As the world is all gung-ho about the new revolution spurred by ChatGPT, the new AI chatbot from OpenAI, new investments are flowing in the industry. Furthermore, the application development software market is estimated to grow at a CAGR of 23.5% until 2031.
However, despite the rosy long-term prospects, the industry is expected to remain under pressure in the near term due to the macroeconomic headwinds. While I think well-established industry players like Salesforce, Inc. (CRM) will be worth betting on, Robinhood Markets, Inc. (HOOD) and Matterport, Inc. (MTTR) could be best avoided considering their weak fundamentals.
Owing to macroeconomic issues such as the Russian invasion of Ukraine and geopolitical tensions, tech companies might witness product shortages and delays, service disruptions, the bankruptcy of core suppliers, increased product costs, and reduced global sales in the near term. Moreover, the sticky inflation might prompt more rate hikes ahead, which could mar the industry’s performance.
However, in the long term, the IT services market is expected to boom as companies look to bring in outside IT staff for implementation and support. Spending on consulting is also expected to increase 6.7% year-over-year to $264.9 billion this year.
Moreover, revenue in the software market is expected to grow at 4.8% CAGR from 2023 to 2027, resulting in a market volume of $388.30 billion by 2027.
Let’s discuss the stocks mentioned above in detail:
Stock to Buy:
Salesforce, Inc. (CRM)
CRM is a provider of customer relationship management technology. The company’s Customer 360 platform enables its customers to work together to deliver connected experiences. Its service offerings include Sales, Marketing, and Commerce. CRM provides its services for customers in financial services, healthcare, manufacturing, and other industries.
On January 12, 2023, CRM introduced a series of innovations to help retailers personalize every shopping moment.
Jujhar Singh, EVP and GM of Salesforce Industries, said, “Salesforce for Retail brings together the power and flexibility of Salesforce’s platform with an expansive ecosystem so retailers can leverage real-time data to acquire new customers, deliver personalized experiences, generate advertising revenue, increase margins, and drive efficiency.”
CRM’s trailing 12-month gross profit margin of 72.69% is 47.8% higher than the 49.18% industry average. Its trailing 12-month levered FCF margin of 30.62% is 349.4% higher than the 6.81% industry average.
CRM’s total revenues increased 14.2% year-over-year to $7.84 billion during the third quarter that ended October 31, 2022. Its subscription and support revenue increased 13.4% year-over-year to $7.23 billion, while its professional services and other revenue came in at $604 million, up 24.8% year-over-year.
The company’s non-GAAP income from operations came in at $1.78 billion, up 30.9% from the prior year’s period. In addition, CRM’s non-GAAP net income increased 9.8% year-over-year to $1.40 billion, while its non-GAAP net income per share rose 10.2% year-over-year to $1.40.
Analysts expect CRM’s revenue for the fiscal fourth quarter that ended January 2023 to come in at $8 billion, indicating a 9.1% year-over-year growth. The company’s EPS is expected to increase 62.3% year-over-year to $1.36. Additionally, CRM has topped consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
The stock has gained 23.2% year-to-date to close the last trading session at $163.36.
CRM’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. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
CRM also has an A grade for Growth and a B for Sentiment. It is ranked #26 out of 137 stocks in the Software - Application industry.
To access additional ratings for CRM’s Stability, Value, Quality, and Momentum, click here.
Stocks to Sell:
Robinhood Markets, Inc. (HOOD)
HOOD operates financial services platform in the United States. Its platform allows users to invest in stocks, exchange-traded funds (ETFs), options, gold, and cryptocurrencies. The company also offers learning and education solutions, which include Robinhood Snacks, Robinhood Learn, Newsfeeds, Robinhood lists and alerts, and First trade recommendations.
Its trailing 12-month asset turnover ratio of 0.06x is 66.9% lower than the 0.19x industry average.
HOOD’s transaction-based revenues declined 29.5% year-over-year to $186 million in the fiscal fourth quarter that ended December 31, 2022. The company reported a net loss and a loss per share of $166 million and $0.19, increasing 60.8% and 61.2% year-over-year, respectively.
Street expects HOOD’s EPS to be negative $0.37 for the current quarter ending March 2023. Its revenue is expected to come in at $423.61 million for the same quarter. Additionally, HOOD has failed to surpass revenue estimates in the trailing four quarters.
The stock has declined 12% over the past year to close its last trading session at $9.95.
HOOD’s POWR Ratings reflect this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.
HOOD also has an F grade for Sentiment and a D for Value, Stability, and Quality. It is ranked #121 in the same industry.
Beyond the POWR Rating grades we’ve stated above, HOOD’s rating for Growth, Momentum can be seen here.
Matterport, Inc. (MTTR)
MTTR, a spatial data company, focuses on digitization and datafication of the built world. It offers Matterport digital twins, a 3D data platform to design, build, operate, promote, and understand spaces.
Its trailing-12-month asset turnover ratio of 0.19x is 69.7% lower than the 0.61x industry average. Its trailing-12-month gross profit margin of 41.99% is 14.6% lower than the 49.18% industry average.
During the fiscal fourth quarter that ended December 31, 2022, MTTR’s loss from operations amounted to $62.37 million. Non-GAAP net loss increased 5.9% year-over-year to $26.56 million, while non-GAAP net loss per share attributable to common shareholders stood at $0.09 for the same quarter.
MTTR’s loss per share and revenue are expected to come in at $0.37 and $423.61 million for the fiscal in the current quarter ending March 2023.
The stock has plunged 45.2% over the past year to close the last trading session at $3.49.
MTTR has an overall rating of F, which translates to a Strong Sell in our POWR Ratings system.
It also has an F grade for Quality and a D for Stability, Momentum, and Value. It is ranked #126 within the same industry.
Click here to see the POWR Ratings of MTTR for Growth and Sentiment.
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CRM shares were trading at $163.38 per share on Thursday morning, up $0.02 (+0.01%). Year-to-date, CRM has gained 23.22%, versus a 4.43% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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