The software industry is expanding significantly due to digital transformation initiatives among businesses across multiple sectors to stay competitive and enhance operational efficiency. Further, the shift to cloud platforms has increased spending on SaaS solutions and cloud-based software.
Given these industry’s tailwinds, investors could consider buying fundamentally sound software stocks Salesforce, Inc. (CRM), ServiceNow, Inc. (NOW), and The Sage Group plc (SGPYY) for substantial gains.
Growing digitalization worldwide, a shift to cloud-based solutions, multichannel integration, and the adoption of advanced technologies like AI, IoT, big data, and metaverse are primary driving forces in the business software industry. The global business software market is estimated to reach $1.10 trillion by 2029, growing at a CAGR of 11.2%.
Besides, the high demand for various software applications to speed up and simplify business operations using advanced IoT technology and cloud-based solutions is expected to support the application software market’s growth. The demand for application development software will likely gain traction over the coming years, owing to the need for scalable and customized software.
The global application development software market is projected to grow at a CAGR of 24.3% until 2028.
Furthermore, the adoption of public cloud services among enterprises is a significant factor expected to drive the software as a service (SaaS) market growth. Considering the high cost of on-premises software deployment, many enterprises are shifting toward the SaaS model. The global SaaS market size is projected to grow at a CAGR of 13.9% by 2032.
Considering these encouraging trends, let’s take a look at the fundamentals of the three best software industry stock picks mentioned below.
Salesforce, Inc. (CRM)
CRM provides Customer Relationship Management (CRM) technology that brings companies and customers together worldwide. The company's service includes sales to store data, monitor leads and progress, forecast opportunities, gain insights through analytics and AI, and deliver quotes, contracts, and invoices.
On March 6, 2024, CRM announced the launch of Einstein 1 Studio, a set of low-code tools that enables Salesforce admins and developers to customize Einstein Copilot, the conversational AI assistant for CRM, and seamlessly embed AI across any app for every customer and employee experience. The new launch is expected to drive the company’s sales and growth.
CRM’s trailing-12-month gross profit margin of 75.50% is 56.3% higher than the industry average of 48.29%. Also, the stock’s trailing-12-month EBITDA margin and net income margin of 26.45% and 11.87% are significantly higher than the industry averages of 9.51% and 2.78%, respectively.
During the fourth quarter that ended January 31, 2024, CRM’s total revenues increased 10.9% year-over-year to $9.29 billion. The company’s non-GAAP net income and non-GAAP EPS grew 35.5% and 36.3% from the previous year’s quarter to $2.25 billion and $2.29, respectively.
Analysts expect CRM’s revenue for the first quarter (ending April 2024) to increase 10.9% year-over-year to $9.15 billion. Street expects the company’s EPS to grow 40.2% year-over-year to $2.37 for the ongoing quarter. Moreover, CRM has surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive.
CRM’s stock has soared 44% over the past nine months to close the last trading session at $301.73.
CRM’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
The stock has a B grade for Growth and Quality. CRM is ranked #16 in the 132-stock B-rated Software - Application industry.
Beyond what is stated above, we’ve also rated CRM for Sentiment, Value, Stability, and Momentum. Get all CRM ratings here.
ServiceNow, Inc. (NOW)
NOW provides end-to-end intelligent workflow automation platform solutions for digital businesses in North America, Europe, the Middle East and Africa, and Asia Pacific. The company operates the Now platform for end-to-end digital transformation, AI, robotic process automation, performance analytics, and collaboration and development tools.
On March 20, 2024, NOW furthered its generative AI (GenAI) leadership with new capabilities in its Washington, D.C. platform release. The new features enhance the Now Assist GenAI experiences, which offer responsible, intelligent automation embedded into the ServiceNow platform.
“ServiceNow leads the industry with secure, responsible generative AI solutions, all on a single platform for end-to-end business transformation. With the latest innovations in the Washington, D.C. release, we are bringing generative AI to new use cases and personas so we can multiply its impact for every industry,” said Jon Sigler, senior vice president of Platform at ServiceNow.
