Despite macroeconomic challenges, the software industry is growing thanks to the increased digital transformation initiatives and the widespread adoption of software applications across enterprises.
Considering these factors, it could be wise to buy fundamentally strong software stocks: Open Text Corporation (OTEX), Dassault Systèmes SE (DASTY), and Dynatrace, Inc. (DT), currently trading under $50.
Before delving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
The software industry is experiencing growth amid the widespread adoption of cloud-based software applications. These applications offer numerous advantages over traditional software, driving the industry’s significant expansion.
According to Gartner, the industry is experiencing significant growth, with a projected software spending of $922.75 billion in 2023, representing a 13.5% year-over-year increase. This growth is expected to be further propelled by integrating generative AI into software applications.
As per a Goldman Sachs report, the integration of generative AI into software is anticipated to boost customer spending on software, with generative AI contributing an additional $150 billion to the current $685 billion global software market.
The global end-user spending on public cloud services is forecasted to grow 21.7% year-over-year to $597.30 billion in 2023. Software-as-a-Service (SaaS) spending is projected to grow 17.9% year-over-year to $197 billion this year. Investors’ interest in software stocks can be gauged from the iShares Expanded Tech-Software Sector ETF’s (IGV) 44.7% returns over the past year.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software – Application industry picks, beginning with the third choice.
Stock #3: Open Text Corporation (OTEX)
Headquartered in Waterloo, Canada, OTEX provides information management software and solutions. The company offers content services, and operates an experience cloud platform.
On October 10, 2023, OTEX introduced its unified Partner Network, combining its partner ecosystems with Micro Focus, serving over 30,000 partners worldwide. This program offers standardized support and opportunities, delivering top-notch solutions to enterprise customers.
Sandy Ono, Chief Marketing Officer at OTEX, predicts that the OTEX Partner Network will thrive as a collaborative ecosystem driven by R&D investments, enabling partners to enhance customer data and information flows with AI, bringing cloud and AI to new heights.
On August 24, 2023, OTEX announced an expanded partnership with Google Cloud to provide AI-powered integrations, enabling organizations to leverage their data on Google Cloud for competitive advantage. The collaboration brings generative AI apps, enhanced Google Workspace teamwork, cloud migration support, and AI solutions for customer support, communication, software development, and sales enablement.
OTEX also announced a smart workspace for enterprises in collaboration with Google Workspace. They’re also teaming up with Tata Consultancy Services (TCS) to implement customized Google Workspace and Core Content solutions for clients.
In terms of the trailing-12-month EBITDA margin, OTEX’s 24.80% is 170.4% higher than the 9.17% industry average. Its 40.73% trailing-12-month levered FCF margin is 451.9% higher than the 7.38% industry average. Likewise, the stock’s 3.35% trailing-12-month net income margin is 58.7% higher than the 2.11% industry average.
OTEX’s total revenues for the fiscal fourth quarter ended June 30, 2023, increased 65.2% year-over-year to $1.49 billion. Its non-GAAP operating income rose 48.4% from the year-ago quarter to $431.74 million.
In addition, non-GAAP net income rose 14.1% year-over-year to $245.84 million. Its non-GAAP earnings per share attributable to OTEX came in at $0.91, representing an increase of 13.8% year-over-year. Also, its adjusted EBITDA increased 47.6% year-over-year $462.85 million.
Analysts expect OTEX’s EPS and revenues for the quarter ended September 30, 2023, to increase 17.6% and 64.5% year-over-year, $0.91 and $1.40 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 41.3% to close the last trading session at $36.03.
OTEX’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
It has a B grade for Growth and Value. Within the Software - Application industry, it is ranked #37 out of 134 stocks. To see OTEX’s Momentum, Stability, Sentiment and Quality ratings, click here.
Stock #2: Dassault Systèmes SE (DASTY)
Headquartered in Vélizy-Villacoublay, France, DASTY provides software solutions and services worldwide. It operates in three segments: Manufacturing Industries, Life Sciences & Healthcare, and Infrastructure & Cities.
On June 20, 2023, DASTY and Dassault Aviation announced a long-term collaboration to develop a next-generation fighter using the 3DEXPERIENCE platform on a highly secure cloud environment, ensuring European autonomy and sovereignty in defense.
Bernard Charlès, Chairman and CEO at DASTY, commented on the need for defense programs to address societal challenges and the significance of their partnership with Dassault Aviation in establishing a European sovereign cloud with high-security standards, which can be extended to other industries such as healthcare and public services.
