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3 Software Stocks to Buy for Potential Gains

Despite prevailing macroeconomic challenges, the software industry is poised for rapid growth in the foreseeable future due to the growing enterprise dependence on software solutions and the incorporation of emerging technologies. Thus, it could be wise to invest in quality software stocks GoDaddy (GDDY), CSG Systems (CSGS), and Yext (YEXT) for potential gains. Continue reading…

The software industry grappled with various macroeconomic headwinds over the past year. However, the industry is well-positioned for significant growth and expansion in the long term with the increasing reliance of consumers and enterprises on software solutions and the integration of advanced technologies.

To that end, we think fundamentally sound software stocks GoDaddy Inc. (GDDY), CSG Systems International, Inc. (CSGS), and Yext, Inc. (YEXT) have the potential to generate solid returns, which should make them suitable additions to one’s portfolio. Let us understand this in detail.

Numerous economic headwinds, such as high inflation and rising interest rates, continue to affect the software industry and the economy at large. But according to John-David Lovelock, distinguished VP analyst at Gartner Inc (IT), “Macroeconomic headwinds are not slowing digital transformation.”

Tech spending remains robust, with global spending anticipated to reach $4.60 trillion this year, marking a 5.5% increase from 2022, as per Gartner. The IT services segment is expected to sustain its growth trajectory until 2024, fueled primarily by the infrastructure-as-a-service market, which is projected to experience over 30% growth this year.

Moreover, as enterprises prioritize investments to gain a competitive edge through heightened productivity, automation, and other software-driven transformation initiatives, the software segment will be experiencing double-digit growth this year.

The most notable trend in the industry is the increased utilization of cloud-native solutions by software development companies for application development, team management, and communication. These solutions are independent of specific infrastructures and can operate on multiple servers, facilitating effortless adoption by any company.

Emerging technologies such as AI, cybersecurity, blockchain, progressive web applications, software outsourcing, and IoT further bolster the industry’s expansion by driving innovation, improving security measures, enhancing development processes, and expanding the possibilities of immersive and interconnected experiences.

As a report by Spherical Insights, the global enterprise software market size is expected to grow at a CAGR of 11% and reach $519.88 billion by 2030. Meanwhile, investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 34.7% returns over the past six months.

Given the industry’s bright growth prospects, quality software stocks GDDY, CSGS, and YEXT could be ideal investments for potential gains.

Let’s now delve into the fundamentals of these stocks.

GoDaddy Inc. (GDDY)

GDDY offers personalized products and guidance. It serves entrepreneurs, small businesses, individuals, organizations, developers, designers, and domain investors. The company operates through two segments: Applications and Commerce; and Core Platform.

On May 31, GDDY introduced three innovative products and services powered by generative AI. The company would enable its customers to use it for streamlining content creation, leading to significant customer acquisition. These new introductions would enhance GDDY’s market position and increase its profitability.

On May 1, GDDY and Microsoft (MSFT) announced their partnership to help small businesses seamlessly accept payments during live Microsoft Teams meetings with customers. As one of the three chosen commerce providers for Microsoft Teams meetings, GDDY’s payment processing solution, GoDaddy Payments, will enable small businesses to accept payments effortlessly.

This partnership highlights the rapid growth and strong reputation of GDDY as a leading payment provider in the United States, ensuring increased growth opportunities for the company.

GDDY’s total revenues for the first quarter (ended March 31, 2023) increased 3.3% year-over-year to $1.04 billion. Its normalized EBITDA grew 10.5% from the year-ago value to $249.70 million. In addition, the company’s cash inflow from operating activities rose 7.7% year-over-year to $270.30 million.

As of March 31, 2023, the company’s cash and cash equivalents were $892.40 million, compared to $774 million as of December 31, 2022.

Analysts expect GDDY’s revenue for the fiscal year (ending December 2023) to increase 4.8% year-over-year to $4.29 billion. The consensus EPS estimate of $2.44 for the ongoing year reflects an 11.3% growth year-over-year. Shares of GDDY have gained 8.4% over the past year to close the last trading session at $77.30.

GDDY’s solid fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

GDDY has a B grade for Quality. It is ranked #6 in the 50-stock Software - Business industry.

In addition to the POWR Ratings I’ve just highlighted, you can see GDDY’s ratings for Growth, Momentum, Value, Stability, and Sentiment here.

