With enterprises relying heavily on software to drive their operations and rising adoption of emerging technologies, it could be wise to invest in quality software stocks VMware, Inc. (VMW), F5, Inc. (FFIV), and Yext, Inc. (YEXT) to capitalize on growing software demand. Before we delve deeper into these stocks, let’s first look at the factors contributing to the software industry's success.
Enterprises increasingly invest in software products and services to optimize and streamline business processes, automate repetitive tasks, improve visibility, and gain a competitive edge. The growing adoption of advanced technologies, such as cloud computing, AI, AR&VR, and the Internet of Things (IoT), is boosting the software industry’s growth and expansion.
According to the latest forecast by Gartner, Inc. (IT), worldwide end-user spending on public cloud services is expected to grow by 21.7% from a year ago to $597.30 billion in 2023. Cloud computing drives digital business transformation through emerging technologies, such as generative AI, Web3, and the metaverse.
On top of it, Gartner forecasted software spending to reach $891.39 billion this year, indicating an increase of 12.3% year-over-year.
According to a report by The Business Research Company, the global software products market is expected to reach $2.36 trillion by 2027, growing at a 12% CAGR. Moreover, investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 16.2% returns over the past six months.
Considering the industry’s tailwinds, investing in fundamentally sound software stocks VMW, FFIV, and YEXT could be wise now.
Let's take a closer look at the fundamentals of these stocks:
VMware, Inc. (VMW)
VMW provides enterprise-controlled multi-cloud services for all applications. Its portfolio includes cloud infrastructure, networking, security, cloud management, application modernization, and anywhere workspaces that allow its customers to build, manage, connect, and protect their workloads on VMW’s digital foundation.
On February 28, VMW and Samsung expanded their collaboration to integrate Samsung’s O-RAN-compliant virtualized RAN solutions with VMware Telco Cloud Platform for the DISH Wireless 5G network buildout. This partnership marks VMW’s first step towards achieving full network programmability and realizing the vision of networking on demand for dynamic applications.
On the same day, VMW and NTT DATA Corporation (NTDTY) announced an expanded collaboration to speed up software-defined, large-scale Open RAN deployments via combined solutions and services. This partnership should enable VMW to aid service providers in broadening their service portfolios, simplifying their networks, and increasing profitability and time to value.
VMW’s total revenue increased 5.2% year-over-year to $3.71 billion for the fiscal 2023 fourth quarter that ended February 3. Its non-GAAP income before income taxes rose 13.1% from the year-ago value to $ 1.15 billion. Moreover, the company’s non-GAAP net income increased 7% year-over-year to $915 million, while non-GAAP EPS came in at $2.13, up 5.4% year-over-year.
The consensus revenue estimate of $14.12 billion for the fiscal year (ending January 2024) reflects a 5.8% year-over-year improvement. Likewise, the consensus EPS estimate of $6.92 for the current year indicates a 6% rise year-over-year. The stock has gained 15% over the past six months to close the last trading session at $126.12.
VMW’s strong fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
VMW has an A grade for Quality and a B for Sentiment and Value. It has topped the 50-stock Software - Business industry.
In addition to the POWR Ratings I’ve just highlighted, you can see VMW’s ratings for Stability, Growth, and Momentum here.
F5, Inc. (FFIV)
FFIV offers multi-cloud solutions for application security and delivery. These solutions enable customers to develop, operate, secure, and govern applications across any architecture, from on-premises to the public cloud. Also, the company provides technical support services, including consulting, training, installation, and maintenance.
On April 4, FFIV announced new security capabilities for comprehensive protection and control of apps and APIs across on-premises, cloud, and edge locations. These enhancements aim to boost the momentum of F5 Distributed Cloud Services, potentially aiding in the company’s revenue growth and expansion.
In addition, on March 6, FFIV announced a partnership with Visa Inc. (V) to reduce login friction for merchants and customers. The collaboration combines Distributed Cloud Authentication Intelligence with F5 Distributed Cloud Bot Defense, providing merchants access to fraud defenses and bot detection to protect the entire commerce journey.
Such endeavors to improve customer experience by leveraging its advanced technology solutions should benefit FFIV significantly.
For the second quarter of the fiscal year 2023 that ended March 31, FFIV’s total revenues increased 10.9% year-over-year to $703.18 million, and its gross profit grew 7.8% from the year-ago value to $547.52 million. Furthermore, the company’s non-GAAP net income and non-GAAP EPS rose 44.8% and 18.8% year-over-year to $81.44 million and 2.53, respectively.
Analysts expect FFIV’s revenue to increase 4.6% year-over-year to $2.82 billion for the fiscal year ending September 2023. Similarly, the company’s EPS for the ongoing year is expected to grow 8.8% from the previous year to $11.08. Also, the company topped its consensus EPS estimates in all four trailing quarters, which is impressive.
Shares of FFIV marginally slumped intraday to close the last trading session at $134.02.
FFIV’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.
FFIV has an A grade for Value and Quality and a B for Growth. Within the Software – Business industry, it is ranked #2 out of 50 stocks.
Click here to access additional FFIV ratings for Sentiment, Stability, and Momentum.
Yext, Inc. (YEXT)
YEXT provides an answer platform that helps businesses deliver relevant and actionable answers to consumer questions in the digital ecosystem. The company organizes business facts and offers field user support, including one-on-one training and content review based on brand guidelines.
On March 2, YEXT announced adding Content Generation to its Knowledge Graph product, allowing organizations to leverage the latest generative AI to increase their team's efficiency and content output. The addition is expected to aid in YEXT’s growth and customer satisfaction.
On January 12, YEXT announced integration with Apple Business Connect. The integration includes support for updates at scale and would give YEXT customers increased control over their presence on Apple Maps. The collaboration demonstrates YEXT’s commitment to continually advancing its listing offering.
For the fiscal 2023 fourth quarter (ended January 31), YEXT’s revenue increased by 1% to $101.90 million. Its adjusted EBITDA rose 703.9% year-over-year to $10.90 million. The company’s non-GAAP net income and EPS stood at $6.29 million and $0.05, compared to a non-GAAP net loss and net loss per share of $4.09 million and $0.03 in the previous year’s quarter, respectively.
Analysts expect YEXT’s revenue to grow 6.1% year-over-year to $428.06 million for the fiscal year ending January 2025. The company’s EPS for the same year is expected to increase by 15.1% year-over-year to $0.25. Furthermore, the company surpassed the consensus revenue and EPS estimates in three of four trailing quarters.
The stock has gained 89.3% over the past month to close the last trading session at $9.01.
YEXT’s POWR Ratings reflect its promising prospects. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
The stock has an A grade for Quality and a B for Value and Growth. It is ranked #3 out of 50 stocks within the same industry.
To see additional POWR Ratings for Stability, Sentiment, and Momentum for YEXT, click here.
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VMW shares were unchanged in premarket trading Monday. Year-to-date, VMW has gained 2.74%, versus a 8.20% rise in the benchmark S&P 500 index during the same period.
About the Author: Aanchal Sugandh
Aanchal's passion for financial markets drives her work as an investment analyst and journalist. She earned her bachelor's degree in finance and is pursuing the CFA program. She is proficient at assessing the long-term prospects of stocks with her fundamental analysis skills. Her goal is to help investors build portfolios with sustainable returns.
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