The software industry’s prospects look promising, thanks to increased digitalization of corporate processes across end-use sectors and technological innovations. Additionally, the growing adoption of cloud-based solutions and integration of artificial intelligence is likely to propel the industry ahead.
Given the industry’s solid growth prospects, investors could consider buying fundamentally strong software stocks Amdocs Limited (DOX), Vimeo, Inc. (VMEO), and Yalla Group Limited (YALA). These stocks are A (Strong Buy) rated in our proprietary POWR Ratings system.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
Software is crucial for individuals and businesses, enabling critical decision-making, customer satisfaction, and operational efficiency. Enterprises are shifting to cloud-based software solutions to enhance their flexibility and scalability. Gartner predicts spending on software to grow by 12.7% year-over-year to $1.03 trillion in 2024.
The business software and services market is expected to reach $893.67 billion by 2028, growing at a CAGR of 11.4% over the projected period. Such robust growth estimates highlight the critical role that business software and services play in driving efficiency and productivity for companies across various industries.
As technology advances, businesses are increasingly relying on innovative software solutions to stay competitive in the global market. The growing popularity of public cloud services is driving widespread adoption of software-as-a-service (SaaS), which provides cost savings, flexibility, data security, scalability, automation, and ease of access.
The software as a service (SaaS) market is projected to grow at a CAGR of 13.7% to reach $819.23 billion by 2030. In addition, demand for various software applications that use IoT technology and cloud-based solutions to accelerate and simplify company operations drives market growth. This trend is motivated by the desire for greater efficiency and productivity in a competitive business environment.
The global application development software industry is expected to reach $1.16 trillion by 2031, growing at a CAGR of 23.5%. Moreover, investors’ interest in software stocks is evident from the SPDR S&P Software & Services ETF (XSW) 26.7% returns over the past year.
With these encouraging market trends in mind, let’s delve into the fundamentals of the three software stocks.
Amdocs Limited (DOX)
DOX offers global software and service solutions, mainly focusing on cloud-based offerings for the communications, entertainment, and media sectors. Its portfolio includes CES23, a customer experience suite for 5G and cloud-native services, alongside modular solutions for billing, revenue management, and network automation.
On February 26, 2024, DOX announced the expansion of its partnership with Microsoft Corporation (MSFT) to deliver verticalized GenAI capabilities for the telecoms industry, leveraging DOX's amAIz platform and MSFT's Azure OpenAI Service.
The collaboration will include the establishment of a dedicated lab and center of excellence to stimulate innovation and expedite the deployment of GenAI technologies by global communications service providers.
On February 20, 2024, DOX and BMC, a global leader in software solutions for the autonomous digital enterprise, announced an alliance to accelerate connected digital operations in the telecoms and financial services industries, resulting in increased growth, automation, and customer efficiency.
The collaboration will leverage Amdocs' position as a major provider of IT and network services to accelerate and improve access to BMC's industry-leading automation, operations, and service management solutions.
DOX’s trailing-12-month ROTA of 8.64% is 562.4% higher than the industry average of 1.30%. Its 11.30% trailing-12-month net income margin is 346.2% higher than the 2.53% industry average. Also, its 15.73% trailing-12-month ROCE is 417.2% higher than the 3.04% industry average.
For the fiscal first quarter ended December 31, 2023, DOX’s revenue increased 5% year-over-year to $1.25 billion. The company’s non-GAAP operating and net income grew 7.5% and 4.1% from the previous year’s quarter to $225.24 million and $183.83 million, respectively. Also, its non-GAAP EPS rose 7.1% from the year-ago value to $1.56.
Street expects DOX’s EPS and revenue for the quarter ending March 31, 2024, to increase 7.1% and 2.1% year-over-year to $1.57 and $1.25 billion, respectively. It surpassed consensus EPS estimates in three of the trailing four quarters. Over the past three months, the stock has gained 8.2% to close the last trading session at $92.74.
