Despite macroeconomic uncertainties, the software industry’s prospects look bright amid increasing spending and rising adoption of cloud solutions. Therefore, it could be wise to own fundamentally sound software stocks Amdocs Limited (DOX), Pegasystems Inc. (PEGA) and F5, Inc. (FFIV), which look poised to deliver stable returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
Gartner expects global software investment to exceed $922.75 billion this year, an increase of 13.7% year-over-year.
Also, the global business software services market is predicted to grow at a 12.5% CAGR until 2032, reaching $1.36 trillion. The primary industry drivers boosting market expansion include an ever-increasing need for better operational effectiveness and transparency in different organizations and businesses.
In addition, the software market in the U.S. is predicted to grow at a 4.2% CAGR until 2028, resulting in a market volume of $414.70 billion.
Moreover, investor’s interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 12.5% returns over the past six months.
Considering these conducive trends, let’s take a look at the fundamentals of the three best Software – Business stocks, starting with number 3.
Stock #3: Amdocs Limited (DOX)
DOX provides software and services worldwide. It designs, develops, operates, implements, supports, and markets open and modular cloud portfolio.
DOX’s trailing-12-month non-GAAP P/E of 13.36x is 34% lower than the industry average of 20.24x. Its trailing-12-month EV/EBIT of 11.26x is 33.5% lower than the industry average of 16.93x.
DOX’s trailing-12-month EBIT margin of 14.78% is 201% higher than the 4.91% industry average. Its trailing-12-month asset turnover ratio of 0.74x is 19.6% higher than the 0.62x industry average.
DOX’s revenue increased 6.5% year-over-year to $1.24 billion in the fiscal third quarter that ended June 30, 2023. Its operating income came in at $182.71 million, up 7.9% year-over-year. Its non-GAAP net income increased 21.1% year-over-year to $189.61 thousand. The company’s non-GAAP EPS increased 23.6% year-over-year to $1.57.
Analysts expect DOX’s revenue to increase 6.8% year-over-year to $5.22 billion for the year ending September 2024. Its EPS is expected to grow at 11.2% year-over-year to $6.58 for the same period. It surpassed EPS estimates in three of four trailing quarters. Shares of DOX has gained marginally intraday to close the last trading session at $79.
DOX’s POWR Ratings reflect this promising outlook. 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.
DOX also has a B grade for Stability, Sentiment and Quality. It is ranked #8 out of 44 stocks in the B-rated Software – Business industry. Click here for the additional POWR Ratings for Growth, Value, and Momentum for DOX.
Stock #2: Pegasystems Inc. (PEGA)
PEGA develops, markets, licenses, hosts, and supports enterprise software applications. The company provides Pega Platform, an intelligent automation software for clients’ processes and workflows, and Pega Infinity, a software platform that unifies customer engagement and digital process automation.
PEGA’s trailing-12-month gross profit margin of 71.94% is 45.6% higher than the 49.41% industry average. Its trailing-12-month levered FCF margin of 13.34x is 80.8% higher than the 7.38x industry average.
In the third quarter, which ended on September 30, 2023, PEGA’s total revenue increased 23.6% year-over-year to $334.64 million. The company’s non-GAAP net income and non-GAAP EPS came in at $37.60 million and $0.44, compared to a non-GAAP net loss and non-GAAP loss per share of $27.50 million and $0.34 in the same quarter last year, respectively.
Street expects PEGA’s revenue to increase 4% year-over-year to $1.37 billion for the year ending December 2023. Its EPS is expected to grow at 137.9% year-over-year to $1.71 for the same period. The stock gained 22.3% year-to-date to close the last trading session at $41.88.
It’s no surprise that PEGA has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Growth and a B grade for Value. It is ranked #4 in the same industry.
Beyond what is stated above, we’ve also rated PEGA for Stability, Sentiment, Momentum and Quality. Get all PEGA ratings here.
Stock #1: F5, Inc. (FFIV)
FFIV offers multi-cloud application security and delivery solutions globally, aiding customers in deploying, securing, and managing applications across various architectures. Its offerings include F5 BIG-IP appliances, F5 NGINX Software Solutions, F5 Distributed Cloud WAAP, and F5 Distributed Cloud Bot Defense.
FFIV’s forward non-GAAP P/E multiple of 12.03 is 40.6% lower than the industry average of 20.24. Its forward EV/EBIT multiple of 8.94% is 47.2% lower than the industry average of 16.93.
FFIV’s trailing-12-month ROCE of 14.99% is significantly higher than the industry average of 1.13%. Its trailing-12-month ROTA of 7.53% is significantly higher than the industry average of 0.03%.
For the fiscal fourth quarter that ended September 30, 2023, FFIV’s total revenue increased marginally from the prior-year quarter to $706.97 million, while its gross profit increased 2.4% year-over-year to $566.01 million.
The company’s adjusted net income and non-GAAP EPS came in at $209 million and $3.50, representing increases of 32.3% and 33.6%, respectively, from the prior-year quarter.
The consensus EPS estimate of $12.40 for the year ending September 2024 represents a 6% increase year-over-year. It surpassed EPS estimates in all four trailing quarters. FFIV’s shares has gained 11.1% over the past six months to close the last trading session at $149.22.
FFIV’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked first in the same industry. It has an A grade for Quality and a B for Growth and Value. To see additional FFIV’s ratings for Sentiment, Stability and Momentum, click here.
What To Do Next?
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DOX shares were trading at $80.25 per share on Tuesday morning, up $1.25 (+1.58%). Year-to-date, DOX has declined -10.45%, versus a 10.06% 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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