Increasing digitalization activities across multiple sectors and the growing popularity of cloud-based services have resulted in a rising need for dependable software solutions and services. The requirement for efficiency, automation, and operational simplification drives the growing demand for advanced software tools and services.
Given the industry’s promising growth prospects, investors could consider buying fundamentally sound software stocks Dassault Systems SE (DASTY), Instructure Holdings, Inc. (INST), and MarketWise, Inc. (MKTW).
Before diving deeper into the fundamentals of these stocks, let’s discuss what’s driving the software industry’s growth.
Growing investments in digitization initiatives across organizations are putting the focus on the software industry as it plays a crucial role in the proper functioning of enterprises. Advanced software solutions help improve efficiency and drive innovation. Gartner forecasts software spending to rise 12.7% year-over-year to $1.03 trillion in 2024.
The software industry is also benefiting from the growing popularity of the public cloud. Worldwide end-user spending on public cloud services is projected to grow 20.4% over the prior year to $678.80 billion this year. Gartner’s Vice President Analyst Sid Nag said, “Cloud has become essentially indispensable.”
Public cloud services’ segments include Cloud Application Infrastructure Services (PaaS), Cloud System Infrastructure Services (IaaS), and Cloud Application Services (SaaS), together forming an industry cloud platform. Industry cloud platforms address industry-relevant business outcomes by combining SaaS, PaaS, and IaaS services into a comprehensive product offering.
Gartner forecasts that more than 70% of enterprises will use industry cloud platforms by 2027 to accelerate their business initiatives, up from less than 15% last year. With the adoption of the cloud, businesses are moving away from traditional applications. They have started using cloud-based software applications as they provide advantages like scalability, security, cost savings, easy accessibility, etc.
The global Software as a Service (SaaS) market is projected to grow at a CAGR of 18.7% to reach $908.21 billion by 2030. Furthermore, the surging demand for mobile applications and the rising popularity of e-commerce and online services are driving the growth of software applications.
The global Application Development software market is anticipated to grow at a CAGR of 20.6% until 2028. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software ETF’s (IGV) 50.8% returns over the past year.
Considering these conducive trends, let’s analyze the fundamentals of the three Software - Application picks, beginning with the third choice.
Stock #3: MarketWise, Inc. (MKTW)
MKTW operates a content and technology multi-brand platform for self-directed investors globally. Its platform includes subscription businesses that provide financial research, software, education, and tools. It offers various investment strategies, investment research product portfolios, and financial newsletters. The company also includes stock research and portfolio management services under multiple brands.
In terms of the trailing-12-month gross profit margin, MKTW’s 87.34% is 45.2 % higher than the 60.15% industry average. Likewise, its 1.31% trailing-12-month Return on Total Assets is 19.8% higher than the industry average of 1.10%. Furthermore, the stock’s 1.05x trailing-12-month asset turnover ratio is 399.7% higher than the industry average of 0.21x.
For the fiscal third quarter, which ended September 30, 2023, MKTW’s total net revenue amounted to $106.15 million. Its net income attributable to MKTW came in at $140 thousand, compared to a net loss attributable to MKTW of $4.01 million in the prior-year quarter. The company’s free subscribers rose 6% year-over-year to 16.34 million.
In addition, its net cash provided by operating activities rose 21.8% year-over-year to $12.06 million.
Analysts expect MKTW’s revenue for the quarter ending June 30, 2024, to increase 16.9% year-over-year to $121.13 million. Its EPS for the quarter ended December 31, 2023, is expected to increase 286.3% year-over-year to $0.05. Over the past nine months, the stock has gained 70.8% to close the last trading session at $2.54.
MKTW’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates 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 Value and a B for Quality. Within the Software – Application industry, it is ranked #25 out of 131 stocks. To see MKTW’s additional ratings for Growth, Momentum, Stability, and Sentiment, click here.
Stock #2: 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.
On October 30, 2023. INST announced that it acquired Parchment for approximately $835 million, thereby expanding its Learning Platform and accessing a $2 billion market. The move aims to provide a comprehensive digital record of achievements and skills, strengthening INST’s position in education from K-12 to lifelong learning.
The Parchment acquisition is expected to contribute around $115 million in revenue this year and is set to close in Q1 2024, subject to regulatory approval. INST will benefit from Parchment’s stable and recurring revenues.
In terms of the trailing-12-month gross profit margin, INST’s 65.15% is 33.7% higher than the 48.75% industry average. Likewise, its 30.61% trailing-12-month EBITDA margin is 233.9% higher than the industry average of 9.17%. Furthermore, the stock’s 34.34% trailing-12-month levered FCF margin is 287.6% higher than the industry average of 8.86%.
INST’s total revenue for the fiscal third quarter, which ended September 30, 2023, increased 10.2% year-over-year to $134.92 million. Its non-GAAP operating income increased 23.5% year-over-year to $57.05 million. The company’s adjusted EBITDA increased 22.3% over the prior year quarter to $58.22 million.
Its non-GAAP net income increased 21.2% year-over-year to $35.76 million. Also, its non-GAAP net income per common share came in at $0.25, registering an increase of 19% year-over-year.
Street expects INST’s revenue and EPS for the quarter ended December 31, 2023, to increase 7.9% and 13.7% year-over-year to $134.62 million and $0.23, respectively. It surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive. Over the past three months, the stock has gained 2.9% to close the last trading session at $25.19.
INST’s positive outlook is reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has an A grade for Growth and Sentiment and a B for Stability. It is ranked #24 in the same industry. Beyond what is stated above, we’ve also rated INST for Value, Momentum, and Quality. Get all INST ratings here.
Stock #1: Dassault Systèmes SE (DASTY)
Headquartered in Vélizy-Villacoublay, France, DASTY provides software solutions and services worldwide. It offers SOLIDWORKS, CATIA, GEOVIA, BIOVIA, SIMULIA, DELMIA, 3DVIA, and ENOVIA. It also provides Centric PLM, 3DEXCITE, NETVIBES, 3DEXPERIENCE, and MEDIDATA. It serves companies in the transportation and mobility, industrial equipment, aerospace, and defense, and high-tech sectors.
In terms of the trailing-12-month EBIT margin, DASTY’s 21.63% is 346.5% higher than the 4.85% industry average. Likewise, its 17.81% trailing-12-month net income margin is 724.5% higher than the industry average of 2.16%. Furthermore, the stock’s 7.26% trailing-12-month Return on Total Assets is significantly higher than the industry average of 0.56%.
For the fiscal third quarter, which ended September 30, 2023, DASTY’s total revenue increased 3.8% year-over-year to €1.42 billion ($1.54 billion). Its non-IFRS operating income increased 2% over the prior-year quarter to €442 million ($479.64 million). The company’s net income attributable to shareholders increased 7% year-over-year to €371.30 million ($402.92 million).
Also, its EPS came in at €0.28, representing an increase of 7.7% over the prior year quarter.
For the quarter ended December 31, 2023, DASTY’s revenue and EPS are expected to increase 4.7% and 13.2% year-over-year to $1.81 billion and $0.31, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 38.5% to close the last trading session at $51.84.
It’s no surprise that DASTY has an overall rating of B, which translates to a Buy in our POWR Ratings system.
It has an A grade for Stability and Quality. Within the Software - Application industry, it is ranked #23. Beyond what we’ve stated above, we have also rated the stock for Growth, Value, Momentum, and Sentiment. Get all ratings of DASTY 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.
DASTY shares were trading at $51.78 per share on Monday afternoon, down $0.06 (-0.11%). Year-to-date, DASTY has gained 5.63%, versus a 2.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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