Rising enterprise data volume and automation, coupled with heightened cybersecurity concerns, are driving the global software market. However, as challenges exist, fundamentally strong software stocks Informatica Inc. (INFA) and Yext, Inc. (YEXT) could be ideal buys this month. However, it could be best to wait for an entry point in Upland Software, Inc. (UPLD) and avoid SentinelOne, Inc. (S).

The software industry is growing due to digitalization, technological advancements, and efficient resource management needs. This year, the software market is expected to reach a revenue of $698.80 billion, with enterprise software leading at $292 billion. The market is projected to grow at a CAGR of 5.3% to reach $858.10 billion by 2028, with the United States generating the most revenue at $353.50 billion in 2024.

The Software as a Service (SaaS) market is growing rapidly, driven by increased cloud adoption and cost-effective software delivery models, accelerated by trends like remote work and efficiency enhancements. The global SaaS market is projected to grow at a CAGR of 13.9% to reach $1.02 trillion by 2032.

Moreover, the global application development software market is experiencing rapid growth driven by the surging demand for mobile applications and technological advancements, with opportunities emerging from the expanding e-commerce landscape. The market is projected to grow at a CAGR of 24.5% to reach $730.70 billion by 2030.

Additionally, the global cybersecurity market is expanding due to rising cyber-attacks from e-commerce growth and IoT adoption, prompting the adoption of advanced security solutions. Technological innovations like AI and ML are driving new cybersecurity solutions, with regulations and demand for skilled professionals also contributing to market growth. The market is projected to grow at a CAGR of 12.3% by 2030.

However, in response to economic uncertainty, the tech industry witnessed widespread layoffs, driven by reduced digital advertising spending and constrained consumer spending due to rising inflation. On top of it, the still-high interest rates pose a challenge for the industry.

Considering these conducive trends, let’s examine the fundamentals of four software stocks.

Stocks to Buy:

Informatica Inc. (INFA)

INFA offers AI-powered data management solutions for enterprise-scale operations, including data integration, API management, and governance products. Its platform unifies data across multi-cloud and hybrid systems, facilitating seamless connectivity and management.

INFA’s trailing-12-month levered FCF margin of 25.08% is 178.3% higher than the industry average of 9.01%. The stock’s trailing-12-month cash from operations of $226.02 million is 178.5% higher than the industry average of $81.16 million.

During the third quarter, which ended September 30, 2023, INFA’s total revenues rose 9.8% year-over-year to $408.56 million. The company's non-GAAP net income and net income per share grew 53.2% and 50% from the prior-year quarter to $80.62 million and $0.27, respectively. Also, its adjusted EBITDA increased 48.9% year-over-year to $132.19 million.

INFA’s revenue and EPS are expected to grow 6.4% and 38.4% year-over-year to $388.74 million and $0.21, respectively, for the fiscal first quarter ending March 2024. The company surpassed the revenue and EPS estimates in three of the trailing four quarters, which is notable.

INFA’s shares have surged 111.4% over the past nine months to close the last trading session at $31.12.

INFA’s POWR Ratings reflect this robust outlook. The stock has an overall rating of A, equating to a Strong 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 Stability, Sentiment, and Quality. Among the 20 stocks in the B-rated Software - SAAS industry, it is ranked #2.

In addition to the POWR Ratings stated above, access INFA’s Value and Momentum ratings here.

Yext, Inc. (YEXT)

YEXT offers a cloud platform for businesses to manage global consumer queries and control online business information. Its service caters to industries like healthcare, retail, and financial services, offering centralized data management across various digital platforms.

YEXT’s trailing-12-month gross profit margin of 77.22% is 58.5% higher than the industry average of 48.71%. The stock’s trailing-12-month levered FCF margin of 14.60% is 62% higher than the industry average of 9.01%.

