The adoption of Artificial Intelligence (AI) is experiencing steady growth across diverse industries and sectors. Businesses are increasingly recognizing the significant potential of AI to drive innovation and improve efficiency, leading to a discernible increase in demand for AI-based software solutions.

Given the solid demand for AI, keeping a close eye on two sound software stocks, Tyler Technologies, Inc. (TYL) and HubSpot, Inc. (HUBS), could be wise. Tech giant Microsoft Corporation (MSFT), on the other hand, appears well-equipped to capitalize on this trend and could be a solid portfolio addition.

The software industry spans a broad spectrum, encompassing various niches like enterprise software, cloud computing, cybersecurity, and artificial intelligence. Given the growing appetite for digital transformation in the corporate world, there is a sustained demand expected for cloud software, business intelligence solutions, and an array of other software types.

Moreover, this year, the software sector is poised for substantial growth, with organizations ramping up their usage and reallocating budgets toward essential applications and platforms that enhance operational efficiency. This includes a heightened focus on enterprise resource planning (ERP) and customer relationship management (CRM) applications.

As indicated by Gartner’s estimates, worldwide spending on software is set to witness a 13.7% year-over-year growth in 2023, reaching an impressive $922.75 billion. Looking ahead, the forecast for 2024 anticipates a substantial surge, projecting global software spending to reach $1.05 trillion, showcasing a 14.1% year-on-year rise.

Furthermore, the AI landscape gained significant momentum with the introduction of OpenAI's ChatGPT last year. Companies from diverse industries have enthusiastically embraced this trend, ushering in generative AI-powered chatbots, deploying AI assistants for efficient enterprise data management, and introducing AI services capable of generating images and videos.

As the demand for software-driven solutions and the rapid adoption of AI tools continue to surge, the global AI software market is poised for extraordinary growth. Projections suggest that by 2032, this market could reach an astounding $1.09 trillion, demonstrating an impressive CAGR of 23%.

Considering the robust projections, let us dive deeper into the fundamentals of the Software – Business picks, starting with number three.

Stocks to Watch:

Stock #3: Tyler Technologies, Inc. (TYL)

TYL provides integrated information management solutions and services for the public sector. It operates in two segments: Enterprise Software and Platform Technologies. In addition, the company also offers financial management solutions, software as a service arrangements and electronic document filing solutions, etc.

On September 19, TYL unveiled its recent achievement with the “Appearance with e-filing Easy Form” initiative, which is designed to assist self-represented litigants filing civil court cases in Illinois.

This achievement results from a collaborative effort between TYL, Suffolk University Law School, Illinois Legal Aid Online (ILAO), and the Administrative Office of the Illinois Courts (AOIC). Together, these entities have successfully simplified the entire process, from form creation to electronic filing, for courts in nearly every county across Illinois.

On August 8, TYL acquired Computing System Innovations, LLC (CSI), a firm specializing in cutting-edge artificial intelligence automation, redaction, and indexing solutions tailored for courts, recorders, attorneys, and various other users.

This strategic move enables TYL to expand its offerings by incorporating CSI's AI-powered redaction and indexing solution into its portfolio, providing current and potential clients with automated data entry and document processing capabilities. Furthermore, TYL intends to harness CSI's AI and automation technology across its diverse verticals, including Municipal & Schools, Property & Recording, and Platform Solutions.

In the second quarter that ended June 30, 2023, TYL’s revenues rose 7.6% year-over-year to $504.28 million, while its non-GAAP operating income came in at $115.91 million, representing an increase of 4.8% year-over-year.

Moreover, the company’s non-GAAP net income and EPS grew 8.1% and 6.9% from the prior-year quarter to $85.93 million and $2.01, respectively. Also, its adjusted EBITDA improved 5.4% from the year-ago value to $125.50 million.  

Analysts expect TYL’s revenue for the fiscal third quarter (ending September 2023) to increase 5% year-over-year to $496.97 million, while its EPS during the same period is expected to be $1.99. Additionally, the company surpassed its revenue and EPS estimates in three of the trailing four quarters, which is promising.

Over the past three and five years, TYL’s revenue grew at CAGRs of 19.6% and 16.4%, respectively. Its total assets and levered FCF have increased at CAGRs of 24.8% and 17.9% over the past three years, respectively.

TYL’s shares have gained 20.1% over the past nine months to close the last trading session at $385.31

TYL’s POWR Ratings reflect this promising outlook. It has a B grade for Sentiment. In the 45-stock Software - Business industry, it is ranked #25. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

Click here to see TYL’s ratings for Growth, Value, Momentum, Stability, and Quality.  

Stock #2: HubSpot, Inc. (HUBS)

HUBS provides a cloud-based Customer Relationship Management (CRM) platform for businesses. The company's CRM platform includes marketing, sales, service, and content management systems, as well as integrated applications, such as search engine optimization, blogging, website content management, etc.

On September 25, HUBS announced its place in the esteemed Leaders Quadrant of the 2023 Gartner Magic Quadrant for B2B Marketing Automation Platforms report. Gartner's evaluation of HUBS’ Marketing Hub considered factors such as completeness of vision and ability to execute, resulting in HUBS securing its position as a Leader in this category for the third consecutive year.

