarter to $65.69 million.

During the same quarter, the company reported a net income of $4.22 million and $0.03 per share versus a net loss of $9.09 million and $0.06 per share in the year-ago quarter, respectively. Furthermore, its total current assets stood at $260.49 million, up 1.2% compared to $257.38 million as of December 31, 2022.

The consensus revenue estimate of $83.13 million for the fiscal fourth quarter (ended December 2023) represents a 20.9% improvement year-over-year. Meanwhile, the consensus EPS estimate for the same quarter stands at $0.03. Additionally, it topped its revenue and EPS estimates in three of the trailing four quarters, which is impressive.

SEMR’s shares have surged 44.9% over the past nine months to close the last trading session at $12.10.

It’s no surprise that SEMR has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for Growth. In the same 131-stock industry, it is ranked #26. 

In addition to the POWR Ratings we’ve stated above, we also have SEMR ratings for Value, Momentum, Stability, and Quality. Get all SEMR ratings here. 

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SEMR shares were trading at $12.13 per share on Thursday afternoon, up $0.03 (+0.25%). Year-to-date, SEMR has declined -11.20%, versus a 5.28% rise in the benchmark S&P 500 index during the same period.

Anushka's ultimate aim is to equip investors with essential knowledge that empowers them to make well-informed investment choices and attain sustained financial prosperity in the long run.

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