Digital transformation initiatives across various industries have been driving the growth of the software application industry. Cloud-based software applications have replaced traditional software by helping enterprises scale their operations and improve productivity.

Given the bright prospects of the software industry, it could be wise to buy fundamentally strong software stocks Synopsys, Inc. (SNPS), Salesforce, Inc. (CRM), and SAP SE (SAP).

Before diving deeper into the fundamentals of these stocks, let’s discuss why the software application industry is well-positioned to grow.

Cloud adoption has been a significant driver of the industry’s growth as cloud-based software has become more accessible and affordable. Software companies are reporting significant growth in their annual recurring revenues (ARR) because of their subscription-based products.

The industry’s growth is expected to be further enhanced by integrating generative AI into software applications. According to a Goldman Sachs report, as software companies integrate generative AI tools into products, their customers will spend more on software. Goldman Sachs expects generative AI to add an incremental $150 billion to the current global software market of $685 billion.

Gartner forecasts software spending to increase 13.7% year-over-year to $922.75 billion. Gartner’s Distinguished VP Analyst John-David Lovelock said, “Generative AI’s best channel to market is through software, hardware, and services that organizations are already using. Every year, new features are added to tech products and services as add-ons or upgrades.”

“Most enterprises will incorporate generative AI in a slow and controlled manner through upgrades to tools that are already built into IT budgets,” he added.

Considering these conducive trends, let’s evaluate the fundamentals of three Software – Application picks, starting with number 3.

Stock #3: Synopsys, Inc. (SNPS)

SNPS provides electronic design automation software products for designing and testing integrated circuits. The company offers Digital and Custom IC Design solutions that provide digital design implementation solutions, a verification solution that offers virtual prototyping, static and formal verification, simulation, emulation, field programmable gate array-based prototyping, debug solutions, and FPGA design products.

In terms of the trailing-12-month net income margin, SNPS’ 18.71% is 819.9% higher than the 2.03% industry average. Likewise, its 23.48% trailing-12-month EBITDA margin is 156.1% higher than the industry average of 9.17%. Furthermore, the stock’s 3.08% trailing-12-month Capex/Sales is 27.1% higher than the industry average of 2.42%.

SNPS’ total revenue for the third quarter ended July 31, 2023, increased 19.2% year-over-year to $1.49 billion. Its non-GAAP net income attributed to SNPS rose 36.2% over the prior-year quarter to $445.88 million. Its non-GAAP net income per share attributed to SNPS came in at $2.88, representing an increase of 37.1% year-over-year.

Analysts expect SNPS’ EPS and revenue for the quarter ending October 31, 2023, to increase 58.9% and 23.3% year-over-year to $3.03 and $1.58 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 45.9% to close the last trading session at $459.75.

SNPS’ strong fundamentals are reflected in its POWR Ratings. 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.

Within the Software - Application industry, it is ranked #9 out of 133 stocks. It has an A grade for Growth and Quality and a B for Stability and Sentiment. Click here to see the other ratings of SNPS for Value and Momentum.

Stock #2: Salesforce, Inc. (CRM)

CRM is a cloud-based software company. It provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company’s CRM software and application focus on sales, marketing automation, customer service, e-commerce, and analytics.

On June 29, 2023, CRM announced that it would invest $4 billion in its UK business over the next five years. Salesforce UKI’s CEO Zahra Bahrololoumi said, “A clear pro-innovation regulatory framework that compels safe and responsible use of AI is vital, and Salesforce is fully focused on bringing secure, trusted, enterprise-ready generative AI to UK businesses.”

On March 7, 2023, CRM announced the launch of Einstein GPT. This first generative AI CRM technology delivers AI-created content at a hyper-scale level across every sale, service, marketing, commerce, and IT interaction.

Einstein GPT will infuse CRM’s proprietary AI models with generative AI technology from an ecosystem of partners and real-time data from the Salesforce Data Cloud. The new launch is expected to boost the company’s growth and profitability.

In terms of the trailing-12-month gross profit margin, CRM’s 74.52% is 51.8% higher than the 49.10% industry average. Likewise, its 23.30% trailing-12-month EBITDA margin is 154% higher than the industry average of 9.17%. Furthermore, the stock’s 31.95% trailing-12-month levered FCF margin is 333.4% higher than the industry average of 7.37%.

For the fiscal second quarter ended July 31, 2023, CRM’s total revenues increased 11.4% year-over-year to $8.60 billion. Its net cash provided by operating activities increased 141.9% over the prior-year quarter to $808 million. The company’s non-GAAP net income rose 76% year-over-year to $2.09 billion. In addition, its non-GAAP EPS came in at $2.12, representing an increase of 78.2% year-over-year.

Street expects CRM’s EPS and revenue for the quarter ending October 31, 2023, to increase 46.1% and 11.2% year-over-year to $2.05 and $8.72 billion, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. The stock has gained 52.4% year-to-date to close the last trading session at $202.01.

CRM’s POWR Ratings reflect this positive outlook. CRM has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

It is ranked #8 in the same industry. It has an A grade for Growth and a B for Sentiment and Quality. To see the other ratings of CRM for Value, Momentum, and Stability, click here.

Stock #1: SAP SE (SAP)

Headquartered in Walldorf, Germany, SAP provides enterprise application software products worldwide. The company operates through Applications, Technology & Services; Qualtrics; Business Network; and Sustainability segments.

On September 7, 2023, SAP announced that it agreed to acquire LeanIX, an enterprise architecture management (EAM) software company. The acquisition enables SAP to expand its business transformation portfolio, giving customers access to the full suite of tools required for continuous business transformation and facilitating AI-enabled process optimization.

On March 13, 2023, SAP announced that it had agreed to sell its 423 million shares of Qualtrics International Inc. for $7.70 billion to Silver Lake and Canada Pension Plan Investment Board (CPP Investments). The sale aligns with SAP’s strategy to streamline its portfolio and focus on its core cloud growth and profitability.

In terms of the trailing-12-month levered FCF margin, SAP’s 24.25% is 228.9% higher than the 7.37% industry average. Likewise, its 15.67% trailing-12-month EBIT margin is 236.4% higher than the industry average of 4.66%. Furthermore, the stock’s 3.88% trailing-12-month Return on Common Equity is 222.5% higher than the industry average of 1.20%.

For the fiscal second quarter ended June 30, 2023, SAP’s total revenue increased 4.8% year-over-year to €7.55 billion ($7.95 billion). Its operating profit rose 28.1% over the prior year quarter to €1.36 billion ($1.43 billion). The company’s profit after tax increased significantly year-over-year to €3.38 billion ($3.56 billion). Also, its EPS came in at €2.93, representing an increase of 946.4% year-over-year.

For the quarter ended September 30, 2023, SAP’s EPS and revenue are expected to increase 37.2% and 5.8% year-over-year to $1.52 and $8.27 billion, respectively. Over the past year, the stock has gained 48.6% to close the last trading session at $129.56.

SAP’s POWR Ratings reflect solid prospects. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

It is ranked #7 in the Software - Application industry. It has a B grade for Growth, Stability, and Quality. Click here to see the additional ratings of SAP for Value, Momentum, and Sentiment.

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CRM shares were trading at $200.73 per share on Friday morning, down $1.28 (-0.63%). Year-to-date, CRM has gained 51.39%, versus a 11.59% rise in the benchmark S&P 500 index during the same period.

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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