The software industry is expected to thrive due to digitization, demand for efficient solutions, and advancements in artificial intelligence and machine learning technologies. Given the industry’s solid growth prospects, investors could consider buying fundamentally sound software stocks such as DocuSign, Inc. (DOCU), Instructure Holdings, Inc. (INST) and Cognyte Software Ltd. (CGNT) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
According to Gartner, global software spending will reach $1.04 trillion in 2024, a rise of 13.8% year-over-year. Also, the global Software as a Service (SaaS) industry is expected to reach $908.21 billion by 2030, growing at an 18.7% CAGR. Public and hybrid cloud-based solutions, integration, and centralized data-driven analytics are driving growth in the Software as a Service (SaaS) market.
In addition, the application development software market in the United States is expected to rise at a CAGR of 5.8% until 2028, reaching $113.70 billion. This expansion can be attributed to rising demand for mobile applications as well as the rapid adoption of emerging technologies such as AI and blockchain.
Moreover, according to Statista, software market revenue is expected to hit $659 billion this year. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 20.3% gains over the past six months.
In light of these encouraging trends, let’s look at the fundamentals of the three above-mentioned software stocks.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers DocuSign e-signature solution that enables sending and signing of agreements on various devices.
On November 14, 2023, DOCU announced the launch of WhatsApp Delivery, allowing users to close deals faster by using the world's most popular messaging platform. DocuSign eSignature integration with WhatsApp allows customers to easily connect with signers via their preferred communication platforms, providing real-time notifications for secure signing.
DOCU’s trailing-12-month ROTC of 7.38% is 183.9% higher than the 2.60% industry average. Its trailing-12-month levered FCF margin of 36.52% is 343.3% higher than the 8.24% industry average.
DOCU’s total revenue grew 10.5% year-over-year to $687.69 million in the fiscal second quarter that ended July 31, 2023. Its non-GAAP gross profit increased 11.3% from the prior-year quarter to $565.79 million.
Also, its non-GAAP net income increased 66% year-over-year to $149.62 million, while non-GAAP EPS came at $0.72, representing an increase of 63.6% year-over-year.
Analysts expect DOCU’s revenue to increase 8.6% year-over-year to $2.73 billion for the year ending January 2024. Its EPS is expected to grow 30.5% year-over-year to $2.65 for the same period. It surpassed EPS estimates in all four trailing quarters. Shares of DOCU has gained 11.2% over the past month to close the last trading session at $43.10.
DOCU’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
DOCU also has a B grade for Growth, Value and Quality. It is ranked #3 out of 22 stocks in the A-rated Software - SAAS industry. Click here for the additional POWR Ratings for Stability, Sentiment and Momentum for DOCU.
Instructure Holdings, Inc. (INST)
INST provides cloud-based learning, assessment, development, and engagement systems worldwide. It offers the Canvas Learning Management System (LMS), Canvas Studio (an online video platform), Canvas Catalog (a course catalog and registration system), Canvas Network, Canvas Credentials (a digital badging solution), and Canvas Student Pathways.
INST’s trailing-12-month EBITDA margin of 30.61% is 237.7% higher than the 9.07% industry average. Its trailing-12-month levered FCF margin of 34.33% is 316.9% higher than the 8.24% industry average.
During the third quarter that ended September 30, 2023, INST’s total revenue increased 10.2% year-over-year to $134.92 million. Its non-GAAP operating income increased 23.5% from the prior-year period to $57.05 million.
Its non-GAAP net income and non-GAAP net income per share increased 21.2% and 19% year-over-year to $35.76 million and $0.25, respectively.
Street expects INST’s revenue to increase 11.4% year-over-year to $529.51 million for the year ending December 2023. Its EPS is expected to grow at 11.4% year-over-year to $0.86 for the same period. It surpassed EPS estimates in three of four trailing quarters. The stock has gained 11.6% year-to-date to close the last trading session at $26.15.
INST has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Growth and Sentiment and a B for Stability. It is ranked #24 out of 132 stocks in the Software - Application industry.
Beyond what is stated above, we’ve also rated INST for Value, Momentum and Quality. Get all INST ratings here.
Cognyte Software Ltd. (CGNT)
Headquartered in Israel, CGNT designs and commercializes security and analytics software. It offers investigative analytics, operational intelligence analytics, and threat intelligence analytics solutions to government agencies and enterprises with Actionable Intelligence.
CGNT’s trailing-12-month gross profit margin of 65.34% is 34.3% higher than the 48.67% industry average. Its trailing-12-month levered FCF margin of 12.56% is 52.4% higher than the 8.24% industry average.
For the second quarter ended July 31, 2023 CGNT’s total revenue came in at $150.32 million. Its gross profit for the period stood at $102.72 million. Its total liabilities came in at $230.94 million for the period that ended July 31, 2023, compared to $233.30 million for the period that ended January 31, 2023.
The consensus revenue estimate of $325.70 million for the year ending January 2025 represents a 6.1% increase year-over-year. Its EPS is expected to grow at 22.4% for the same period. CGNT’s shares have gained 73.9% over the past year to close the last trading session at $5.13.
CGNT’s fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #25 in the same industry. It has an A grade for Sentiment and a B for Growth and Value. To see additional CGNT’s ratings for Value, Momentum and Quality, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
DOCU shares were trading at $44.78 per share on Friday morning, up $1.68 (+3.90%). Year-to-date, DOCU has declined -19.20%, versus a 20.46% 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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