The escalating evolution of technologies and dynamic shifts in consumer behavior are driving an increasing demand for agile and adaptive software solutions. Against this backdrop, this article sheds light on the fundamentals of three software stocks, Workday, Inc. (WDAY), Amdocs Limited (DOX), and C3.ai, Inc. (AI).

After assessing the fundamentals of the aforementioned stocks, I believe WDAY and DOX could be solid buys. However, it could be best to steer clear of AI, considering the stock's grim fundamentals. But before delving into the analysis of stocks, let's take a glimpse at the current dynamics of the software industry.

The global software market is anticipated to hit $1.79 trillion by 2032, witnessing an impressive CAGR of 11.7% from 2023 to 2032. The surge in demand for advanced mobile applications and cloud-based solutions has been the driving force for the market growth. On top of it, the incorporation of generative AI into the creation of software applications is positioned to advance the industry’s growth.

Generative AI amplifies the software application’s capacity to learn, adapt, generate innovative ideas, and improve automated, dynamic decision-making processes, potentially revolutionizing the experiences of customers, users, product owners, architects, and developers.

Given the increasing integration of generative AI in development of software applications, the revenue in the global application development software market is forecasted to reach $179.90 billion by 2024 and increase further to $234.70 billion by 2028, witnessing a CAGR of 6.9% from 2024 to 2028.

Furthermore, Gartner predicts strong double-digit growth in the software segment for 2024, largely fueled by increased investments in cloud technologies. The forecast for this year indicates a significant upswing in global software spending, reaching $1.04 trillion, showcasing a noteworthy year-over-year increase of 13.8%.

Considering the solid growth projections, let’s now examine the fundamentals of the featured software stocks in detail:

Stocks to Buy:

Workday, Inc. (WDAY)

WDAY provides enterprise cloud applications in the United States and internationally. Its applications help its customers to plan, execute, analyze, and extend to other applications and environments, and to manage their business and operations.

On December 8, 2023, WDAY declared that it achieved the position of a Leader in the 2023 Gartner Magic Quadrant for Financial Planning Software. This recognition marks the second time WDAY has been acknowledged as a Leader since the inception of this category in 2022.

Dennis Yen, the General Manager of Planning at WDAY expressed the belief that this acknowledgment reflects the company's commitment to innovation and its distinctive combination of user-friendly functionality with the capability to manage substantial data volumes for intricate modeling needs.

On September 28, 2023, WDAY officially revealed its partnership with Automatic Data Processing, Inc. (ADP), a prominent player in enterprise cloud applications for finance and human resources.

Through this partnership, both companies will collaborate to enhance the interaction between WDAY and ADP systems, aiming to deliver an improved, seamless global payroll, compliance, and HR experience for their shared customers.

The stock’s trailing-12-month gross profit margin of 74.73% is 52.1% higher than the 49.14% industry average. Likewise, its trailing-12-month CAPEX/Sales of 3.65% is 54.1% higher than the industry average of 2.37%. Furthermore, WDAY’s trailing-12-month levered FCF margin of 24.31% is 181.1% higher than the industry average of 8.65%.

For the fiscal third quarter, which ended on October 31, 2023, WDAY’s total revenues increased 16.7% year-over-year to $1.87 billion, while its operating income came in at $87.86 million versus an operating loss of $26.32 million in the prior-year quarter.

Moreover, the company’s net income stood at $113.71 million and $0.43 per share compared to a net loss of $74.72 million and $0.29 per share in the same period last year, respectively. Also, its free cash flows rose 11.7% from the year-ago value to $390.83 million.

Street expects WDAY’s revenue and EPS for the fiscal fourth quarter (ending January 2024) to increase 16.4% and 47.9% year-over-year to $1.92 billion and $1.46, respectively. Moreover, the company has an excellent surprise history, surpassing the revenue and EPS estimates in each of trailing four quarters.

Over the past three months, WDAY’s shares surged 31.3% to close the last trading session at $283.24.

WDAY’s POWR Ratings reflect this promising outlook. The stock has an overall B rating, translating 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 Growth and a B grade for Sentiment and Quality. In the 134-stock Software - Application industry, it is ranked #23. Click here to see WDAY’s ratings for Value, Momentum, and Stability.   

Amdocs Limited (DOX)

DOX provides software and services worldwide. It designs, develops, operates, implements, supports, and markets open and modular cloud portfolios. It also offers AI-powered, cloud-native, and home operating systems; as well as data intelligence solutions and applications.

