1 software stock to watch this week and 1 you shouldn’t waste your time on

The strong indications that the Fed will stop interest rate increases give some market optimism. On the other hand, amid increasing digitization, the software industry’s growth prospects look stable. So we think quality software stock VMware (VMW) might be worth your watchlist now. However, given the market’s increased volatility, the fundamentally weak stock Toast (TOST) is best avoided. Continue reading….

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Investor interest in software stocks has deteriorated due to repeated interest rate hikes and increased recession probabilities. However, the release of the Fed minutes indicated increased support to put interest rate increases on hold in response to data indicating cooling.

On a related note, Kansas City Fed President Esther George stated last week in an interview, “When I think about inflation today, we’ve kind of turned the tide of shortages on the supply chain and the manufacturing side.”

Furthermore, according to Fortune Business Insights, the global Software as a Service market size is expected to grow by a CAGR of 27.5% from 2022 to 2028. Investor interest in software stocks is also evident from the iShares North American Tech-Multimedia Networking ETFs (IGN) 1.3% increase in the last month.

Given this backdrop, fundamentally strong software stock VMware, Inc. (VMW) should now be added to your watchlist. But given the market’s increased volatility, the stock is fundamentally weak Toast, Inc. (TOAST) is best avoided.

Stock to buy:

VMware, Inc. (VMW)

VMW provides software solutions in the areas of modern applications, cloud management and infrastructure, networking, security and digital workspaces in the US and internationally.

November 8, 2022, VMW and Hewlett Packard Enterprise (HPE) announced the next step in its collaboration with HPE GreenLake for VMware, bringing together HPE GreenLake and VMware Cloud to create a fully integrated solution with a simple pay-as-you-go hybrid cloud consumption model. This should be strategically beneficial for the companies.

Also on November 8, VMW and Equinix, Inc. (EQIX), the world’s digital infrastructure provider, announced a global expansion of their partnership to deliver new digital infrastructure and multi-cloud services. The companies collaborated to launch VMware Cloud on Equinix Metal®, a new distributed cloud service that will provide a more high-performance, secure and cost-effective cloud alternative for enterprise applications.

VMW’s total revenue increased marginally year-over-year to $3.21 billion for the third quarter ended October 28, 2022. Subscription and SaaS revenue increased 20.5% year-over-year to $988 million. In addition, its long-term debt came in at $9.69 billion for the period ending October 28, 2022, compared to $12.67 billion for the period ending January 28, 2022.

The Street expects VMW’s revenue to rise 4% year-over-year to $13.37 billion in 2023. Over the past month, the stock has risen 7% to close last trade at $119.26.

VMW has an overall B-rating, which corresponds to a purchase this spring POWR Ratings systems. POWR Ratings evaluates stocks based on 118 different factors, each with its own weighting.

VMW has the grade A for quality and B for value and stability. Within Software – Business industry, it is ranked first among 53 stocks. click here to see the additional POWR sentiment, momentum and growth ratings for VMW.

Stocks you should avoid:

Toast, Inc. (TOAST)

TOST is an all-in-one cloud-based digital technology platform designed for restaurants of all sizes. It provides a unified platform of software as a service products and financial technology solutions that provide restaurants with everything they need to run their business, including point of sale, digital ordering and delivery, marketing and staff management.

In terms of forward EV/Sales, TOST is currently trading at 3.25x, 22.2% higher than the industry average of 2.66x. Its forward price/sales multiple of 3.61 is 43% higher than the industry average of 2.52.

TOST’s trailing 12-month net income margin of negative 7.03% is lower than the industry average of 3.28%. It is 12 months later EBITDA margin of negative 15.39% is lower than the industry average of 12.05%.

TOST’s operating loss came in at $85 million for the third quarter ended September 30, 2022, a 54.5% year-over-year increase. Its current debt came in at $457 million for the period ending September 30, 2022, compared to $352 million for the period ending December 31, 2021.

In addition, total working capital came in at $1.40 billion, compared to $1.49 billion for the same period.

The company’s EPS is expected to remain negative at least this year. It also missed EPS estimates in each of the last four quarters.

Over the past six months, the stock has lost 56.5% to close last trade at $18.82.

TOST’s overall D-rating corresponds to a sale in our POWR rating system. It has a D for growth, stability, value and quality. The share is ranked #45 in the same industry.

We have also assessed TOST for Sentiment and Momentum. Get all TOST assessments here.

VMW stock was down $0.45 (-0.38%) in premarket trading on Monday. So far this year, VMW has risen 2.53%, against a -14.93% rise in the benchmark S&P 500 in the same period.

About the Author: RashmiKumari

Rashmi is passionate about capital markets, wealth management and financial regulatory issues, which led her to pursue a career as an investment analyst. With a master’s degree in commerce, she wants to make complex financial matters understandable to individual investors and help them make appropriate investment decisions.


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