The software industry is currently thriving due to technological advancements and evolving business needs. Also, global businesses are increasingly investing in cloud computing infrastructure and application development, bolstering the software sector.
So, robust software stocks DocuSign, Inc. (DOCU), Progress Software Corporation (PRGS), and Red Violet, Inc. (RDVT) could be solid buys this month. These stocks boast impressive profit margins.
Global business spending on cloud computing infrastructure is projected to surpass $1 trillion next year, fueled by the adoption of new platforms and as-a-service offerings, including artificial intelligence. Cloud services provide a scalable and accessible infrastructure, allowing Software as a Service (SaaS) providers to deliver software applications to a broad user base efficiently.
As a result, the SaaS market is anticipated to achieve a revenue of $141.40 billion this year. The industry is expected to grow at a CAGR of 5.6% by 2028, reaching $186 billion.
Additionally, the software application industry is experiencing dynamic growth propelled by the accelerating pace of digital transformation. Businesses are increasingly reliant on software applications to streamline operations, enhance productivity, and adapt to evolving market demands.
As technology continues to advance, the software application industry remains at the forefront of innovation, driving efficiency and convenience across sectors. The global application development software market is projected to grow at a CAGR of 24.3% until 2028.
On top of it, the business software market is poised for significant growth, driven by the increasing demand for high-speed data networks. Moreover, the market is driven by heightened demand in the banking, retail, and healthcare sectors.
The global business software market is expected to grow at a CAGR of 11.2% from $580.06 billion this year to $987.61 billion by 2028.
Given the industry tailwinds, it's time to examine the fundamentals of the top three stocks in the software industry.
DocuSign, Inc. (DOCU)
DOCU provides electronic signature solutions in the United States and internationally. The company offers a DocuSign e-signature solution that enables the sending and signing of agreements on various devices. It provides Contract Lifecycle Management (CLM), Gen for Salesforce, Identify, Standards-Based Signatures, and Monitor.
DOCU’s trailing-12-month levered FCF margin of 36.42% is 326.9% higher than the 8.53% industry average. Its 79.38% trailing-12-month gross profit margin is 62.4% higher than the 48.88% industry average.
On November 30, DOCU obtained StateRAMP authorization, reinforcing its commitment to providing secure and smooth agreement experiences for state and local governments. StateRAMP establishes cloud security standards, educates on best practices, and verifies the security of vendors handling government data.
This authorization, alongside DOCU's FedRAMP Moderate approval, enhances data security for state and local governments, ensuring efficient service delivery while maintaining a robust security posture.
On November 14, DOCU introduced WhatsApp Delivery, enabling users to expedite deal closures through the widely used messaging platform. This expansion allows customers to connect with signers effortlessly, with the DocuSign eSignature integration on WhatsApp providing real-time notifications linked directly to agreements for swift and secure signing.
DOCU’s total revenues for the third quarter ended October 31, 2023, rose 8.5% year-over-year to $700.42 million. Its non-GAAP income from operations increased 27.4% year-over-year to $187.41 million. Its non-GAAP net income rose 38.7% year-over-year to $163.80 million. Also, its non-GAAP EPS came in at $0.79, representing an increase of 38.6% year-over-year. Its net cash provided by operating activities increased 402.8% over the prior-year quarter to $264.18 million.
Analysts expect DOCU’s revenues for the fiscal fourth quarter ending January 31, 2024, to increase 6% year-over-year to $695 million. Its EPS is likely to be $0.64 in the same quarter. It surpassed the consensus EPS and revenue estimates in each of the trailing four quarters, which is remarkable.
Over the past three months, the stock has gained 43.3% to close the last trading session at 60.473.
DOCU’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 Value and Quality. It is ranked #3 out of 21 stocks in the A-rated Software – SAAS industry.
To access DOCU’s additional Momentum, Stability, and Sentiment ratings, click here.
Progress Software Corporation (PRGS)
PRGS develops, deploys, and manages business applications. OpenEdge, Sitefinity, Kemp LoadMaster, Developer Tools, and DataDirect Connect are some of the company’s applications. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.
