Despite the macroeconomic challenges, the software industry is experiencing solid growth due to increased investments in digital transformation and the growing usage of software applications across various enterprises.
Considering these factors, it could be wise to buy fundamentally strong software stocks Kinaxis Inc. (KXSCF), AppLovin Corporation (APP), and Adobe Inc. (ADBE). These stocks are B (Buy) rated in our proprietary POWR Ratings system.
Before diving deeper into their fundamentals, let’s discuss why the software industry is well-positioned for growth.
The software industry has grown significantly due to the growing adoption of software-based applications that are readily available on the cloud. Such software applications offer several benefits over traditional software applications.
Driven by the high demand for technologies, like the Internet of Things (IoT) and Artificial Intelligence (AI), the application development software market’s revenue in the United States is projected to grow at a CAGR of 5.8%, reaching $113.70 billion by 2028.
According to Gartner's latest forecast, the software industry is experiencing significant growth, with software spending expected to reach $922.75 billion in 2023, marking an increase of 13.5% year-over-year. Furthermore, the industry is likely to get a boost from the integration of generative AI into software applications.
Gartner’s Distinguished VP analyst John-David Lovelock said, “Generative AI’s best channel to market is through software, hardware, and services that organizations are already using. Every year, new features are added to tech products and services as add-ons or upgrades.”
“Most enterprises will incorporate generative AI in a slow and controlled manner through upgrades to tools that are already built into IT budgets,” he added.
Considering these conducive trends, let’s analyze the fundamental aspects of the three Software - Application picks, beginning with the third choice.
Stock #3: Kinaxis Inc. (KXSCF)
Headquartered in Ottawa, Canada, KXSCF provides cloud-based subscription software for supply chain operations internationally. It offers Kinaxis, a cloud-based platform, which provides advanced planning, sales, and operations planning, supply and demand planning, inventory management, and command and control center services.
On August 22, 2023, KXSCF announced it was selected by F.I.S. - Fabbrica Italiana Sintetici S.p.A. to enable concurrent planning in its supply chain, with a focus on creating a more agile and resilient supply chain for the pharmaceutical industry.
On August 8, 2023, KXSCF announced that SUBARU CORPORATION (SUBARU) has expanded its partnership to improve demand forecasting operations, optimize inventory, and increase operational efficiency in its automotive business.
Claire Rychlewski, Global Executive VP, Sales at KXSCF said, "We are excited to continue to support SUBARU's global supply chain as the automotive industry undergoes a period of significant change. End-to-end supply chain visibility is critical to address all the uncertainties in the marketplace, and we look forward to helping SUBARU achieve its supply chain goals.”
In terms of the trailing-12-month Return on Common Equity, KXSCF’s 2.22% is 92.3% higher than the 1.16% industry average. Likewise, its 9% trailing-12-month levered FCF margin is 22.1% higher than the 7.37% industry average. Additionally, its 3.07% trailing-12-month Capex/Sales margin is 26.6% higher than the 2.42% industry average.
KXSCF’s total revenue for the fiscal second quarter ended June 30, 2023, increased 30.9% year-over-year to $105.77 million. Its gross profit increased 27.9% year-over-year to $63.67 million. The company’s cash from operating activities increased 65.7% year-over-year to $15.20 million.
Street expects KXSCF’s revenue for the quarter ended September 30, 2023, to increase 19.9% year-over-year to $107.34 million. Over the past year, the stock has gained 8% to close the last trading session at $109.40.
KXSCF’s positive outlook is 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 Stability. It is ranked #35 out of 133 stocks in the Software - Application industry. To see KXSCF’s Value, Momentum, Sentiment, and Quality ratings, click here.
Stock #2: AppLovin Corporation (APP)
APP builds a software-based platform for mobile app developers to enhance the marketing and monetization of their apps in the United States and internationally.