NOW’s trailing-12-month gross profit margin of 78.59% is 62.7% higher than the industry average of 48.29%. Also, the stock’s trailing-12-month net income margin of 19.30% is 594.8% higher than the industry average of 2.78%. Its trailing-12-month EBIT margin of 8.49% is 74.8% higher than the industry average of 4.86%.
NOW’s total revenues increased 25.8% year-over-year to $2.44 billion during the fourth quarter that ended December 31, 2023. Its net income rose 96.7% year-over-year to $295 million. The company’s net income per share grew 93.2% from the year-ago value to $1.44.
In addition, the company’s cash and cash equivalents were $1.90 billion as of December 31, 2023, compared to $1.47 billion as of December 31, 2022.
Analysts expect NOW’s revenue and EPS for the fiscal first quarter (ended March 2024) to increase 23.5% and 32.2% year-over-year to $2.59 billion and $3.13, respectively. Additionally, the company has surpassed the consensus EPS estimates in each of the trailing four quarters, which is remarkable.
Shares of NOW have gained 66% over the past year to close the last trading session at $785.60.
NOW’s POWR Ratings reflect bright prospects. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
NOW has a B grade for Growth and a B in Sentiment and Quality. It is ranked #12 in the B-rated Software - Business industry.
In addition to the POWR Ratings highlighted above, one can access NOW’s ratings for Value, Momentum, and Stability here.
The Sage Group plc (SGPYY)
Based in Newcastle upon Tyne, the United Kingdom, SGPYY provides technology solutions and services for small and medium businesses in the U.S., the United Kingdom, France, and internationally. It offers cloud-native solutions, such as Sage Intacct, Sage People, Sage 200, Sage X3, Sage Accounting, Sage Payroll, and Sage HR.
On February 28, 2024, SGPYY expanded its construction cloud portfolio to serve customers better. Sage has a history of trust and innovation in cloud and construction technology, serving 48% of ENR Top 400 Contractors and 53% of BD+C Giants Top 115 Contractors.
On February 27, SGPYY signed a strategic collaboration agreement with Amazon Web Services (AWS) to enable AI-powered solutions. This partnership will significantly enhance how SMBs optimize their operations with generative AI and tackle environmental responsibilities, with Sage Earth now available in AWS Marketplace.
SGPYY’s trailing-12-month gross profit margin of 92.86% is 92.3% higher than the industry average of 48.29%. Likewise, the stock’s trailing-12-month net income margin of 9.66% is 247.9% higher than the industry average of 2.78%.
SGPYY’s underlying total revenue for the fiscal year ended September 30, 2023, increased 12.1% year-over-year to £2.18 billion ($2.76 billion). Its underlying operating profit rose 21% from the previous year to £456 million ($577.10 million). The company’s EBITDA increased 15.9% year-over-year to £553 million ($699.86 million).
Also, the company’s underlying EPS came in at 32.25p, representing an increase of 25.3% from the prior year.
Street expects SGPYY’s revenue for the fiscal year (September 2024) to increase 10.2% year-over-year to $3.01 billion. Similarly, the consensus revenue estimate of $3.29 billion for the fiscal year 2025 represents a 9.5% increase year-over-year.
Shares of SGPYY have gained 62.2% over the past year to close the last trading session at $62.44.
SGPYY’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which equates to a Buy in our proprietary rating system.
SGPYY has an A grade for Stability and a B in Growth and Quality. It is ranked #4 out of 19 stocks in the B-rated Software - SAAS industry.
Click here to access the additional SGPYY ratings (Sentiment, Value, and Momentum).
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CRM shares were trading at $300.64 per share on Tuesday morning, down $1.09 (-0.36%). Year-to-date, CRM has gained 14.40%, versus a 8.95% rise in the benchmark S&P 500 index during the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.
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