The software industry is positioned for long-term growth due to technological advances and rising demand for software solutions. Growing investments in digitization and the shift to cloud-based platforms are driving the demand for software solutions.

Amid this backdrop, investors could consider buying fundamentally sound software stocks GoDaddy Inc. (GDDY), Trend Micro Incorporated (TMICY),  and Yalla Group Limited (YALA), given their massive gain potential.

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

The Federal Reserve maintained its benchmark interest rate for the third consecutive time between 5.25% and 5.50%, the highest in 22 years. However, the central bank signaled that it would likely cut interest rates by 75 basis points next year, up from its previous forecast of 50 basis points. Falling interest rates will likely boost the performance of growth stocks, including the ones from the software space.

The software industry is thriving due to advancements in technology, growing digital transformation initiatives, the transition to cloud-based software applications from traditional software applications, etc. Advanced software solutions help enhance efficiency, streamline operations, and improve flexibility and scalability.

Businesses are spending more on software solutions to optimize workflows and take advantage of new technology to boost customer satisfaction and operational effectiveness. Gartner forecasts that software spending is projected to rise 13.8% year-over-year to $1.04 trillion in 2024, driven by increased cloud spending. Global spending on public cloud services is expected to increase 20.4% in 2024.

In the 2024 Gartner CIO and Technology Executive Survey, 80% of CIOs reported that they plan to increase cyber/information security spending in 2024. CIOs are also focusing on investing in Business Intelligence/data analytics and cloud platforms, with 78% and 73% of CIOs expressing interest in increasing spending on these technologies, respectively.

The business software market is forecasted to grow at an 11.2% CAGR to reach $1.10 trillion by 2029. Additionally, the application development market is projected to grow at a CAGR of 25.5% to reach $1.04 trillion by 2030.

Moreover, investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 29.4% returns over the past nine months.

Considering these conducive trends, let’s take a look at the fundamentals of the three software stocks.

GoDaddy Inc. (GDDY)

GDDY engages in the design and development of cloud-based products worldwide. It operates through two segments: Applications and Commerce and Core Platform. The company serves small businesses, individuals, organizations, developers, designers, and domain investors.

On December 5, 2023, GDDY announced that it is introducing Email Automation for Websites + Marketing. The new tool allows businesses to customize, schedule and trigger email communication automatically using intuitive templates, helping business owners focus on growing their business.

The tool would streamline personalized communication for small businesses, potentially boosting customer engagement and benefiting GDDY's market presence.

In terms of the trailing-12-month gross profit margin, GDDY’s 63.02% is 28.3% higher than the 49.14% industry average. Likewise, its 13.22% trailing-12-month EBIT margin is 167.4% higher than the industry average of 4.94%. Furthermore, the stock’s 8.45% trailing-12-month net income margin is 258.4% higher than the industry average of 2.36%.

For the fiscal third quarter ending September 30, 2023, GDDY’s total revenue increased 3.5% year-over-year to $1.07 billion. Its operating income increased 28.8% year-over-year to $167.10 million. The company’s net income attributable to GDDY increased 31% over the prior year quarter to $130.70 million. Also, its EPS came in at $0.89, registering an increase of 41.3% year-over-year.

Analysts expect GDDY’s revenue and EPS for the quarter ended December 31, 2023, to increase 6% and 74% year-over-year to $1.10 billion and $1.04, respectively. Over the past three months, the stock has gained 36.4% to close the last trading session at $100.22.

GDDY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

GDDY has a B grade for Growth, Sentiment, and Quality. Within the B-rated Software – Business industry, it is ranked #7 out of 42 stocks. In addition to the POWR Ratings stated above, one can access GDDY’s additional ratings for Value, Momentum, and Stability ratings here.

Trend Micro Incorporated (TMICY)

Headquartered in Tokyo, Japan, TMICY develops and sells security-related software for computers and related services worldwide. The company offers platforms, such as vision one platform, attack surface management, extended detection and response (XDR), cloud security, network security, threat intelligence. It also provides services packages, managed XDR, incident response, and support services.

On November 29, 2023, TMICY announced that it achieved AWS Built-in Competency in Security and Cloud Operations.

This designation recognizes TMIY as an AWS partner providing customers with an AWS built-in co-build solution that is designed to automatically install, configure, and integrate with key foundational AWS services using a well-architected modular code repository in an automated deployment package validated by AWS experts, helping improve the customers’ time to value.

In terms of the trailing-12-month levered FCF margin, TMICY’s 15.78% is 82.4% higher than the 8.65% industry average. Likewise, its 6.20% trailing-12-month Return on Common Equity is 325.1% higher than the industry average of 1.46%. Furthermore, the stock’s 9.60% trailing-12-month Return on Total Capital is 243% higher than the industry average of 2.80%.

For the nine months ended September 30, 2023, TMICY’s net sales increased 13.3% year-over-year to ¥183.73 billion ($1.27 billion). Its gross profit increased 12.9% year-over-year to ¥138.29 billion ($955.85 million). The company’s operating income rose 14.5% over the prior-year period to ¥29.61 billion ($204.66 million).

Additionally, net income attributable to owners of the parent and EPS amounted to ¥12.81 billion ($88.54 million) and ¥93.26 per share, respectively.

Street expects TMICY’s revenue and EPS for the quarter ended December 31, 2023, to increase 1.5% and 419.2% year-over-year to $467.61 million and $0.38, respectively. Over the past three months, the stock has gained 36.6% to close the last trading session at $51.70.

It’s no surprise that TMICY has an overall rating of A, which translates to a Strong Buy in our POWR Ratings system.

It has a B grade for Growth, Stability, and Quality. Within the B-rated Software – Security industry, it is ranked #2 out of 23 stocks. Beyond what we have stated above, we have also rated TMICY for Value, Momentum, and Sentiment. Get all the TMICY ratings here.

Yalla Group Limited (YALA)

Based in Dubai, the United Arab Emirates, YALA operates a social networking and entertainment platform in the Middle East and North Africa region. It provides mobile applications, including Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application. The company's platform offers group chatting and games services; and sells virtual items, as well as provides upgrade services.

In terms of the trailing-12-month Return on Total Assets, YALA’s 16.88% is significantly higher than the 1.24% industry average. Likewise, its 0.58x trailing-12-month asset turnover ratio is 13% higher than the industry average of 0.52x. Furthermore, the stock’s 4.78% trailing-12-month Capex/Sales is 16.8% higher than the industry average of 4.09%.

YALA’s revenues for the fiscal third quarter ended September 30, 2023, increased 6.4% year-over-year to $85.19 million. Its non-GAAP operating income increased 20.4% year-over-year to $35.45 million. The company’s non-GAAP net income attributable to YALA’s shareholders increased 32.7% over the prior year quarter to $39.27 million. Also, its non-GAAP EPS came in at $0.21, representing an increment of 23.5% year-over-year.

For the quarter ended December 31, 2023, YALA’s revenue is expected to increase 6.5% year-over-year to $79.96 million. Its EPS for fiscal 2023 is expected to increase 24.2% year-over-year to $0.75. Over the nine months, the stock has gained 50.6% to close the last trading session at $5.86.

YALA’s positive outlook is 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 Value, Sentiment, and Quality. It is ranked #6 out of 133 stocks in the Software – Application industry. Click here to see the additional ratings of YALA for Growth, Momentum, and Stability.

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 >

GDDY shares were trading at $101.84 per share on Monday afternoon, up $1.62 (+1.62%). Year-to-date, GDDY has declined -4.07%, versus a -0.81% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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