Despite ongoing economic turbulence, the software industry is well-positioned to grow and expand considerably in the foreseeable years, driven by rapid digital transformation worldwide, increasing automation of business processes across several industry verticals, and a surge in the volume of enterprise data.
Given the backdrop, fundamentally strong software stocks Splunk Inc. (SPLK), Smartsheet Inc. (SMAR), and Park City Group, Inc. (PCYG), which institutional investors depend on, could be ideal investments now.
The COVID-19 pandemic sped up digital transformation globally by several years. Cutting-edge digital technologies are integrating into all areas of a business, boosting efficiency and productivity by speeding up processes, streamlining operations, and automating repetitive tasks.
There has been a significant adoption of software products and solutions in recent years, driven by the growth of e-commerce, e-health, the boom in online services, teleworking, and the increasing number of connected devices. Approximately 90% of businesses think technology is critical for achieving organizational goals.
Moreover, nearly three-fourths of businesses frequently purchase new technology. With outstanding advancements in technology, the software development industry continues to expand exponentially. The new, emerging technologies include Artificial Intelligence (AI), blockchain, cybersecurity, the Internet of Things (IoT), AR&VR, and cloud computing.
Despite economic turbulence, global software spending is projected to increase 12.3% year-over-year to $891.39 billion, according to the forecast by Gartner.
According to a report by Grand View Research, the global software market size is estimated to reach $1.40 trillion by 2030, growing at an 11.5% CAGR.
Given the industry’s bright growth prospects and following smart money, investors could now scoop up shares of quality software stocks SPLK, SAMR, and PCYG for solid returns.
Let’s discuss the fundamentals of these stocks in detail.
Splunk Inc. (SPLK)
SPLK develops, markets, and sells cloud services and licensed software solutions internationally. The company provides unified security and observability platform, including Splunk Security and Splunk Observability. Also, it offers application programming interfaces, software development kits, and other interfaces. Institutions own 88.9% shares of SPLK.
On May 16, SPLK’s Splunk Cloud Platform received StateRAMP authorization at a moderate impact level from the State Risk and Authorization Management Program (StateRAMP®). As a StateRAMP-authorized provider, SPLK allows state, local, and education (SLED) institutions to leverage actionable intelligence and advanced analytics at scale. This should bode well for the company.
On March 21, SPLK announced innovations to Splunk’s unified security and observability platform to help build safer and more resilient digital enterprises. SPLK’s latest innovations include enhancements to SPLK Mission Control and SPLUK Observability Cloud and the general availability of SPLK Edge Processor. These innovations might boost the company’s growth.
SPLK’s trailing-12-month gross profit margin of 77.99% is 58.4% higher than the industry average of 49.24%. Likewise, the stock’s trailing-12-month levered FCF margin of 25.98% is 270.6% higher than the 7.01% industry average.
SPLK’s total revenues increased 11.5% year-over-year to $751.51 million in the first quarter that ended April 30, 2023. Its gross profit grew 15.3% year-over-year to $544.27 million. Also, cash inflows from operating activities were $491.77 million, up 243.1% year-over-year.
In addition, the company’s non-GAAP net income came in at $34.14 million or $0.18, per share, compared to a non-GAAP net loss of $52.09 million or $0.32 per share in the previous-year quarter.
Analysts expect SPLK’s revenue and EPS for the fiscal year (ending January 2024) to increase by 7.1% and 18.7% year-over-year to $3.91 billion and $3.19, respectively. Moreover, the company surpassed its consensus revenue estimates in all four trailing quarters, which is impressive.
The stock has gained 22.5% over the past month and 23.6% over the past six months to close the last trading session at $108.02.
SPLK’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
SPLK has a B grade for Growth, Quality, and Sentiment. It is ranked #5 out of 25 stocks in the B-rated Software – SAAS industry.
To access additional ratings for SPLK’s Momentum, Stability, and Value, click here.
Smartsheet Inc. (SMAR)
SMAR offers an enterprise platform for modern work management. The company provides Smartsheet, WorkApps, Smartsheet Advance, Connectors, Control Center, Dynamic View, and Data Shuttle. The company serves automotive, aerospace, software, technology, e-commerce, finance, and education. About 93.8% shares of SMAR are held by institutions.
SMAR’s trailing-12-month gross profit margin of 78.74% is 59.9% higher than the industry average of 49.24%. And the stock’s trailing-12-month levered FCF margin of 22.53% is 221.4% higher than the 7.01% industry average. Also, its trailing-12-month asset turnover ratio of 0.78x compares to the industry average of 0.61x.
For the first quarter that ended April 30, 2023, SMAR’s total revenue increased 30.6% year-over-year to $219.89 million, while its gross profit grew 32.7% from the prior-year period to $174.01 million. Its non-GAAP operating income stood at $22.80 million, compared to a loss of $22.09 million in the prior year’s period.
In addition, the company’s non-GAAP net income was $25.05 million or $0.18 per share, compared to a loss of $23.75 million or $0.18 per share in the prior-year quarter.
The consensus revenue estimate of $1.14 billion for the fiscal year (ending January 2025) reflects a 21% year-over-year improvement. Likewise, the consensus EPS estimate of $0.65 for the same period indicates a 58.7% rise year-over-year. Moreover, SMAR topped its consensus revenue estimates in all four trailing quarters.
Shares of SMAR have gained 8.1% year-to-date and 53% over the past year to close the last trading session at $42.01.
SMAR’s POWR Ratings reflect its solid outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system.
SMAR has a grade B for Quality, Growth, and Sentiment. In the 25-stock B-rated Software-SAAS industry, it is ranked #7.
Beyond what we stated above, we also have SMAR’s ratings for Stability, Value, and Momentum. Get all SMAR ratings here.
Park City Group, Inc. (PCYG)
PCYG is a software-as-a-service provider that designs, develops, and markets proprietary software products in North America. The company provides ReposiTrak MarketPlace, ReposiTrak Compliance and Food Safety solutions, and ReposiTrak Supply Chain solutions. Institutions hold nearly 26% shares of the company.
PCYG’s trailing-12-month gross profit margin of 82.57% is 67.7% higher than the industry average of 49.24%. The stock’s trailing-12-month EBITDA margin of 31.54% is 287.4% higher than the 8.14% industry average. Also, its trailing-12-month net income margin of 28.13% is significantly higher than the industry average of 1.97%.
PCYG’s revenue increased 5.9% year-over-year to $4.82 million in the third quarter that ended March 31, 2022. Its income from operations grew 29.3% year-over-year to $1.52 million. Also, the company’s net income rose 52.9% from the year-ago value to $1.66 million, while its income per share was $0.08, an increase of 60% year-over-year.
Analysts expect PCYG’s revenue and EPS for the fiscal year (ending June 2023) to increase by 5.7% and 35% year-over-year to $19.07 billion and $0.29, respectively. Furthermore, the company’s revenue and EPS for the fiscal year 2024 are expected to grow 12.5% and 20.7% year-over-year to $21.45 million and $0.35, respectively.
The stock has gained 79.6% over the past six months and 93.6% over the past year to close the last trading session at $9.00.
PCYG’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.
PCYG has an A grade for Quality and a B for Stability and Sentiment. It is ranked #4 out of 25 stocks in the same industry.
In addition to the POWR Ratings I’ve just highlighted, you can see PCYG’s ratings for Growth, Value, and Momentum here.
What To Do Next?
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SPLK shares were unchanged in premarket trading Monday. Year-to-date, SPLK has gained 25.47%, versus a 15.35% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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