On August 7, 2023, APP announced new AI enhancements to AppDiscovery, their mobile user acquisition platform. These improvements offer greater automation, increased accuracy, improved campaign effectiveness, agility, and global reach for advertisers, leading to substantial growth in ROAS campaigns for partners like Peak Games.
Adam Foroughi, CEO and Co-founder at AppLovin. “Our advertisers are benefiting from increased automation and seeing better return on ad spend (ROAS) at a much larger scale. We believe this paves the way for materially more opportunity and growth for our partners over the coming years."
In terms of the trailing-12-month EBIT margin, APP’s 9.88% is 112% higher than the 4.66% industry average. Likewise, its 27.70% trailing-12-month EBITDA margin is 202.6% higher than the 9.15% industry average. Additionally, its 27.80% trailing-12-month levered FCF margin is 277% higher than the 7.37% industry average.
For the fiscal second quarter ended June 30, 2023, APP’s revenues came in at $750.17 million. Its income from operations rose 146.1% year-over-year to $131.33 million. Its net income attributable to APP stood at $80.36 million, compared to a net loss of $21.75 million in the year ago quarter.
Additionally, its net income per share attributable to APP common stockholders came in at $0.22, compared to a net loss per share of $0.06 in the year ago quarter. The company’s adjusted EBITDA came in at $333.51 million, representing an increase of 23.6% year-over-year.
For the quarter ended September 30, 2023, APP’s EPS and revenue are expected to increase 344% and 11.6% year-over-year to $0.27 and $795.92 million, respectively. The stock has gained 283% year-over-year to close the last trading session at $40.33.
APP’s strong fundamentals are reflected in its POWR Ratings. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #26 in the same industry. It has a B grade for Growth and Quality. Click here to see APP’s Value, Momentum, Stability, and Sentiment ratings.
Stock #1: Adobe Inc. (ADBE)
ADBE provides professionals, communicators, businesses, and consumers with a range of products and services to create, manage, deliver, measure, optimize, engage, and transact with content and experiences across diverse digital media formats. Its segments include Digital Media; Digital Experience; and Publishing and Advertising.
On March 21, 2023, ADBE introduced Adobe Firefly, a creative, generative AI model that generates images and text effects.
ADBE’s Digital Media Business President David Wadhwani said, “With Firefly, Adobe will bring generative AI-powered ‘creative ingredients’ directly into customers’ workflows, increasing productivity and creative expression for all creators from high-end creative professionals to the long tail of the creator economy.”
In terms of the trailing-12-month Return on Common Equity margin, ADBE’s 33.97% is significantly higher than the 1.16% industry average. Likewise, its 38.75% trailing-12-month levered FCF margin is 425.6% higher than the 7.37% industry average. Additionally, its 27.12% trailing-12-month net income margin is significantly higher than the 2.03% industry average.
ADBE’s total revenue for the fiscal third quarter that ended September 1, 2023, increased 10.3% year-over-year to $4.89 billion. Its non-GAAP operating income increased 15.8% year-over-year to $2.26 billion. The company’s non-GAAP net income increased 17.7% year-over-year to $1.88 billion.
In addition, its non-GAAP net income per share came in at $4.09, representing an increase of 20.3% year-over-year.
Analysts expect ADBE’s EPS and revenue for the quarter ending November 30, 2023, to increase 14.9% and 10.9% year-over-year to $4.14 and $5.02 billion, respectively. It surpassed the consensus EPS estimates in each of the trailing four quarters. Over the past year, the stock has gained 75.8% to close the last trading session at $518.42.
ADBE’s POWR Ratings reflect solid prospects. It has an overall rating of B, which translates to a Buy in our proprietary rating system.
It is ranked #18 in the Software - Application industry. It has an A grade for Quality and a B for Sentiment. To see ADBE’s Growth, Value, Momentum, and Stability ratings, click here.
What To Do Next?
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ADBE shares were trading at $515.63 per share on Thursday afternoon, down $2.79 (-0.54%). Year-to-date, ADBE has gained 53.22%, versus a 12.14% 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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