The software industry is expanding as a result of digitization trends and increased demand for advanced software solutions, which improve operations and customer experiences across multiple industries.
Given the industry’s promising growth prospects, investors could consider buying fundamentally strong software stocks Smartsheet Inc. (SMAR), Pegasystems Inc. (PEGA), and Vimeo, Inc. (VMEO).
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
The software industry plays a crucial part in economic development and helps drive innovation, improve efficiency, and power digital transformation across various industries. The software industry is expected to benefit from the increased usage of AI in software development, resulting in intelligent, efficient systems and continual technical improvements.
According to Gartner, software spending is expected to grow by 12.7% year-over-year to $1.03 trillion in 2024. Meanwhile, the U.S. software market is estimated to grow at a 7.2% CAGR until 2030.
Growing digitalization initiatives, shift to cloud-based solutions, multichannel integration, resource management, and data analysis for revenue growth are all driving forces in the business software market. The business software market is estimated to reach $1.10 trillion by 2029, growing at a CAGR of 11.2%.
In addition, the rising popularity of public cloud services is boosting the adoption of software-as-a-service (SaaS). SaaS helps businesses by providing advantages like cost savings, flexibility, data security, scalability, automation features, ease of access, etc.
The SaaS market is expected to reach $908.24 billion by 2030, expanding at a CAGR of 18.7%. Moreover, investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 57.1% returns over the past year.
With these encouraging market trends in mind, let’s delve into the fundamentals of the three software stocks.
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform to plan, capture, manage, automate, and report on work for teams and organizations. It serves 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 levered FCF margin of 26.69% is 195.6% higher than the industry average of 9.03%. Its 79.79% trailing-12-month gross profit margin is 63.3% higher than the 48.87% industry average. Additionally, its 0.82x trailing-12-month asset turnover ratio is 34.8% higher than the 0.61x industry average.
During the fiscal third quarter that ended October 31, 2023, SMAR’s total revenue and gross profit increased 23.2% and 26.9% year-over-year to $245.92 million and $198.88 million, respectively.
Also, for the same quarter, its non-GAAP net income came in at $22.59 million, compared to a non-GAAP net loss of $1.89 million in the prior year quarter. Also, non-GAAP net income per share stood at $0.16, compared to a non-GAAP loss per share of $0.01 in the year-ago quarter.
Street expects SMAR’s EPS and revenue for the quarter ended January 31, 2024, to increase 158.7% and 20.4% year-over-year to $0.18 and $255.66 million, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters. Over the past six months, the stock has gained 1.9% to close the last trading session at $43.
SMAR’s POWR Ratings reflect this promising outlook. It 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.
SMAR has a B grade for Growth, Sentiment, and Quality. Within the B-rated Software - SAAS industry, it is ranked #6 out of 19 stocks. To see the additional ratings of SMAR for Value, Momentum and Stability, click here.
Pegasystems Inc. (PEGA)
PEGA develops, markets, licenses, hosts, and supports enterprise software applications in the United States, the rest of the Americas, the United Kingdom, the rest of Europe, the Middle East, Africa, and the Asia-Pacific.
On February 12, 2024, PEGA introduced Pega GenAI Blueprint™, a collaborative application that integrates generative AI with industry best practices to accelerate app building. This new technology allows organizations to quickly generate and iterate on app ideas, reducing time to market and improving development efficiency.
On January 24, 2024, PEGA announced Pega GenAI Knowledge Buddy. This enterprise-grade, generative AI-powered assistant will quickly and easily enable customers and employees to get specific answers synthesized by generative AI from content scattered across knowledge bases. This innovative tool will revolutionize the way users access information, streamlining the process and increasing efficiency.
PEGA’s trailing-12-month ROCE of 27.98% is 870.9% higher than the industry average of 2.88%. Its 4.49% trailing-12-month ROTA is 267.4% higher than the 1.22% industry average. Additionally, its 4.73% trailing-12-month net income margin is 85.1% higher than the 2.56% industry average.
For the fourth quarter that ended December 31, 2023, PEGA’s total revenue increased 19.6% year-over-year to $474.23 million. Its gross profit grew 26.1% from the year-ago value to $383.59 million.
For the same quarter, non-GAAP net income and non-GAAP EPS increased 122.6% and 115.9% over the prior-year quarter to $152.14 million and $1.77, respectively.
Analysts expect PEGA’s revenue and EPS for the quarter ending March 31, 2024, to increase 4.2% and 110.2% year-over-year to $339.01 million and $0.48, respectively. Shares of PEGA have gained 44.7% over the past year to close the last trading session at $66.61.
It’s no surprise that PEGA 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 Value, Sentiment, and Quality. It is ranked #6 out of 44 stocks in the B-rated Software - Business industry. Beyond what is stated above, we’ve also rated PEGA for Momentum and Stability. Get all PEGA ratings here.
Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
On February 29, 2024, VMEO announced the launch of Vimeo Central, a secure, AI-powered video center. Vimeo Central, created for corporate leaders and their teams, enables employees to communicate via video, extract actionable insights from a centralized source of truth, and become a more connected and productive organization.
Vimeo Central uses breakthrough AI technologies to streamline the process of generating, sharing, and analyzing video content on a secure platform. This innovative tool aims to enhance collaboration and decision-making processes for businesses of all sizes.
VMEO’s trailing-12-month gross profit margin of 78.12% is 59.1% higher than the 49.11% industry average. Its trailing-12-month ROTA of 3.54% is 155.2% higher than the 1.39% industry average. Additionally, its 0.68x trailing-12-month asset turnover ratio is 39.6% higher than the 0.49x industry average.
For the fiscal fourth quarter (ended December 31, 2023), VMEO’s revenue stood at $105.54 million. Its non-GAAP gross profit rose 1.6% year-over-year to $82.50 million. The company’s adjusted EBITDA increased 104.6% over the prior-year quarter to $13.30 million.
Also, its net earnings came in at $8.40 million, compared to a net loss of $5.12 million. The company’s EPS stood at $0.05, compared to a loss per share of $0.03 in the prior year’s quarter.
For fiscal 2025, VMEO’s EPS and revenue are expected to increase 121.5% and 4.1% year-over-year to $0.03 and $412.25 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 35.4% to close the last trading session at $5.01.
VMEO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked first in the Software – SAAS industry. It has an A grade for Quality and a B for Value and Sentiment. To see additional VMEO’s ratings for Growth, Momentum, and Stability, click here.
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SMAR shares were unchanged in premarket trading Monday. Year-to-date, SMAR has declined -10.08%, versus a 7.90% 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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