Earlier this year, most investors avoided expensive tech stocks, including those from the software space, and instead bet on cyclical stocks to capitalize on the recovering economy. However, with the rapid spread of the highly contagious COVID-19 Delta variant, investors are regaining their interest in software stocks with an acceptance that  remote working, if not here to stay, is here for at least an extended period.

Investors’ interest in the software stocks is evidenced by the SPDR S&P Software & Services ETF’s (XSW) 11.6% gains over the past three months versus the SPDR S&P 500 Trust ETF’s (SPY) 7.1% returns. Continuing digital transformation and product innovation should help the software industry grow in the coming months. Indeed, according to Statista, IT spending on enterprise software will likely amount to roughly $599 billion this year, representing a 13.2% year-over-year rise.

So, we think it could be wise to bet on fundamentally strong software stocks Software Aktiengesellschaft (STWRY) and CSG Systems International, Inc. (CSGS). They look undervalued at their current price levels, and they have overall Strong Buy ratings in our proprietary POWR Ratings system along with B grades for Value.

Click here to check out our Software Industry Report for 2021

Software Aktiengesellschaft (STWRY)

Headquartered in Darmstadt, Germany, STWRY provides worldwide software development, licensing, maintenance, and information technology (IT) services. The company operates in three segments: Digital Business Platform (DBP); Adabas & Natural (A&N); and Consulting.

In June 2021, GeicoTaikisha chose ADAMOS IIoT, powered by Cumulocity IoT from STWRY, to help it digitalize the  painting process for its customers’ vehicle production plants. This move further expands the company’s consumer base.

For the second quarter, ended June 30, 2021, STWRY’s group bookings increased 18% year-over-year to €126.60 million ($148.46 million). It was driven primarily by strong momentum in its Digital Business and better-than-expected performance in A&N. The company’s IFRS EBIT for the quarter came in at €50.10 million ($58.75 million), representing a 65% year-over-year rise.

In terms of forward EV/S, STWRY’s 3.37x is 16.2% lower than the 4.02x industry average. In addition, its forward EV/EBIT and P/S of 19.59x and 3.67x, respectively, are also lower than the 20.44x and 4x industry averages.

STWRY’s revenue is expected to increase 7.9% year-over-year to $1.06 billion in its fiscal year 2022. The stock has gained 11.7% over the past six months and more than 13% over the past three months.

STWRY’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

The stock has a B grade for Stability, Value, and Quality. Also, click here to access the additional POWR Ratings for STWRY (Growth, Momentum, and Sentiment). STWRY is ranked #3 of 59 stocks in the Software – Business industry.

CSG Systems International, Inc. (CSGS)

A leading provider of revenue management and digital monetization, payments, and customer engagement solutions, Englewood, Colo.-based CSGS operates across more than 130 countries. Its offerings include Advanced Convergent Platform, a private cloud-based platform.

On Aug. 4 Singapore’s first digital network operator, M1 Limited, chose CSGS’ cloud-based Digital Wholesale solution to streamline its business and seamlessly manage traffic without sacrificing quality. M1’s Chief Digital Officer, Nathan Bell, said, “What truly sets CSG apart is their ability to understand our intercarrier customer needs.”

CSGS’ non-GAAP revenue came in at $238.48 million for the second quarter, ended June 30, 2021, representing a 6.2% year-over-year rise. The company’s non-GAAP operating income increased 29.9% year-over-year to $39.79 million, while its non-GAAP net income came in at $26.38 million, up 38.9% year-over-year. Also, its non-GAAP EPS increased 39% year-over-year to $0.82.

In terms of forward non-GAAP P/E, CSGS’ 14.05x is 43.8% lower than the 25x industry average. In addition, the stock’s forward EV/S and P/S of 1.77x and 1.52x, respectively, are also lower than the 4.02x and 4x  industry averages.

Analysts expect CSGS’ revenue and EPS to increase 5.3% and 11.8%, respectively,  year-over-year to $239.85 million and $0.85for the quarter ending September 30, 2021. In addition, it has surpassed the Street’s EPS estimates in three of the trailing four quarters. Over the past nine months, the stock has soared nearly 6% to close yesterday’s trading session at $46.36.

CSGS’ POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to Strong Buy in our proprietary rating system. In addition, the stock has a B grade for Stability, Value, and Quality.

In addition to the POWR Rating grades we’ve just highlighted, one can see CSGS’ ratings for Growth, Momentum, and Sentiment here. Also, CSGS is ranked #4 in the Software – Business industry.

Click here to check out our Software Industry Report for 2021

STWRY shares were trading at $12.23 per share on Thursday morning, up $0.16 (+1.33%). Year-to-date, STWRY has gained 18.29%, versus a 19.19% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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