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3 Software Stocks with Breakout Potential

The software industry holds a promising long-term outlook, driven by the increasing adoption of cloud and AI solutions. So, investors might consider fundamentally strong software stocks Atlassian (TEAM), Manhattan Associates (MANH), and Zedge (ZDGE), which look poised for steady returns. Read on...

Amidst increased reliance on software services and widespread adoption of digital solutions in a multitude of industries, the software industry is booming. So, quality software stocks Atlassian Corporation (TEAM), Manhattan Associates, Inc. (MANH), and Zedge, Inc. (ZDGE) with breakout potential could be wise investments.

The software industry has experienced remarkable growth, primarily fueled by significant hardware, networking, and computing technological advancements. According to the latest forecast by Gartner, worldwide IT spending is projected to total $5.10 trillion in 2024, an increase of 8% from this year.

Notably, the software sector is poised for double-digit growth, primarily fueled by increased investment in cloud computing. Public cloud services are forecasted to surge by 20.4%, driven by both cloud vendor price hikes and greater utilization.

In addition, the escalating demand for cloud deployment across businesses of all sizes is fueling the global application development software market. Software development has revolutionized numerous sectors, from boosting military capabilities and improving healthcare to enhancing business operations and promoting safety standards.

Thus, the application development software market is expected to reach $1.04 trillion by 2030, increasing at a 25.5% CAGR.

Furthermore, with the global advancement of technology, companies in diverse industries progressively incorporate artificial intelligence software to enhance their performance and gain deeper insights into their operations.

The AI software market is expected to reach approximately $1.09 trillion by 2032, expanding at a CAGR of 23%.

Considering these conducive trends, let’s analyze the fundamental aspects of the three Software – Application industry picks, beginning with the third choice.

Stock #3: Atlassian Corporation (TEAM)

Headquartered in Sydney, Australia, TEAM designs, develops, licenses, and maintains various software products globally. The company’s offerings include Jira Software, Jira Work Management, and Confluence.

TEAM’s trailing-12-month gross profit margin of 82.33% is 66.6% higher than the 49.41% industry average. Its trailing-12-month levered FCF margin of 29.73% is 303.3% higher than the 7.37% industry average.

On October 12, 2023, TEAM agreed to acquire Loom, a popular video messaging platform. The integration of Loom's async video capabilities into TEAM's products will enhance team communication and productivity, enabling various teams to use video for different purposes, from issue logging to employee onboarding.

This acquisition will also leverage AI investments from both companies to provide seamless transitions between video, transcripts, summaries, documents, and workflows.

TEAM’s total revenue for the fourth quarter that ended June 30, 2023, increased 23.6% year-over-year to $939.10 million. Its non-GAAP operating income rose 88.4% year-over-year to $202.76 million. The company’s non-GAAP net income rose 114.8% year-over-year to $147.02 million and net income per share increased 111.1% year-over-year to $0.57.

In the to-be-announced quarter that ended September 2023, the company anticipates robust cloud revenue growth year-over-year, ranging from 25% to 30%. The gross margin is expected to be approximately 83.5% on a non-GAAP basis, highlighting healthy profitability.

TEAM’s EPS and revenue are expected to increase 49.1% and 19.6% year-over-year to $0.54 and $965.34 million in the fiscal 2024 first quarter ended September 2023. It surpassed the consensus revenue estimates in each of the trailing four quarters, which is impressive.

The stock has gained 40.4% year-to-date to close the last trading session at $180.64.

TEAM’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted optimally.

It has an A grade for Growth and a B for Sentiment and Quality. It is ranked #38 in the 131-stock Software – Application industry.

Beyond what is stated above, we also have given TEAM grades for Value, Momentum, and Stability. Get all the TEAM ratings here.

Stock #2: Manhattan Associates, Inc. (MANH)

MANH develops, sells, deploys, services, and maintains software solutions to manage supply chains, inventory, and omnichannel operations.

MANH’s trailing-12-month net income and EBIT margins of 18.65% and 22.03% are 816.9% and 348.5% higher than the 2.03% and 4.91% industry average.

On October 19, MANH announced that Tiger Distribution & Logistics Company Limited (TSDC) significantly improved its distribution center operations by implementing Manhattan SCALE. This implementation led to a 20% boost in warehouse efficiency without the need for additional staff.

On September 18, MANH announced that Duluth Trading Company, a well-known retailer of casualwear, workwear, and accessories, had effectively deployed Manhattan Active Warehouse Management at its new distribution center in Adairsville, Georgia.

To sum it up, these announcements not only showcase MANH as a successful provider of advanced technology solutions that boost operational efficiency for businesses like TSDC and Duluth Trading Company but also strengthen its position in the warehouse and logistics management software industry.

MANH’s total revenue increased 20.4% year-over-year to $238.44 million in the fiscal third quarter that ended September 30, 2023. Its adjusted operating income rose 41.3% from the previous-year quarter to $72.48 million.

The company’s adjusted net income increased 55.5% year-over-year to $65.20 million and adjusted EPS increased 59.1% year-over-year to $1.05.

For the fiscal year 2023, MANH anticipates total revenue between $912 million and $916 million, representing a 19% growth. Adjusted operating margin is expected to be within 28.9% to 29.1% and an adjusted EPS ranging from $3.51 to $3.53 is estimated.

Analysts expect MANH’s EPS and revenue to rise 27.6% and 18.9% year-over-year to $3.52 and $911.87 million in the fiscal year 2023. Also, it has surpassed EPS and revenue estimates in each of the trailing four quarters, which is impressive.

Shares of MANH soared 60.6% year-to-date to close the last trading session at $194.98.

MANH’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system.

The stock has an A grade for Quality and a B in Sentiment. It is ranked #37 in the same industry.

To access MANH’s additional ratings for Growth, Value, Stability, and Momentum, click here.

Stock #1: Zedge, Inc. (ZDGE)

ZDGE builds digital marketplaces and games around content that people use to express themselves. The Company monetizes its user base through advertising, subscriptions, and a virtual token-based economy.

ZDGE’s trailing-12-month gross profit margin of 91.77% is 87.7% higher than the 48.90% industry average. Its trailing-12-month asset turnover ratio of 0.54x is 11% higher than the industry average of 0.48x.

During the fiscal year that ended July 31, 2023, ZDGE’s revenue increased 2.6% year-over-year to $27.20 million. The company reported adjusted EBITDA of $5.70 million.

Its total current assets came in at $21.58 million for the year, compared to $19.89 million in the previous year. Also, its total current liabilities came in at $5.76 million, compared to $8.66 million in the previous year.

Street expects ZDGE’s revenue to rise 5.1% year-over-year to 28.63 million for the year ending July 2024. Its EPS is expected to come in at $0.05 for the current year. It surpassed revenue estimates in three of four trailing quarters.

The stock surged 9.1% year-to-date to close the last trading session at $1.92.

It is no surprise that the stock has an overall rating of B, equating to a Buy in our proprietary rating system.

ZDGE also has an A grade for Value and Sentiment and a B for Quality. It is ranked #31 out of 134 stocks in the same industry.

Click here for ZDGE’s additional grades for Growth, Stability, and Momentum.

What To Do Next?

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TEAM shares were trading at $181.46 per share on Wednesday morning, up $0.82 (+0.45%). Year-to-date, TEAM has gained 41.02%, versus a 11.43% rise in the benchmark S&P 500 index during the same period.

About the Author: Kritika Sarmah

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.


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