CSG Systems International, Inc. (CSGS)

CSGS offers integrated real-time revenue management platforms using public cloud, private cloud, or on-premises deployments. It provides numerous brands with strategic insights, experience design, customer journey management, business intelligence analytics, and customer communication solutions.

On June 22, CSGS and PLDT Inc. (PHI), a telecommunications and digital services provider in the Philippines, strengthened their two-decade partnership as PHI adopted the cloud’s potential to propel its business forward and revolutionize customer experience, specifically for its Enterprise unit.

By providing PHI with a unified revenue management solution hosted on Amazon Web Services (AWS), CSGS enables PHI to enhance customer experiences, capitalize on insights, and improve billing processes. Such collaborative efforts should bode well for CSGS.

Also, on February 22, CSGS and Axiata Digital Labs (ADL) launched their collaborative solution at Namibia’s leading mobile operator. The unified cloud offering enables the operator to unlock new revenue streams and deliver innovative digital services. This new launch should bode well for CSGS.

For the first quarter that ended March 31, 2023, CSGS’ non-GAAP operating income increased 33.2% year-over-year to $53.51 million. Its adjusted EBITDA grew 19.4% from the year-ago value to $67.31 million. Furthermore, the company’s non-GAAP net income and EPS increased 15.7% and 20.9% year-over-year to $31.78 million and $1.04, respectively.

The consensus revenue estimate of $1.13 billion for the fiscal year ending December 2024 reflects a 4.8% year-over-year improvement. Likewise, the consensus EPS estimate of $3.90 for the same period indicates a 10.3% rise year-over-year. Also, the company surpassed the consensus revenue estimates in three of the four trailing quarters.

The stock has gained 1.8% over the past month to close the last trading session at $52.20.

CSGS’ strong outlook is reflected in its POWR Ratings. The stock has an overall rating of A, translating to a Strong Buy in our proprietary rating system.

CSGS has an A grade for Growth and a B for Value, Stability, and Quality. It is ranked #4 out of 50 stocks within the Software - Business industry.

Click here to access additional CSGS ratings (Momentum and Sentiment). 

Yext, Inc. (YEXT)

YEXT operates an answer platform that allows customers to provide answers, control business facts, and manage landing page content and consumer reviews. The company's knowledge network spans 200 maps, apps, search engines, GPS systems, digital assistants, directories, and social networks.

On July 5, YEXT launched Yext Content, a cutting-edge headless content management system powered by AI and knowledge graph technology. It empowers companies to deliver engaging experiences across various digital channels seamlessly.

YEXT expects enhanced operational efficiency, heightened customer engagement, and overall financial growth by utilizing AI, data integration, and automation.

On January 12, YEXT revealed its integration with Apple Business Connect, a free tool enabling businesses to claim and customize their location place cards. The integration highlights YEXT's dedication to enhancing its listing offering, providing brands with unprecedented control to optimize local discovery and engagement.

For the fiscal 2024 first quarter (ended April 30, 2023), YEXT’s non-GAAP gross profit grew 4.4% year-over-year to $78.75 million. Its adjusted EBITDA came in at $14.45 million, compared to a loss of $3.03 million in the prior year’s period.

Furthermore, the company’s non-GAAP net income and non-GAAP net income per share attributable to common stockholders stood at $10.60 million and $0.08, compared to a net loss and loss per share of $7.75 million and $0.06 in the previous year’s period, respectively.

For the third quarter ending October 2023, analysts expect the company’s revenue to grow 3% year-over-year to $102.29 million. Likewise, YEXT’s EPS is estimated to be $0.07 for the next quarter, indicating a 250% year-over-year improvement. Moreover, the company surpassed its consensus revenue and EPS estimates in three of the trailing four quarters.

Shares of YEXT have gained 57.6% over the past six months and 134.5% over the past year to close the last trading session at $10.48.

YEXT’s robust outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our pro­­­­­­­­­prietary rating system.

YEXT has an A grade for Quality and a B for Value and Growth. It has ranked #5 out of 50 stocks within the same industry.

Click here to access additional YEXT ratings for Stability, Momentum, and Sentiment.

What To Do Next?

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GDDY shares were trading at $77.10 per share on Friday afternoon, down $0.20 (-0.26%). Year-to-date, GDDY has gained 3.05%, versus a 18.58% 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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