The high demand for Software as a Service (SaaS) based solutions due to the growing need for hybrid operating environments and cloud computing is propelling the growth for fundamentally sound software stocks New Relic, Inc. (NEWR), Informatica Inc. (INFA), and Vimeo, Inc. (VMEO), which are winning now. Hence, it could be profitable to invest in them now.
The software industry is reaping benefits from accelerated digital transformation. As enterprises pursue shifting their on-premise workload to cloud environments, application and infrastructure monitoring is gaining prominence.
Moreover, inflationary pressures have further led to increased adoption of cloud services, with cloud constituting, on average, 32% of IT budgets. Despite cost pressures, 57% of companies require a ‘very high’ to ‘extremely high’ level of IT transformation to support their current business strategies, compared to 48% last year.
In addition, with continued digital transformation across every industry, emerging trends, and cutting-edge technology, the global SaaS market is expected to reach $462.94 billion by 2028, growing at a CAGR of 18.5%.
Despite a slowing economy, NEWR, INFA, and VMEO are thriving on the backs of their solid financials and high profitability. Let’s delve deeper into the fundamentals of these stocks.
New Relic, Inc. (NEWR)
NEWR provides a software platform for customers to collect telemetry data in one place and derive actionable insights from that data in a unified front-end application. Its platform provides users with a consistent view of their digital environment, allowing them to observe and operate all the components of their digital infrastructure.
On May 17, NEWR announced an integration with AWS Systems Manager Distributor to enable automatic deployment of the New Relic monitoring infrastructure agent via the AWS Command Line Interface (CLI) and any AWS infrastructure-as-code (IaC) tooling to streamline observability across Amazon Web Services (AWS) environments.
The New Relic infrastructure agent provides engineers with the metrics to troubleshoot infrastructure performance issues and scale their Amazon EC2 instances to deliver performant services. This should help boost the company’s operational capability.
In the fiscal third quarter (ended December 31, 2022), NEWR’s revenue increased 17.8% year-over-year to $239.76 million. Its gross profit grew 32.4% from the year-ago value to $178.45 million, while its non-GAAP income from operations came in at $18.69 million versus a loss of $10.60 million.
The company’s non-GAAP attributable net income amounted to $21.81 million and $0.32 per share, compared to an adjusted net loss of $11.69 million and $0.18 per share, respectively, in the same period.
Analysts expect NEWR's revenue to increase 17.2% year-over-year to $241.13 million in the fourth quarter (ended March 31, 2023), while its EPS is expected to be $0.22 in the same period. Moreover, the company surpassed the revenue estimates in each of the trailing four quarters, which is excellent.
The stock’s trailing-12-month gross profit and levered FCF margins of 71.48% and 9.12% are 45.2% and 32.4% higher than the 49.24% and 6.88% industry averages, respectively.
Over the past year, the stock has gained 85.7% to close the last trading session at $83.84.
NEWR’s POWR Ratings reflect this promising outlook. The company has an overall B rating, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has a B grade for Growth, Sentiment, and Quality. Out of 24 stocks in the Software - SAAS industry, it is ranked #2. Click here to see the additional ratings for NEWR (Value, Momentum, and Stability).
Informatica Inc. (INFA)
INFA is a leading enterprise cloud data management platform. It is an end-to-end, cloud-native Artificial Intelligence (AI)-powered Intelligent Data Management Cloud (IDMC) platform designed to assist businesses in pioneering their data on any cloud, multi-cloud, hybrid system.
On May 10, the company strengthened ties with ZS, a global management consulting and technology firm, to provide powerful data integration for life sciences. The new unified data fabric integrates the power of INFA’s IDMC platform with ZS’s ZAIDYN™ platform to facilitate a faster, more cohesive data management experience.
On the same day, INFA enhanced its partnership with Google Cloud with the announcement of two new developments: the launch of INFA’s Intelligent Master Data Management Software-as-a-Service natively and its comprehensive Intelligent Data Management Cloud on Google Cloud, providing customers with trusted data.
Such collaborations should enable the company to continue delivering innovative solutions for its customers across various marketplaces.
During the first quarter that ended March 31, 2023, INFA’s total revenues increased marginally year-over-year to $365.43 million, while its subscription revenues grew 8.2% from the year-ago value to $213.92 million. Its non-GAAP income from operations stood at $84.81 million, up 1.7% from the prior year’s quarter.
In addition, its non-GAAP net income amounted to $44.64 million and $0.15 per share in the same period. Also, the company processed nearly 54.3 trillion cloud transactions per month, up 68.1% year-over-year.
The consensus EPS estimate of $0.21 for the fiscal third quarter (ending September 2023) represents a 15.6% improvement year-over-year. The consensus revenue estimate of $403.78 million for the next quarter indicates an 8.6% increase from the same period last year. The company has an impressive earnings surprise history, surpassing the consensus EPS estimates in three of the trailing four quarters.
In terms of trailing-12-month INFA’s levered FCF margin of 26.55% is 285.7% higher than the 6.88% industry average. Also, its trailing-12-month gross profit and EBITDA margins of 79.28% and 12.30% compare to the industry averages of 49.24% and 8.92%, respectively.
Shares of INFA have gained 5.9% over the past five days to close the last trading session at $15.72.
It is no surprise that INFA has an overall rating of B, which translates to Buy in our proprietary rating system. It also has a B grade for Value, Stability, and Quality. Within the same industry, it is ranked first.
In addition to the POWR Ratings I’ve just highlighted, you can see the INFA ratings for Growth, Momentum, and Sentiment here.
Vimeo, Inc. (VMEO)
VMEO provides online video software and services globally. The company offers video tools through a software-as-a-service model, which enables the users to create, collaborate, and communicate with video on a single platform.
During the first quarter that ended on March 31, 2023, VMEO’s revenue amounted to $103.58 million, while its total operating expenses decreased 23.3% year-over-year to $82.72 million. In addition, its adjusted EBITDA amounted to $3.20 million versus an adjusted EBITDA loss of $10.40 million.
Street expects VMEO’s revenue to amount to $408.36 million in the fiscal year 2023. It is expected to reach $432.61 million in 2024, reflecting an increase of 5.9% year-over-year. Moreover, the company topped the EPS and revenue estimates in each of the trailing four quarters.
VMEO’s trailing-12-month gross profit margin of 76.60% is 53.9% higher than the 49.77% industry average. Likewise, its trailing-12-month asset turnover ratio of 0.71x is 43.4% higher than the industry average of 0.49x.
The stock has gained 6.4% year-to-date to close the last trading session at $3.65.
VMEO’s solid prospects are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system.
It also has a B grade for Value, Sentiment, and Quality. The stock is ranked #3 of 24 stocks in the same industry. To see the other ratings of VMEO for Growth, Momentum, and Stability, click here.
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NEWR shares were trading at $84.28 per share on Thursday afternoon, up $0.44 (+0.52%). Year-to-date, NEWR has gained 49.30%, versus a 9.21% rise in the benchmark S&P 500 index during the same period.
About the Author: Shweta Kumari
Shweta's profound interest in financial research and quantitative analysis led her to pursue a career as an investment analyst. She uses her knowledge to help retail investors make educated investment decisions.
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