The software industry is thriving thanks to the ever-expanding demand for digitization and widespread data usage across various industries to make improved business decisions. Moreover, the growing adoption of public cloud-based services is also boosting the long-term prospects of the industry.
Amid this backdrop, it could be wise to buy fundamentally strong software stocks Docebo Inc. (DCBO), Salesforce, Inc. (CRM), and IBEX Limited (IBEX). These stocks are rated A (Strong Buy) in our proprietary rating system, POWR Ratings.
Before delving deeper into their fundamentals, let’s discuss what’s shaping the software industry’s prospects.
Global enterprises are prioritizing enhancing their digital capabilities with advanced software solutions to streamline operations. They are shifting to cloud-based solutions for improved flexibility and scalability. Increased corporate investments in cloud computing, digital transformation, big data analytics, and AI are driving robust demand for advanced software solutions.
The U.S. software market is expanding due to increased demand from the banking, retail, and healthcare sectors. Gartner has projected worldwide IT spending to grow 6.8% year-over-year to $5 trillion in 2024. Moreover, spending on software this year is projected to increase 12.7% over the prior year to $1.03 trillion.
The application development software market thrives on increased cloud adoption, IoT integration, mobile app development, and demand for sophisticated applications bolstered by low-code platforms and emphasis on DevOps and digitization. The global cloud market is projected to rise from $626.40 billion in 2023 to $727.90 billion in 2024, marking a 16.2% year-over-year increase.
Additionally, the growing popularity of public cloud services has led to the adoption of Software as a Service (SaaS). SaaS has enabled software companies to benefit from subscription-based, recurring revenue models. The global SaaS market is projected to grow at a CAGR of 18.7% to reach $908.21 billion by 2030.
On top of it, the software market’s growth will be driven by the integration of generative AI into various software applications. Goldman Sachs estimates that the total addressable market (TAM) of the generative AI software is approximately $150 billion. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software ETF’s (IGV) 50.8% returns over the past year.
Considering these conducive trends, let’s analyze the fundamentals of the three Software - Application picks, beginning with the third choice.
Stock #3: Docebo Inc. (DCBO)
Headquartered in Toronto, Canada, DCBO operates as a learning management software company that provides artificial intelligence (AI)-powered learning platforms in North America, Europe, and the Asia-Pacific region. It offers a Learning Management System (LMS) to train internal and external workforces, partners, and customers.
In terms of the trailing-12-month levered FCF margin, DCBO’s 18.18% is 104% higher than the 8.92% industry average. Its 80.86% trailing-12-month gross profit margin is 65.6% higher than the 48.82% industry average. Likewise, the stock’s 0.65x trailing-12-month asset turnover ratio is 5.4% higher than the 0.62x industry average.
DCBO’s revenues for the third quarter ended September 30, 2023, increased 25.8% year-over-year to $46.51 million. Its gross profit rose 26.5% from the previous year's quarter to $37.73 million. Also, its non-GAAP net income came in at $4.95 million and $0.15 per share, representing an increase of 236.4% and 275% year-over-year, respectively.
Analysts expect DCBO’s EPS and revenues for the quarter ended December 31, 2023, to increase 101.8% and 24.2% year-over-year to $0.14 and $48.39 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past nine months, the stock has gained 22.7% to close the last trading session at $44.59.
It’s no surprise that DCBO has an overall rating of A, which translates to a Strong Buy in our proprietary POWR Ratings system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has an A grade for Sentiment and Quality and a B for Growth. Within the Software - Application industry, it is ranked #11 out of 131 stocks. To see DCBO’s Value, Momentum, and Stability ratings, click here.
Stock #2: Salesforce, Inc. (CRM)
CRM provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company's service includes sales to store data, monitor leads and progress, forecast opportunities, gain insights through analytics and relationship intelligence, and deliver quotes, contracts, and invoices.
In terms of the trailing-12-month EBITDA margin, CRM’s 24.96% is 170.2% higher than the 9.24% industry average. Likewise, its 74.99% trailing-12-month gross profit margin is 53.6% higher than the 48.82% industry average. Its 15.87% trailing-12-month EBIT margin is 239% higher than the 4.68% industry average.
CRM’s total revenues for the fiscal third quarter, which ended on October 31, 2023, rose 11.3% year-over-year to $8.72 billion. Its net cash provided by operating activities increased 389.5% over the prior-year quarter to $1.53 billion. The company’s non-GAAP net income rose 47.9% year-over-year to $2.09 billion. In addition, its non-GAAP EPS came in at $2.11, up 50.7% year-over-year.
Street expects CRM’s EPS and revenue for the quarter ending January 31, 2024, to increase 34.8% and 10% year-over-year to $2.26 and $9.22 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 69.6% to close the last trading session at $279.94.
CRM’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. It is ranked #10 in the same industry. In total, we rate CRM on eight different levels. Beyond what we stated above, we also have given CRM grades for Value, Momentum, and Stability. Get all the CRM ratings here.
Stock #1: IBEX Limited (IBEX)
IBEX provides end-to-end technology-enabled customer lifecycle experience solutions. The company’s products and services portfolio includes offers of customer service, technical support, revenue generation, and other value-added outsourced back-office services, as well as customer acquisition solutions that comprise digital marketing, e-commerce technology, and platform solutions.
On December 5, 2023, IBEX announced a partnership with Sapling.ai to leverage Sapling.ai’s AI-powered messaging assistant technology into its Wave X platform. The collaboration aims to enhance agent capabilities and deliver a superior customer experience across various use cases.
Jim Ferrato, CIO at IBEX, said, “We are committed to delivering industry-leading CX, and this partnership is another step toward building and refining our AI-enabled Wave X platform with the latest technology available today. Integrating Sapling’s AI assistant as part of Wave X will enable us to enhance agent performance, optimize customer interactions, and deliver greater customer satisfaction.”
In terms of the trailing-12-month net income margin, IBEX’s 6.25% is 3.3% higher than the 6.05% industry average. Likewise, its 10.99% trailing-12-month Return on Total Assets is 124.7% higher than the 4.89% industry average. Additionally, its 1.81x trailing-12-month asset turnover ratio is 124.4% higher than the industry average of 0.81x.
For the first quarter, which ended September 30, 2023, IBEX’s total revenues came in at $124.61 million. Its income from operations rose 8.6% year-over-year to $8.33 million. The company’s net cash inflow from operating activities increased 56.1% over the prior year quarter to $8.68 million.
Also, its adjusted net income increased 11.4% year-over-year to $7.57 million. Additionally, its adjusted EPS came in at $0.40, representing an increase of 11.1% year-over-year.
For the quarter ending March 31, 2024, IBEX’s revenue is expected to increase 1.3% year-over-year to $133.31 million. Its EPS for the quarter ending June 30, 2024, is expected to increase 81.9% year-over-year to $0.60. It surpassed the Street EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 14.1% to close the last trading session at $18.28.
IBEX's POWR Ratings reflect its solid prospects. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.
It is ranked #7 in the Software – Application industry. It has an A grade for Value and a B for Stability, Sentiment, and Quality. To see IBEX's Growth and Momentum ratings, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
CRM shares rose $1.41 (+0.50%) in premarket trading Monday. Year-to-date, CRM has gained 6.92%, versus a 2.52% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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