The software sector is poised for significant growth, driven by the growing demand for digitalizing business operations, the rising popularity of cloud-based and customized solutions, and the integration of advanced technologies like generative AI.
Given this backdrop, investors could consider buying quality software stocks such as GoDaddy Inc. (GDDY), DocuSign, Inc. (DOCU), and Yalla Group Limited (YALA). Before diving deeper into the fundamentals of these stocks, let’s discuss what’s shaping the software industry’s prospects.
The rapid incorporation of generative AI and the growing investments in IT services are expected to boost IT spending. According to Gartner, worldwide IT spending will rise 8% from last year to $5.06 trillion in 2024. They predict global IT spending to exceed $8 trillion well before the end of the decade. Software spending is expected to rise 13.9% year-over-year to $1.04 trillion this year.
Ongoing digitalization initiatives have driven the employment of business software applications. They enable businesses to function better by smoothening operations, streamlining processes, making better decisions, and managing customers better. The business software market is estimated to reach $1.10 trillion by 2029, growing at an 11.2% CAGR.
With the rapid adoption of cloud-based services, businesses worldwide are shifting to cloud-based software applications, which offer cost savings, flexibility, and scalability. The ease of deployment and reliability of cloud-based applications has driven the Software-as-a-Service (SaaS) market. The global SaaS market is projected to grow at a CAGR of 18.4%, reaching $1.23 trillion by 2032.
Incorporating advanced IoT and cloud-based solutions to amplify and streamline business operations and the rise of low-code platforms drive the demand for software applications. Thus, the global application development software revenue is predicted to reach $733.50 billion by 2028, exhibiting a CAGR of 24.3%.
In light of these encouraging trends, let's examine the fundamentals of the three software stock picks.
GoDaddy Inc. (GDDY)
GDDY designs and develops cloud-based products in the U.S. and internationally. It operates through two segments: Applications and Commerce and Core Platform.
On April 30, 2024, GDDY announced the integration of Gmail and Microsoft 365 emails into its Conversations feature, providing small businesses with a unified inbox to manage all communication channels conveniently.
This enhancement aims to help businesses track conversations across platforms, respond faster, and enhance customer satisfaction by reducing time spent switching between email platforms.
On April 17, 2024, GDDY announced a partnership with Upwork to enhance opportunities for web designers and developers. As Upwork's first web presence partner, GDDY will connect freelancers with businesses seeking specialized web services, offering vetted experts and exclusive deals on GDDY’s products.
GDDY’s trailing-12-month net income margin of 39.96% is considerably higher than the industry average of 2.37%. Likewise, its trailing-12-month Return on Common Equity and Return on Total Assets of 6,077.33% and 21.67% are significantly higher than the industry averages of 3.14% and 1.33%, respectively.
GDDY’s total revenue and operating income for the fiscal first quarter that ended March 31, 2024, increased 7% and 148.4% year-over-year to $1.11 billion and $175.90 million, respectively. Its NEBITDA rose 25.4% from the year-ago quarter to $313 million.
Moreover, its net income attributable to GDDY stood at $401.50 million, up 748.8% over the prior-year quarter. Also, its net income attributable to GDDY per share of class A common stock grew 820% year-over-year to $2.76.
Analysts expect GDDY’s revenue and EPS for the quarter ending June 30, 2024, to increase 6.2% and 100.3% year-over-year to $1.11 billion and $1.08, respectively. The company surpassed the Street EPS estimates in three of the trailing four quarters, which is impressive. Over the past year, the stock has gained 89.6%, closing the last trading session at $133.57.
GDDY’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 are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
GDDY has an A grade for Sentiment and a B for Growth and Quality. It is ranked #4 out of 43 stocks in the B-rated Software - Business industry. Beyond what we stated above, we have also rated GDDY for Value, Momentum, and Stability. Get all the GDDY ratings here.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the U.S. and internationally. It enables an agreement to be signed electronically on various devices virtually anywhere in the world.
On May 6, 2024, DOCU announced an agreement to acquire Lexion for $165 million in cash. DOCU aims to enhance its Intelligent Agreement Management (IAM) platform with Lexion's advanced AI capabilities, facilitating faster contract reviews, insights generation, and process automation for businesses worldwide.
On April 11, 2024, DOCU introduced Docusign IAM, an AI-powered Intelligent Agreement Management platform aiming to revolutionize agreement handling for businesses, addressing the inefficiencies of outdated systems and processes, and helping to unlock valuable insights, streamline workflows, and enhance overall productivity.
DOCU’s trailing-12-month asset turnover ratio of 0.92x is 51.4% higher than the industry average of 0.61x. Similarly, its trailing-12-month gross profit margin and levered FCF margin of 80.40% and 40.32% are 63.9% and 298.1% higher than the industry averages of 49.06% and 10.13%, respectively.
For the fiscal fourth quarter that ended January 31, 2024, DOCU’s total revenue and non-GAAP gross profit stood at $712.39 million and $587.38 million, up 8% and 7.9% year-over-year, respectively. For the same quarter, its non-GAAP net income and net income per share increased 19.5% and 16.9% from the year-ago quarter to $159.25 million and $0.76, respectively.
Street expects DOCU’s revenue and EPS for the quarter that ended April 30, 2024, to increase 6.9% and 9.8% year-over-year to $706.99 million and $0.79, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters. DOCU’s stock has gained 45.3% over the past six months, closing the last trading session at $59.76.
DOCU’s POWR Ratings reflect its positive prospects. It has an overall A rating, equating to a Strong Buy in our proprietary rating system.
DOCU has an A grade for Growth and Quality and a B for Value. Within the A-rated Software - SAAS industry, it is ranked first out of 18 stocks. Click here for the additional POWR Ratings of DOCU (Momentum, Stability, and Sentiment).
Yalla Group Limited (YALA)
Headquartered in Dubai, the United Arab Emirates, YALA operates a social networking and gaming platform primarily in the Middle East and North Africa region. It provides mobile applications, including Yalla, a voice-centric group chat platform, and Yalla Ludo, a casual gaming application.
YALA’s trailing-12-month EBIT margin of 30.22% is 264.1% higher than the industry average of 8.30%. Its trailing-12-month Return on Common Equity and Return on Total Capital of 23.28% and 11.97% are 722.7% and 245.2% higher than the industry averages of 2.83% and 3.47%, respectively.
YALA’s revenues for the fiscal fourth quarter that ended December 31, 2023, increased 7.7% year-over-year to $80.93 million. The company’s non-GAAP operating income rose 34.1% from the year-ago value to $27.07 million. YALA’s non-GAAP net income attributable to YALA’s shareholders stood at $34.97 million or $0.19 per share, up 59.4% and 58.3% over the prior-year quarter, respectively.
For the quarter that ended March 31, 2024, YALA’s revenue is expected to increase 6.2% year-over-year to $78.06 million. Its EPS for fiscal 2025 is expected to grow 71.7% year-over-year to $0.79. It surpassed consensus revenue estimates in each of the trailing four quarters. The stock has gained 29.1% over the past year to close the last trading session at $4.83.
YALA’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.
It has a B grade for Growth, Value, Stability, Sentiment, and Quality. It is ranked #6 out of 136 stocks in the Software - Application industry. To see YALA’s rating for Momentum, click here.
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GDDY shares were trading at $132.39 per share on Tuesday morning, down $1.18 (-0.88%). Year-to-date, GDDY has gained 24.71%, versus a 9.91% rise in the benchmark S&P 500 index during the same period.
About the Author: Neha Panjwani
From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.
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