On June 15, 2023, DASTY announced that Jindal Stainless Limited (JSL), a leading stainless-steel manufacturer in India, will use their solutions to enhance production planning and execution processes to meet customer demand more effectively.
In terms of the trailing-12-month gross profit margin, DASTY’s 83.64% is 70.4% higher than the 49.10% industry average. Its 14.10% trailing-12-month Return on Common Equity is significantly higher than the 1.20% industry average. Likewise, the stock’s 17.48% trailing-12-month net income margin is 727.3% higher than the 2.11% industry average.
For the fiscal second quarter that ended June 30, 2023, DASTY’s total revenue increased 4.7% year-over-year to €1.45 billion ($1.54 billion). Its non-IFRS operating income increased 1.5% year-over-year to €448.90 million ($476.23 million).
Moreover, its net income attributable to shareholders (non-IFRS) rose 7.1% year-over-year to €371.60 million ($394.22 million). Also, its earnings per share (non-IFRS) rose 7.7% year-over-year to €0.28.
For the quarter ended September 30, 2023, DASTY’s EPS and revenue are expected to increase 18.3% and 8.9% year-over-year to $0.19 and $1.51 billion, respectively. It surpassed the consensus EPS estimates in three of the trailing four quarters. Over the past year, the stock has gained 20.8% to close the last trading session at $39.40.
It’s no surprise that DASTY has an overall rating of B, which translates to a Buy in our proprietary POWR Ratings system.
It has an A grade for Quality and a B for Stability. It is ranked #32 in the same industry. In total, we rate DASTY on eight different levels. Beyond what we stated above, we also have given DASTY grades for Growth, Value, Momentum, and Sentiment. Get all the DASTY ratings here.
Stock #1: Dynatrace, Inc. (DT)
DT provides a security platform for multicloud environments. It operates a security platform, which provides application and microservices monitoring, runtime application security, infrastructure monitoring, log management and analytics, digital experience monitoring, digital business analytics, and cloud automation.
On October 5, 2023, DT announced new innovations for customers using the DT platform on Microsoft Azure, including Dynatrace Grail data lakehouse, AutomationEngine, AppEngine, and an enhanced user experience. These features will be available for Azure customers in early 2024.
Steve Tack, SVP of Product Management at DT, said, “Bringing our latest platform technologies to Microsoft Azure enables more customers and teams within organizations to harness our industry-leading AI, analytics, and automation capabilities to modernize cloud operations, expedite releases of high-quality and secure software, and ensure flawless digital experiences for their users.”
On July 31, 2023, DT announced the acquisition of Rookout, a provider of solutions for debugging running code in Kubernetes-hosted cloud-native applications. This addition will enhance code-level observability in production environments and improve collaboration across development, IT, and security teams.
DT’s CTO, Bernd Greifeneder, predicts that acquiring Rookout will accelerate the shift-left and shift-right process by providing developer-observability solutions that scale from the developer's IDE, reducing maintenance time and enabling organizations to meet enterprise governance requirements.
In terms of the trailing-12-month net income margin, DT’s 11.77% is 457% higher than the 2.11% industry average. Its 9.44% trailing-12-month Return on Common Equity is 685.3% higher than the 1.20% industry average. Likewise, the stock’s 5.28% trailing-12-month Return on Total Assets is significantly higher than the 0.37% industry average.
DT’s total revenues for the first quarter ended June 30, 2023, increased 24.5% year-over-year to $332.89 million. Its non-GAAP operating income rose 52.7% year-over-year to $92.08 million. The company’s non-GAAP net income increased 52.5% year-over-year to $79.05 million. In addition, its non-GAAP net income per share rose 50% year-over-year to $0.27
Street expects DT’s EPS and revenue for the quarter ended September 30, 2023, to increase 20.5% and 23.4% year-over-year to $0.27 and $344.56 million, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 40.7% to close the last trading session at $48.18.
DT’s strong prospects are reflected in its POWR Ratings. It has an overall rating of B, equating to a Buy in our proprietary rating system.
It has a B grade for Growth, Sentiment, and Quality. It is ranked #30 in the Software - Application industry. Click here to see DT’s Value, Momentum and Stability ratings.
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.
DASTY shares were trading at $38.85 per share on Thursday afternoon, down $0.55 (-1.40%). Year-to-date, DASTY has gained 9.15%, versus a 14.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Abhishek Bhuyan
Abhishek embarked on his professional journey as a financial journalist due to his keen interest in discerning the fundamental factors that influence the future performance of financial instruments.
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