On January 8, 2024, DOX introduced Amdocs CPQ Pro, a next-generation configure-price-quote software utilizing generative AI capabilities, powered by DOX’s telco-grade generative AI platform amAIz.

CPQ Pro aligns with DOX’s strategy of advancing generative AI co-pilot use cases in the communications industry, aiming to reduce time to market, improve efficiency, and elevate customer experience through service differentiation across its product and services portfolio.

On November 7, 2023, DOX and NVIDIA Corporation (NVDA) joined forces to enhance and accelerate the adoption of Large Language Models (LLMs) in generative AI applications and services within the telecommunications and media industries.

Through their collaboration, DOX will tailor enterprise-grade LLMs, leveraging NVDA’s accelerated computing within the DOX amAIz framework. This partnership aims to enable efficient deployment of generative AI use cases for communication service providers, spanning customer experiences to network provisioning.

DOX’s trailing-12-month EBIT margin of 14.83% is 202.4% higher than the 4.92% industry average. Likewise, its trailing-12-month net income margin of 11.06% is 369.1% higher than the industry average of 2.36%. Furthermore, its trailing-12-month levered FCF margin of 14.73% is 70.3% higher than the industry average of 8.65%.

For the fiscal fourth quarter, which ended on September 30, 2023, DOX’s revenue increased 6.5% year-over-year to $1.24 billion, while its free cash flow rose 81.9% from the year-ago value to $245.81 million.

The company’s non-GAAP net income and non-GAAP EPS amounted to $169.01 million and $1.42, up 7.3% and 10.1% from the prior-year quarter, respectively. Additionally, its non-GAAP operating income grew 7.7% year-over-year to $221.11 million.

The consensus EPS estimate of $1.56 for the fiscal 2024 first quarter (ended December 2023) reflects a 7.8% year-over-year improvement. While the consensus revenue estimate of $1.24 billion for the same period indicates a 4.9% year-over-year rise.

Moreover, the company surpassed its revenue estimates in three of the trailing four quarters and EPS estimates in each of the trailing four quarters, which is impressive.

DOX’s shares have soared 13.9% over the past three months to close the last trading session at $91.36.

It’s no surprise that DOX has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. It has an A grade for Quality and a B for Stability and Sentiment. Out of 42 stocks in the B-rated Software - Business industry, it is ranked #6.  

In addition to the POWR Ratings we’ve stated above, we also have DOX’s ratings for Growth, Value, and Momentum. Get all DOX ratings here.

Stock to Sell:

C3.ai, Inc. (AI)

AI operates as an enterprise Artificial Intelligence (AI) software company internationally. The company provides C3 AI platform, an application development and runtime environment that enables customers to design, develop, and deploy enterprise AI applications.

AI’s trailing-12-month asset turnover ratio of 0.26x is 57.6% lower than the 0.62x industry average. Likewise, the stock’s trailing-12-month cash per share of $1.24 is 35.3% lower than the industry average of $1.92. Furthermore, its negative trailing-12-month Return On Total Assets (ROTA) of 24.48% compares to industry average of 0.48%

In the fiscal second quarter, which ended on October 31, 2023, AI’s total revenue amounted to $73.23 million, while its gross profit declined 1.3% from the prior-year quarter to $41.11 million.

Moreover, during the same quarter, the company’s net loss came in at $69.78 million and $0.59 per share, respectively. In addition, its cash and cash equivalents stood at $149.01 million, down 47.7% compared to $284.83 million as of April 30, 2023.

Analysts predict AI’s revenue for the fiscal third quarter (ending January 2024) to be $76.14 million. While its EPS for the same quarter is projected to decline 360.3% year-over-year to negative $0.28 and is expected to remain negative for the fiscal year (ending April 2024).

The stock plunged 5.5% over the past month to close the last trading session at $26.21.

AI’s bleak fundamentals are reflected in its POWR Ratings. It has an overall rating of F, which equates to a Strong Sell in our proprietary rating system.

It has an F grade for Quality and a D grade for Value, Stability, and Sentiment. Within the 21-stock Software - SAAS industry, it is ranked last. Click here to see the other ratings of AI for Growth and Momentum.  

What To Do Next?

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WDAY shares were trading at $283.24 per share on Monday afternoon, up $4.27 (+1.53%). Year-to-date, WDAY has gained 2.60%, versus a 0.29% rise in the benchmark S&P 500 index during the same period.

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