In the fiscal third quarter, which ended October 31, 2023, YEXT’s revenue rose 1.9% year-over-year to $101.16 million. The company's non-GAAP income from operations and net income increased 270.9% and 349.4% from a year-ago quarter to $9.98 million and $11.29 million, respectively. Moreover, its non-GAAP net income per share attributable to common stockholders grew 350% from the prior-year quarter to $0.09.

Street expects YEXT’s EPS to grow 40% year-over-year to $0.07 for the fiscal fourth quarter ended January 2024. Its revenue for the same quarter is expected to be $100.24 million. The company surpassed the EPS estimates in each of the trailing four quarters.

The stock has gained 8.5% over the past month to close the last trading session at $6.03. It gained 1% intraday.

YEXT’s optimistic fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

YEXT has an A grade for Growth and a B for Value, Sentiment, and Quality. Within the B-rated Software - Business industry, it is ranked #3 of 43 stocks.

To access additional ratings for YEXT’s Momentum and Stability, click here.

Stock to Hold:

Upland Software, Inc. (UPLD)

UPLD provides cloud-based enterprise work management solutions worldwide, offering a suite of software applications under the Upland brand. Serving various industries, its offerings include marketing, sales, project management, and human resources solutions, along with professional services and customer support.

UPLD’s trailing-12-month EBITDA margin of 15.51% is 69.4% higher than the industry average of 9.16%. But the stock’s trailing-12-month CAPEX/Sales of 0.39% is 83.7% lower than the industry average of 2.38%.

During the third quarter, which ended September 30, 2023, UPLD generated a total revenue of $74,12 million. The company's free cash flow grew significantly year-over-year to $17.78 million. However, its non-GAAP net income and EPS declined 25% and 34% from the previous-year quarter to $12.93 million and $0.33, respectively.

Street expects UPLD’s revenue and EPS to fall 6.3% and 45.3% from the prior-year quarter to $72.23 million and $0.19, respectively, in the fiscal first quarter ending March 2024.

The stock has declined 46.9% over the past year to close the last trading session at $4.68. Yet, it gained 58.1% over the past six months.

UPLD’s mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, equating to Neutral in our proprietary rating system.

It has a C grade for Growth, Momentum, Stability, and Quality. It is ranked #43 among 131 stocks in the Software - Application industry.

Click here to see UPLD’s additional Value and Sentiment ratings.

Stock to Avoid:

SentinelOne, Inc. (S)

S is a global cybersecurity firm providing AI-powered threat prevention, detection, and response solutions for endpoints and cloud workloads. Its platform offers seamless protection against diverse cyber threats with autonomous capabilities.

The stock’s trailing-12-month CAPEX/Sales of 0.22% is 90.9% lower than the 2.38% industry average. Its trailing-12-month asset turnover ratio of 0.26x is 57.6% lower than the 0.61x industry average.

In the fiscal third quarter, which ended October 31, 2023, S’ non-GAAP sales and marketing expenses increased 18.7% from the previous-year quarter to $81.91 million. Its non-GAAP operating loss and net loss stood at $18.19 million and $7.73 million, respectively. The company reported non-GAAP net loss per share of $0.03.

Analysts expect S’ EPS to grow 67.9% year-over-year to negative $0.04 in the fiscal fourth quarter ended January 2024. Its revenue in the same quarter is expected to be $169.37 million.

The stock rose 2.3% intraday to close the last trading session at $29.70.

S’ bleak prospects are reflected in its POWR Ratings. The stock has an overall rating of D, which equates to a Sell in our proprietary rating system.

S has a D grade for Value, Stability, and Quality. Within the Software - Security industry, it is ranked #23 among 23 stocks.

To see S’ additional POWR Ratings for Growth, Momentum, and Sentiment, click here.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

INFA shares were trading at $31.44 per share on Monday afternoon, up $0.32 (+1.03%). Year-to-date, INFA has gained 10.74%, versus a 5.85% rise in the benchmark S&P 500 index during the same period.

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.

More...