Businesses have been updating their processes to keep pace with the market’s shifting expectations and to enhance user experiences. Many companies are considering significant new investments in advanced software solutions. Furthermore, hybrid cloud adoption is expected to accelerate next year to support employees and companies as the world’s dependence on software solutions increases.

The trends in cybersecurity measures, customer retention, low-code development adoption, and other software solutions should propel the industry’s growth. And investor optimism about the software industry is evident in the iShares Expanded Tech-Software Sector ETF's (IGV) 19.2% returns over the past year.

Therefore, we think fundamentally strong small-cap software stocks CSG Systems International, Inc. (CSGS) and Magic Software Enterprises Ltd. (MGIC) could be ideal picks now. These stocks are also rated Strong Buy in our proprietary rating system.

Click here to check out our Software Industry Report for 2021

CSG Systems International, Inc. (CSGS)

Incorporated in 1994, CSGS in Englewood, Colo., is a provider of revenue management and digital monetization, payments, and customer engagement solutions. The company also provides managed services, professional services, and licenses various solutions, such as mediation, partner management, and charging. CSGS also serves financial services, healthcare, media and entertainment companies, and government markets. The company has a market capitalization of $1.85 billion.

CSGS’ revenue increased 7.8% year-over-year to $263.21 million in the third quarter, ended September 30, 2021. The company’s operating income grew 13.2% from its  year-ago value to $32.76 million. Its net income rose 18.9% from the prior-year quarter to $16.13 million. Also, the company’s EPS increased 19% year-over-year to $0.5.

CSGS’ revenue is expected to increase 4.8% year-over-year to $967.6 million in its fiscal year 2021. The company has an impressive earnings surprise history; it beat the consensus EPS estimates in each of the trailing four quarters. Its EPS is expected to grow 6.7% in the current year. The stock has gained 25.8% in price year-to-date and 31.4% over the past year.

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

Also, the stock has a B grade for Value, Quality, and Stability. We have also graded CSGS for Momentum, Sentiment, and Growth. Click here to access all CSGS's ratings.

CSGS is ranked #3 of 60 stocks in the Software – Business industry.

Magic Software Enterprises Ltd. (MGIC)

Headquartered in Or Yehuda, Israel, MGIC has a market capitalization of $1.05 billion. The company provides private mortgage insurance, other mortgage credit risk management solutions, and ancillary services. MGIC operates in the Software Services segment and IT Professional Services segment. And the company’s  subsidiaries include Mortgage Guaranty Insurance Corporation (MGIC) and MGIC Indemnity Corporation (MIC).

During the third quarter, ended September 30, 2021, MGIC’s revenues increased 27.4% year-over-year to $120.87 million. The company’s gross profit grew 12.1% from its year-ago value to $32.63 million. Its operating income rose 9.2% from the prior-year quarter to $12.05 million. Also, the company’s net income increased 4.2% year-over-year to $8.76 million.

Analysts expect MGIC's revenue to increase 13% year-over-year to $534.4 million in its fiscal 2021. The company has surpassed the consensus EPS in each of the trailing four quarters. Its EPS is estimated to grow 11.7% next year. The stock has gained 34.9% in price over the past nine months.

MGIC's POWR Ratings reflect this promising outlook. The stock has an overall A rating, which equates to a Strong Buy in our proprietary rating system. The stock also has an A grade for Sentiment and a B grade for Growth and Stability.

In addition to the POWR Rating grades I have just highlighted, one can see MGIC's ratings for Momentum, Value, and Quality here. The stock is ranked #8 of 168 stocks in the Software - Application industry.

Click here to check out our Software Industry Report for 2021

CSGS shares were trading at $56.26 per share on Tuesday afternoon, down $0.43 (-0.76%). Year-to-date, CSGS has gained 28.12%, versus a 24.55% rise in the benchmark S&P 500 index during the same period.

Priyanka is a passionate investment analyst and financial journalist. After earning a master's degree in economics, her interest in financial markets motivated her to begin her career in investment research.

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