Despite the ongoing significant macroeconomic challenges, there are enough reasons to be optimistic about the software industry. A substantial uptick in technological developments, consistent digitization, and software spending buoyed by emerging trends should help the industry thrive this year and beyond.
With these factors in mind, let’s look at fundamentally sound software stocks Autodesk, Inc. (ADSK), Open Text Corporation (OTEX), and Commvault Systems, Inc. (CVLT) that seem well positioned to capitalize on the industry’s tailwinds.
Rising interest rates fueled by the Federal Reserve’s rate hikes have hammered most technology segments over the past year. Amid the increasing likelihood of a recession, the rising borrowing costs due to the unprecedented interest rate hikes last year have worried investors about the prospects of software companies.
However, while inflation continues to erode consumer purchasing power and drive device spending lower, overall enterprise IT spending is expected to remain strong. According to the latest forecast by Gartner, Inc. (IT), software and IT services would drive worldwide IT spending to $4.50 trillion in 2023, indicating an increase of 2.4% above last year.
Software companies continue to be technological juggernauts. Revenue growth for software equities is driven by increased corporate investment in cloud computing, digital transformation, big data analytics, and artificial intelligence. Furthermore, the global software market is expected to grow at a CAGR of 8.7% from 2022 to 2028.
Given this backdrop, investors looking to buy and hold quality software stocks could consider adding ADSK, OTEX, and CVLT to their portfolios this year.
Autodesk, Inc. (ADSK)
ADSK is a three-dimensional (3D) design, engineering, and entertainment software and services provider. Its product offerings include AutoCAD Civil 3D, BIM 360, AutoCAD, and AutoCAD LT, among other software and tools.
ADSK’s total net revenue increased 8.8% year-over-year to $1.32 billion in the fourth quarter (ended January 31, 2023). Its net income grew 229.2% from the year-ago value to $293 million, while its non-GAAP income from operations increased 13.8% year-over-year to $479 million. The company’s non-GAAP net income per share rose 24% from its year-ago value to $1.86.
ADSK’s trailing-12-month net income margin and levered FCF margin of 16.44% and 28.53% are 463.7% and 323.7% higher than the industry averages of 2.92% and 6.73%, respectively. Its trailing-12-month ROCE of 82.54% is significantly higher than the 4.75% industry average.
The consensus EPS estimate of $1.55 for the fiscal first quarter (ending April 30, 2023) represents an 8.7% improvement year-over-year. The consensus revenue estimate of $1.27 billion for the current quarter represents an 8.4% increase from the same period last year.
The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in three of the trailing four quarters.
ADSK’s shares have gained 11% year-to-date to close the last trading session at $207.46.
ADSK’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
ADSK has an A grade for Quality and a B for Growth. Out of 137 stocks in the Software - Application industry, it is ranked #11. Click here to see the additional POWR Ratings for ADSK (Stability, Value, Momentum, and Sentiment).
Open Text Corporation (OTEX)
OTEX designs, develops, markets, and sells information management software and solutions. It offers an integrated portfolio of Information Management solutions delivered at scale in the OpenText Cloud, enabling organizations to optimize their digital supply chains.
On March 1, 2023, OTEX announced that Bayer had chosen its Business Network Cloud Enterprise as a strategic solution for select B2B integration activities within the Consumer Health and Pharmaceuticals businesses to increase agility and improve operational efficiencies. This reflects the strong demand for its services and vast market reach over its peers.
In the second quarter that ended December 31, 2022, OTEX’s total revenues increased 2.3% year-over-year to $897.44 million. Its gross profit increased 3.3% from its year-ago value to $635.75 million, while its attributable net income improved 192.7% year-over-year to $258.49 million. The company’s EPS came in at $0.96, representing an increase of 200% year-over-year.
For the quarter ending March 31, 2023, OTEX’s revenue represents a 34.4% increase from the same period last year to $1.19 billion. Its EPS for the quarter ending June 2023 is expected to increase 13.8% year-over-year to $0.91. The company surpassed the consensus EPS estimates in three of the trailing four quarters.
Over the past three months, the stock has gained 20.5% to close the last trading session at $35.28.
OTEX’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Value, Stability, Sentiment, and Quality. In the same industry, it is ranked #3 of 137 stocks.
In addition to the POWR Ratings I’ve just highlighted, you can see the OTEX ratings for Growth and Momentum here.
Commvault Systems, Inc. (CVLT)
CVLT provides data protection and information management software applications and related services globally. The company sells its products and services to large enterprises, small and medium-sized businesses, and government agencies.
On January 26, CVLT announced that the industry research firm GigaOm had named Commvault a “Leader” and “Outperformer” in the new GigaOm Radar for Kubernetes Data Protection for the third year running.
Ranga Rajagopalan, Vice President of Products at CVLT, stated, “By natively integrating with Kubernetes, Commvault fully protects customers' modern application environments across full clusters and at the namespace level, giving complete and scalable protection, no matter where the application is running.”
CVLT’s total revenue increased 3.1% year-over-year to $581.11 million for the nine-month period that ended December 31, 2022. Its non-GAAP net income and non-GAAP EPS amounted to $83.94 million and $1.83, respectively, for the same period.
In addition, its total current assets came in at $506.68 million for the period that ended December 31, 2022, compared to $484.08 million for the period that ended March 31, 2022.
Analysts expect CVLT’s revenue for the fiscal year 2023 to be $778.10 million, representing a marginal increase year-over-year. Its EPS is expected to increase by 10% per annum over the next five years. It surpassed the EPS estimates in three out of four trailing quarters.
The stock has gained 12.7% over the past six months to close the last trading session at $59.21.
It is no surprise that CVLT has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system. It has an A grade for Quality and a B for Growth and Value. Within the same industry, it is ranked #7.
Beyond what we’ve stated above, we have also given CVLT grades for Stability, Sentiment, and Momentum. Get all CVLT ratings here.
What To Do Next?
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ADSK shares were trading at $209.14 per share on Monday afternoon, up $1.68 (+0.81%). Year-to-date, ADSK has gained 11.92%, versus a 6.09% 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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