The software sector is expanding amid the demand for creative solutions and digital transformation across industries. Therefore, quality software stocks, Adobe Inc. (ADBE), Squarespace, Inc. (SQSP) and Salesforce, Inc. (CRM) could be worth adding to your watchlist.

Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.

The software market in the US is expected to reach $338.20 billion in revenue by 2023. Revenue is expected to grow at a CAGR of 4.2%, reaching a market volume of $414.70 billion by 2028. Technological developments and the increasing adoption of cloud-based software are boosting the market’s expansion.

Moreover, the global application development software market is expected to reach $1.16 trillion by 2031, increasing at a 23.5% CAGR. The market for application development software is likely to expand due to the rising need for scalable and customized software applications.

In addition, the global artificial intelligence software market is estimated to grow at a CAGR of 29.6% until 2028, reaching $80.60 billion. This growth can be attributed to the increased application of AI technology in a variety of areas, including healthcare, banking, and retail. The processing of natural language and machine learning algorithms advances are also propelling market growth.

In light of these encouraging trends, let’s look at the fundamentals of the three top-rated Software - Application stocks, beginning with number 3.

Stock #3: Adobe Inc. (ADBE)

ADBE provides professionals, communicators, businesses, and consumers with a range of products and services to create, manage, deliver, measure, optimize, engage, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media; Digital Experience; and Publishing and Advertising.

ADBE’s trailing-12-month net income margin of 27.12% is significantly higher than the 2.11% industry average. Its trailing-12-month ROCE of 33.97% is significantly higher than the 1.20% industry average.

ADBE’s total revenue for the fiscal third quarter that ended September 1, 2023, increased 10.3% year-over-year to $4.89 billion. Its non-GAAP operating income increased 15.8% year-over-year to $2.26 billion. The company’s non-GAAP net income increased 17.7% year-over-year to $1.88 billion.

In addition, its non-GAAP EPS came in at $4.09, representing an increase of 20.3% year-over-year.

The consensus revenue estimate of 19.38 billion for the year ending November 2023 represents a 10.1% increase year-over-year. Its EPS is expected to grow at 16.1% to $15.92 for the same period. It surpassed EPS estimates in all the four trailing quarters. ADBE’s shares have gained 93.1% over the past year to close the last trading session at $549.91.

ADBE’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.

ADBE also has an A grade for Quality and a B for Sentiment. It is ranked #19 out of 134 stocks in the Software - Application industry. Click here for the additional POWR Ratings for Value, Growth, Stability, and Momentum for ADBE.

Stock #2: Squarespace, Inc. (SQSP)

SQSP operates a platform for businesses and independent creators to build an online presence, grow their brands, and manage their businesses across the internet. Its suite of products ranges from websites, e-commerce, marketing tools, and hospitality services. Also, it offers tools for scheduling with Acuity and managing social media presence with Bio Sites and Unfold.

SQSP’s trailing-12-month levered FCF margin of 21.61% is 192.8% higher than the 7.38% industry average. Its trailing-12-month ROTC of 10.48% is 329.1% higher than the 2.44% industry average.

SQSP’s revenue grew 16.4% year-over-year to $247.53 million in the second quarter that ended June 30, 2023. Its gross profit was $204.36 million, an increase of 16.3% year-over-year.

The company’s operating income rose 309.8% from the prior-year period to $36.67 million. Additionally, SQSP’s adjusted EBITDA came in at $73.38 million, up 68.2% year-over-year.

Street expects SQSP’s revenue to increase 14.7% year-over-year to $994.60 million for the year ending December 2023. Its EPS is expected to grow 92.2% year-over-year to $1.05 for the same period. Over the past year, the stock has gained 44.2% to close the last trading session at $30.56.

SQSP’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 #12 in the same industry. It has an A grade for Growth, and Quality and a B for Sentiment. To see additional SQSP’s ratings for Value, Momentum and Stability, click here.

Stock #1: Salesforce, Inc. (CRM)

CRM is a cloud-based software company. It provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company’s CRM software and application focus on sales, marketing automation, customer service, e-commerce, and analytics.

On September 12, 2023, CRM and Google announced a strategic collaboration expansion to bring together Salesforce, the #1 AI CRM, and Google Workspace, the world’s most popular productivity application, to drive productivity with AI. This collaboration will result in new bidirectional connectors that will enable users to combine context from Salesforce and Google Workspace, such as Google Calendar, Docs, Meet, Gmail, and others, to create generative AI experiences across platforms.

This partnership aims to empower businesses with insightful insights and streamline their workflows by utilizing the power of AI across both platforms.

CRM’s trailing-12-month levered FCF margin of 31.95% is 332.9% higher than the 7.38% industry average. Its trailing-12-month ROTA of 1.71% is 365.6% higher than the 0.37% industry average.

For the fiscal second quarter ended July 31, 2023, CRM’s total revenues increased 11.4% year-over-year to $8.60 billion. Its net cash provided by operating activities increased 141.9% over the prior-year quarter to $808 million. The company’s non-GAAP net income rose 76% year-over-year to $2.09 billion. In addition, its non-GAAP EPS came in at $2.12, representing an increase of 78.2% year-over-year.

Analysts expect CRM’s revenue to increase 10.9% year-over-year to $34.78 billion for the year ending January 2024. Its EPS is expected to grow at 53.3% year-over-year to $8.03 for the same period. It surpassed EPS estimates in all the four trailing quarters. Over the past year the stock has gained 45.1% to close the last trading session at $206.85.

It’s no surprise that CRM has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Growth and a B for Stability, Sentiment and Quality. It is ranked #9 in the same industry.

Beyond what is stated above, we’ve also rated CRM for Value, and Momentum. Get all CRM ratings 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.

2024 Stock Market Outlook >

ADBE shares were trading at $566.53 per share on Thursday afternoon, up $16.62 (+3.02%). Year-to-date, ADBE has gained 68.34%, versus a 15.61% rise in the benchmark S&P 500 index during the same period.

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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