The surging inflation and the Fed’s aggressive rate hikes led to a significant tech sell-off last year. The tech-heavy Nasdaq Composite has dropped 25.2% over the past year.

However, the tech industry remains well-positioned for long-term growth due to increasing investment in cloud solutions, software, and cyber protection. According to Wedbush analyst Dan Ives, the tech industry will grow by 20% in 2023.

Furthermore, the software industry is expected to witness steady growth amid the rising adoption of advanced technologies such as the internet of things (IoT), 5G, artificial intelligence (AR), virtual reality (VR), the surge in e-commerce, and increased automation of business operations. The global software market is expected to grow at a 7.2% CAGR until 2028.

In addition, John-David Lovelock, distinguished VP analyst at Gartner, said, “Enterprise IT spending is recession-proof as CEOs and CFOs, rather than cutting IT budgets, are increasing spending on digital business initiatives.”

Given the backdrop, investors might add quality software stocks Microsoft Corporation (MSFT) and Salesforce, Inc. (CRM) to their watchlist in 2023.

Microsoft Corporation (MSFT)

MSFT develops, licenses, and supports software, services, devices, and solutions worldwide. The company operates in three segments: Productivity and Business Processes; Intelligent Cloud; and More Personal Computing.

On December 14, MSFT and Viasat, Inc. (VSAT) announced a new partnership to help deliver internet access to 10 million people around the globe, including 5 million across Africa.

MSFT’s VP of Technology and Corporate Responsibility, Teresa Hutson, said, “Working with Viasat, we will use satellite to reach remote areas that previously have had few if any, options for conventional connectivity. Together, we will be able to rapidly scale and expand Airband’s reach, exploring a wider pipeline of projects and new countries where we haven’t yet worked.”

MSFT’s gross profit margin of 68.26% is 37.8% higher than the 49.53% industry average, while its Levered FCF margin of 22.73% is 203.5% higher than the industry average of 7.49%.

MSFT’s total revenues came in at $50.12 billion for the first quarter that ended September 30, 2022, up 10.6% year-over-year. Moreover, its gross margin came in at $34.67 billion, up 9.5% year-over-year. Also, its operating income came in at $21.52 billion, up 6.3% year-over-year.

Analysts expect MSFT’s revenue to increase 7.1% year-over-year to $212.35 billion in 2023. Its EPS is expected to increase 3.8% year-over-year to $9.56 in 2023. It surpassed EPS estimates in three of four trailing quarters. Over the past three months, the stock has gained 2.2% to close the last trading session at $239.23.

MSFT’s strong fundamentals are reflected in its POWR Ratings. The stock’s overall B rating indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

MSFT has a B grade for Stability, Sentiment, and Quality. In the Software – Business industry, it is ranked #9 out of 52 stocks. Click here for the additional POWR Ratings for Value, Growth, and Momentum for MSFT.

Salesforce, Inc. (CRM)

CRM is a customer relationship management technology provider. The company’s Customer 360 platform enables its customers to work together to deliver connected experiences.

In terms of forward Price/Book, CRM is currently trading at 2.48x, 36.2% lower than the industry average of 3.88x.

CRM’s gross profit margin of 72.69% is 46.8% higher than the 49.53% industry average, while its Levered FCF margin of 30.62% is 308.8% higher than the industry average of 7.49%.

CRM’s total revenues increased 14.2% year-over-year to $7.83 billion for the third quarter that ended October 31, 2022. Moreover, its subscription and support revenue increased 13.4% year-over-year to $7.23 billion. Also, its gross profit increased 14.5% year-over-year to $5.75 billion.

Street expects CRM’s revenue to increase 16.9% year-over-year to $30.97 billion in 2023. Its EPS is expected to increase by 3.1% year-over-year to $4.93 in 2023. It surpassed EPS estimates in all four trailing quarters. CRM’s shares have gained 10.3% over the past month to close the last trading session at $149.51.

CRM’s overall B rating equates to a Buy in our POWR Ratings system.

It has an A grade for Growth and a B grade for Sentiment. It is ranked #20 out of 139 stocks in the Software - Application industry. Beyond what is stated above, we’ve also rated CRM for Value, Momentum, Stability, and Quality. Get all the CRM ratings here.

MSFT shares were trading at $239.23 per share on Monday afternoon, up $0.72 (+0.30%). Year-to-date, MSFT has declined -0.25%, versus a 4.20% 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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