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2 Under-the-Radar Software Stocks with Buy Ratings: PDF Solutions and Karooooo

The software industry is projected to grow tremendously in the coming months, thanks to strong demand driven by the continuing digital transformation, remote working models, accelerated automation across various industries, and increased corporate spending. Thus, we think it could be profitable to invest in fundamentally solid software companies PDF Solutions (PDFS) and Karooooo (KARO). Read on.

The stocks of software companies experienced their worst sell-off earlier this year since the pandemic-driven rout in March 2020.  However, the U.S. indexes have rallied over the past two weeks. Because the economy is mending, the software sector is expected to grow significantly amid robust demand. The digital transformation of businesses, remote working arrangements, and automation across industries including manufacturing, healthcare, retail, and transportation are the contributing factors to sustained demand in the tech sector. Furthermore, an increase in corporate spending on digital transformation, cloud computing, big data analytics, and other tech areas is expected to drive the growth of software stocks.

The software sector’s revenue is expected to reach $608.7 billion by 2022 and $806.2 billion by 2027, growing at a 5.8% CAGR. Approximately $303.10 billion of the worldwide revenue is estimated to be generated in the U.S. in 2022. Investors’ bullish sentiment surrounding the industry is evident from Technology Select Sector SPDR ETF’s (XLK) 7.3% gain over the past month and 14.6% gain over the past year.

Given the software industry’s impressive growth prospects, we think it could be wise to add quality software stocks PDF Solutions, Inc. (PDFS) and Karooooo Ltd. (KARO) to one’s portfolio.

Click here to check out our Software Industry Report for 2022

PDF Solutions, Inc. (PDFS)

PDFS provides proprietary software and physical, intellectual property products in the U.S., China, Japan, Taiwan, and internationally. The Santa Clara, Calif.-based company offers products for integrated circuit designs, electrical measurement hardware tools, and proven methodologies. PDFS sells its products and services through direct sales, service teams, and strategic alliances with manufacturers, fabless semiconductor companies, and system houses.

In February, PDFS announced that GigaDevice, a global provider of semiconductors for memory, microcontrollers, and sensors, had selected Exensio® Fabless from PDFS for advanced analytics, production monitoring, and reporting across its semiconductor products. The order from GigaDevice is expected to boost PDFS’ revenue streams and growth.

In its fiscal 2021 fourth quarter, ended Dec. 31, 2021, PDFS' total revenues increased 33.6% year-over-year to $29.89 million. Its gross profit improved 42.4% from the prior-year period to $19.49 million. PDFS’ net income rose 321.1% year-over-year to $2.80 million. And the company's net income per share increased 333.3% year-over-year to $0.07.

The $31.60 million consensus revenue estimate for its fiscal 2022 first quarter, ended March 31, 2022, represents 30.8% growth from the same period in 2021. The $0.06 consensus EPS estimate for the to-be-reported quarter indicates a 220% year-over-year rise.

The stock has gained 16.8% in price over the past six months and 38.5% over the past year. PDFS closed Friday's trading session at $27.18.

PDFS' POWR Ratings reflect this promising outlook. It has an overall B grade, which equates to Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

PDFS has an A for Sentiment. It has a B grade for Growth. And within the Software - Application industry, it is ranked #26 of 160 stocks.

To see additional POWR Ratings (Stability, Value, Quality, and Momentum) for PDFS, click here.

Karooooo Ltd. (KARO)

Headquartered in Singapore, KARO provides a mobility software-as-a-service (SaaS) platform for connected vehicles and other assets in Africa, Europe, the Asia-Pacific, the Middle East, and the U.S. The company also provides cost management and administration capability services, asset tracking and recovery services, and specialist mobility solutions.

KARO’s revenue increased 22.2% year-over-year to ZAR719.54 million ($49.10 million) in its fiscal 2022 third quarter, ended Nov. 30, 2021. KARO’s adjusted gross profit improved 11.2% year-over-year to ZAR469.66 million ($32.05 million). Its adjusted EBITDA rose 13.2% year-over-year to ZAR341.53 million ($23.30 million). Its adjusted profit for the period increased 11.6% from the year-ago value to ZAR148.31 million ($10.12 million), and the company’s adjusted earnings per share rose 9.8% year-over-year to ZAR4.72.

Analysts expect KARO's revenue for its fiscal year 2022 fourth quarter, ended Feb. 28, 2022, to come in at $48.69 million, representing a 12.3% rise year-over-year. The Street expects the company's EPS for the to-be-reported quarter to come in at $0.31, representing a 6.3% increase year-over-year.

Over the past five days, the stock improved 5% in price and closed Friday’s trading session at $29.90.

KARO's strong fundamentals are reflected in its POWR Ratings. The stock has an overall grade of A, which equates to Strong Buy in our proprietary rating system.

KARO has an A grade for Quality and Sentiment. It has a B grade for Value. Within the Software - Application industry, it is ranked #6 of 160 stocks.

To see additional POWR Ratings (Growth, Momentum, and Stability) for KARO, click here.

Click here to check out our Software Industry Report for 2022

PDFS shares were trading at $26.95 per share on Monday afternoon, down $0.23 (-0.85%). Year-to-date, PDFS has declined -15.22%, versus a -3.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.


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