DOX’s POWR Ratings reflect this promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
DOX has a B grade for Value, Stability, Sentiment, and Quality. Within the B-rated Software – Business industry, it is ranked #7 out of 44 stocks. To see the additional ratings of DOX for Growth and Momentum, click here.
Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, which enables its users to create, collaborate, and communicate with video on a single platform.
On February 29, 2024, VMEO announced the launch of Vimeo Central, a secure, AI-powered video center. Vimeo Central, created for corporate leaders and their teams, enables employees to communicate via video, extract actionable insights from a centralized source of truth, and become a more connected and productive organization.
Vimeo Central uses breakthrough AI technologies to streamline the process of generating, sharing, and analyzing video content on a secure platform. This innovative tool aims to enhance collaboration and decision-making processes for businesses of all sizes.
VMEO’s trailing-12-month gross profit margin of 78.12% is 59.7% higher than the 48.92% industry average. Its trailing-12-month ROCE of 5.86% is 83.3% higher than the 3.19% industry average. Additionally, its 0.68x trailing-12-month asset turnover ratio is 39.4% higher than the 0.49x industry average.
VMEO’s revenue for the fiscal fourth quarter that ended December 31, 2023, stood at $105.54 million. Its non-GAAP gross profit rose 1.6% year-over-year to $82.50 million. The company’s adjusted EBITDA increased 104.6% over the prior-year quarter to $13.30 million.
In addition, its net earnings came in at $8.40 million, compared to a net loss of $5.12 million. The company’s EPS stood at $0.05, compared to a loss per share of $0.03 in the prior year’s quarter.
For fiscal 2025, VMEO’s EPS and revenue are expected to increase 131.6% and 4.1% year-over-year to $0.03 and $412.25 million, respectively. It surpassed the Street EPS estimates in each of the trailing four quarters. Over the past three months, the stock has gained 35.4% to close the last trading session at $5.01.
VMEO’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which equates to a Strong Buy in our proprietary rating system.
It is ranked #2 out of 19 stocks in the B-rated Software – SAAS industry. It has an A grade for Quality and a B for Value and Sentiment. Click here to see the additional ratings of VMEO for Growth, Momentum, and Stability.
Yalla Group Limited (YALA)
Based in Dubai, the United Arab Emirates, YALA runs a social networking and entertainment platform in the Middle East and North Africa, featuring voice-centric group chat on Yalla and casual gaming on Yalla Ludo. The platform offers group chatting, gaming services, virtual item sales, and upgrade options.
YALA’s trailing-12-month EBIT margin of 28.13% is 241.8% higher than the industry average of 8.23%. Its 16.88% trailing-12-month ROTA is significantly higher than the 1.40% industry average. Additionally, its 24.34% trailing-12-month levered FCF margin is 210.6% higher than the 7.84% industry average.
For the third quarter, which ended September 30, 2023, YALA’s revenues grew 6.4% year-over-year to $85.19 million. The company generated non-GAAP operating income and net income of $35.45 million and $38.28 million, up 20.4% and 30.3% from the previous year quarter, respectively. Moreover, its non-GAAP EPS rose 23.5% from the prior-year quarter to $0.21.
Analysts expect YALA’s EPS and revenue for fiscal 2024 to increase 6.3% and 3.7% year-over-year to $0.77 and $329.71 million, respectively. Shares of YALA have gained 35.7% over the past year, closing the last trading session at $5.40.
It’s no surprise that YALA has an overall A rating, equating to a Strong Buy in our POWR Ratings system.
It has a B grade for Value and Quality. It is ranked #9 out of 132 stocks in the B-rated Software - Application industry.
Beyond what is stated above, we’ve also rated YALA for Growth, Momentum, Stability, and Sentiment. Get all YALA 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.
DOX shares were trading at $92.66 per share on Monday morning, down $0.08 (-0.09%). Year-to-date, DOX has gained 5.43%, versus a 7.36% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
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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