PRGS’ trailing-12-month EBIT and EBITDA margins of 20.12% and 34.10% are 312.3% and 268.7% higher than the industry averages of 4.88% and 9.25%, respectively.
On November 2, 2023, PRGS launched Progress Sitefinity 15, featuring enhanced generative AI (GenAI) capabilities that enable marketers to generate tailored content at scale. The update also includes the Sitefinity Integration Hub, offering no-code data connectivity with leading MarTech platforms for unified customer profiles.
The GenAI support empowers marketers to create and optimize personalized content based on real-time insights, enhancing the company's prospects.
Its annualized dividend rate of $0.70 per share translates to a dividend yield of 1.27% on the current share price. Its four-year average yield is 1.49%. PRGS’ dividend payments have grown at CAGRs of 4% over the past five years.
PRGS’ non-GAAP revenue for the third quarter ended August 31, 2023, increased 14.8% year-over-year to $175.78 million. Its non-GAAP income from operations increased 13.8% year-over-year to $68.39 million. Its non-GAAP net income rose 10.6% year-over-year to $48.75 million. Also, its non-GAAP earnings per share came in at $1.08, representing an 8% year-over-year increase.
Street expects PRGS’s revenue to rise 9.4% year-over-year to $174.12 million in the fiscal fourth quarter ended November 2023. It exceeded EPS estimates in each of the trailing four quarters.
The stock has gained 9.6% over the past year to close the last trading session at $54.98.
PRGS’s POWR Ratings reflect its steady outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system.
PRGS has a B grade for Value and Quality. It is ranked #22 within the 131-stock Software - Application industry.
In addition to the POWR Ratings stated above, one can access PRGS’ additional PRGS’s Growth, Momentum, Stability, and Sentiment ratings here.
Red Violet, Inc. (RDVT)
RDVT specializes in proprietary technologies and applies analytical capabilities to provide identity intelligence. It delivers idiCORE, an investigative solution addressing diverse organizational challenges, and offers FOREWARN, an app-based solution that equips users with instant knowledge before engaging face-to-face with consumers.
RDVT’s trailing-12-month gross profit and net income margins of 78.04% and 22.43% are 59.6% and 856.1% higher than the industry averages of 48.88% and 2.35%.
On December 20, RDVT repurchased an additional $5 million of the company's common stock, in addition to the existing $5 million repurchase program, of which about $500,000 remained authorized as of December 19, 2023.
Since November 3, 2023, the company has repurchased 93,814 shares at an average price of $19.97. Since the authorization of the previous $5 million repurchase program on May 2, 2022, the company has bought back $4.05 million of its common stock at an average price of $18.78. The decision reflects confidence in the business, pipeline, and ability to generate strong free cash flow.
On October 27, RDVT’s subsidiary FOREWARN, LLC, a prominent provider of real-time information solutions for real estate agents, announced a collaboration with the Georgia Multiple Listing Service (GAMLS). This partnership allows GAMLS to offer FOREWARN® services to its 52,000+ MLS subscribers across Georgia, enhancing proactive safety measures for real estate agents.
RDVT’s revenue increased 5.4% year-over-year to $15.84 million during the fiscal third quarter that ended September 30, 2023. Its adjusted EBITDA grew 3.4% from the prior year’s period to $5.36 million. Also, the company’s net income and EPS came in at $12.50 million and $0.87, up 453.4% and 443.8% year-over-year, respectively.
RDVT has gained 7.3% over the past year to close its last trading session at $20.50.
RDVT's optimistic outlook is evident in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system.
RDVT has a B grade for Quality and Stability. It is ranked #14 out of 43 in the B-rated Software – Business industry.
Click here to access the additional RDVT ratings (Growth, Value, Momentum and Sentiment).
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.
DOCU shares were trading at $60.63 per share on Friday morning, up $0.16 (+0.26%). Year-to-date, DOCU has gained 9.40%, versus a 26.06% 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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