“We’re thrilled that Gartner has recognized us as a Leader for a third consecutive year. HubSpot is committed to helping our customers grow, and with launches like HubSpot AI Assistant, SMS messaging, and robust consent features, we believe, marketers can trust HubSpot is always innovating on their behalf,” said Nicholas Holland, VP Product, Marketing Hub, at HUBS.

For the fiscal second quarter, which ended on June 30, 2023, HUBS’ total revenue increased 25.5% year-over-year to $529.14 million. The company’s non-GAAP net income amounted to $69.98 million and $1.34 per share, up 212.1% and 204.5% from the prior-year quarter, respectively. Also, its free cash flow rose 166.4% from the year-ago value to $59.62 million.

Street expects HUBS’ revenue and EPS for the third quarter (ending September 2023) to increase 20.3% and 79.9% year-over-year to $534.96 million and $1.24, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters, which is impressive.

Additionally, its revenue has grown at CAGRs of 36.6% and 34.5% over the past three and five years, respectively. While its total assets and levered FCF improved at CAGRs of 14.7% and 83.7% over the past three years, respectively.

The stock has gained 76.3% over the past nine months and 67.2% year-to-date to close the last trading session at $483.37.

HUBS’ strong fundamentals are reflected in its POWR Ratings. It has a B grade for Growth, Sentiment, and Quality. Within the same industry, it is ranked #22. Click here to see HUBS’ ratings for Value, Momentum, and Stability.

Stock to Buy:

Stock #1: Microsoft Corporation (MSFT)

One of the most popular and sought-after software companies, MSFT barely requires any introduction. It develops, licenses, and supports software, services, devices, and solutions worldwide. It offers services such as Office, Exchange, SharePoint, Microsoft Teams, Office 365 Security and Compliance, Skype for Business, Skype, Outlook.com, OneDrive, LinkedIn, etc.

On September 19, MSFT declared a quarterly dividend of $0.75 per share, payable to its shareholders on December 14, 2023. This dividend marks a significant increase of 10% compared to the previous quarter's dividend. The company’s annual dividend of $3 translates to a 0.96% yield on the prevailing prices, while its four-year average dividend yield is 0.94%.

Over the past three and five years, MSFT’s dividend payouts have grown at a CAGR of 10.1%. Also, it has a record of 18 years of consecutive dividend growth.

On July 11, MSFT and KPMG announced a major global partnership expansion focused on workforce modernization, secure development, and utilization of AI solutions across industries. As part of this groundbreaking alliance, KPMG has committed to investing multi billion dollars in Microsoft Cloud and AI services within the next five years.  

By harnessing the power of Microsoft Cloud and Azure OpenAI Service capabilities, KPMG’s vast global workforce of 265,000 employees will be empowered to unlock their creativity, conduct faster analysis, and dedicate more time to strategic advice. This enhanced capacity should enable the companies to better assist clients, including over 2,500 KPMG and MSFT joint clients.

On June 29, MSFT and Moody’s Corporation (MCO) unveiled a strategic partnership to provide cutting-edge solutions for financial services and global knowledge workers. This collaboration will leverage MCO’s strong data and analytical capabilities along with the immense power and scale of Microsoft Azure OpenAI Service.

Together, they will develop innovative offerings that elevate corporate intelligence and risk assessment insights using Microsoft AI and Moody’s proprietary data, analytics, and research as the foundation.

MSFT’s total revenue increased 8.3% year-over-year to $56.19 billion in the fourth quarter (ended June 30, 2023), while its operating income rose 18.1% from the year-ago value to $24.25 billion.

The company’s net income and EPS grew 19.9% and 20.6% from the prior-year quarter to $20.08 billion and $2.69, respectively. In addition, its comprehensive income amounted to $19.38 billion, up 33.3% from the year-ago value.

The consensus EPS estimate of $2.65 for the first quarter of fiscal 2024 (ending September 2023) represents a 12.6% improvement year-over-year. The consensus revenue estimate of $54.53 billion for the ongoing quarter reflects an 8.8% increase from the same period last year. Moreover, the company has an excellent earnings surprise history, surpassing the EPS estimates in each of the trailing four quarters.

MSFT’s revenue and net income grew at CAGRs of 14% and 17.8% over the past three years, respectively. Likewise, its EPS and levered FCF improved at CAGRs of 18.9% and 11.3% over the same period.

The stock has surged 32.3% over the past year to close the last trading session at $312.79.

It’s no surprise that MSFT has an overall rating of B, which equates to Buy in our proprietary rating system. It has an A grade for Sentiment and a B for stability and Quality. In the same industry, it is ranked #9.

In addition to the POWR Ratings we’ve stated above, we also have MSFT’s ratings for Growth, Value, and Momentum. Get all MSFT ratings here.

What To Do Next?

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MSFT shares were trading at $314.42 per share on Thursday afternoon, up $1.63 (+0.52%). Year-to-date, MSFT has gained 32.00%, versus a 13.49% rise in the benchmark S&P 500 index during the same period.

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