Despite the aggressive rate hikes that have plagued tech stocks since the start of the year, the software industry’s outlook looks strong, thanks to rapid digitization and demand for cloud-based solutions. While fundamentally strong software stocks Salesforce (CRM) and Mitek Systems (MITK) may be worth buying to take advantage of the industry’s long-term growth prospects, you’d be wise to steer clear of fundamentally weak stocks Robinhood Markets (HOOD) and Fastly (FSLY). ). Continue reading….
2022 has been a challenging year for technology stocks due to various macroeconomic concerns. The Fed’s aggressive rate hikes have made high-growth tech stocks look unattractive to investors, leading the tech-heavy Nasdaq Composite to lose 28.6% so far this year.
However, inflation is now showing signs of cooling down, with November’s CPI rises 0.1% from last month and 7.1% from a year ago, below analyst estimates. The relief in inflation has prompted the Fed to stick to its word of slowing the pace of rate hikes, as it announced a rate hike of 50 basis points yesterday.
As the Fed begins to slow the pace of rate hikes, software stocks may once again become attractive investment options for investors. According to Gartner, enterprise software spending is projected to grow 8.6% in 2023.
Although the industry’s outlook looks bright, not all software stocks are likely to turn out to be profitable investments. To capitalize on the industry’s recovery prospects, you may want to buy fundamentally strong software stock Salesforce, Inc. (CRM) and Mitek Systems, Inc. (MITK). On the other hand, Robinhood Markets, Inc. (HOOD) and Fastly, Inc. (FSLY) are best avoided now due to their weak fundamentals and poor growth prospects.
Shares to buy:
Salesforce, Inc. (CRM)
CRM offers customer relationship management technology that brings companies and customers together worldwide. The Customer 360 platform empowers customers to work together to deliver connected experiences for their customers. The company’s service offering includes sales, service, marketing and trade.
On September 21, 2022, Insurtech leader Zywave announced a dedicated partnership and increased collaboration with CRM. This partnership is believed to bring together the worlds of insurance agency sales and customer service, creating more efficient, strategic workflows powered by data and content to deliver a seamless customer experience.
Raja Singh, Senior VP and General Manager of CRM, said, “Together, Salesforce and Zywave enable users to do their jobs efficiently and unlock critical business data that can be leveraged for real-time intelligence going forward.”
For the fiscal third quarter ended October 31, 2022, CRM’s total revenue increased 14.2% year-over-year to $7.84 billion. The company’s gross profit rose 14.5% year over year to $5.75 billion. In addition, revenues from operations increased significantly year over year to 460 million dollars.
Analysts expect CRMs EPS and revenue for the quarter ending December 31, 2022, to increase 61.6% and 9.2% year-over-year to $1.36 billion and $8 billion, respectively. CRM has an impressive track record of earnings surprises, beating consensus EPS estimates in each of the last four quarters. The stock has fallen 15.1% in the past month to finish last trading at $134.75.
CRM’s strong fundamentals are reflected in its POWR Ratings. The share has an overall rating of B, which corresponds to a buy in our proprietary rating system. POWR Ratings evaluates stocks based on 118 different factors, each with its own weighting.
Within Software – Application industry, it is ranked #15 out of 139 stocks. It has an A grade for growth and a B for sentiment.
We’ve also given CRM grades for value, momentum, stability and quality.Get all CRM reviews here.
Mitek Systems, Inc. (MITK)
MITK develops, markets and sells solutions for mobile image capture and digital identity verification worldwide. The company’s solutions are embedded in native mobile apps and browsers to facilitate digital consumer experiences. It offers products such as Mobile Deposit, Mobile Verify, Mobile Fill, CheckReader, among others.
For the fiscal third quarter ended June 30, 2022, MITK’s total revenue increased 23.8% year-over-year to $39.33 million. Non-GAAP net income came in at $10.18 million. The company’s non-GAAP EPS came in at $0.23, representing no change from the year-ago period.
Analysts expect MITK’s revenue for the quarter ended September 30, 2022 to be up 16.1% year-over-year to $38.61 million. For fiscal 2022, EPS is expected to increase 17.1% year-over-year to $0.89.
It has a commendable track record of earnings surprises, beating consensus EPS estimates in each of the last four quarters. The stock has risen 24.7% over the past six months to close the last trade at $10.90.
It’s no surprise that MITK has an overall rating of B, which translates to a buy in our proprietary rating system. Within the software – application industry, it is ranked number 8. In addition, it has a B grade for growth, value and quality.
click here to see the additional ratings of MITK for Momentum, Stability and Sentiment.
Stocks to avoid:
Robinhood Markets, Inc. (HOOD)
HOOD operates a financial services platform that allows users to invest in stocks, exchange-traded funds, options, gold and cryptocurrencies. The company also offers various learning and education solutions that include Snacks, Learn, Newsfeed and cash handling services.
HOOD’s total net revenue for the third quarter ended September 30, 2022, decreased 1.1% year-over-year to $361 million. Net loss narrowed 87% year-over-year to $175 million. In addition, the loss per share was reduced by 90.3% year-over-year to $0.20.
HOOD’s EPS for the quarter ending December 31, 2022 is expected to remain negative. Revenue for fiscal 2022 is expected to fall 24.6% year-over-year to $1.37 billion. The stock has fallen 48.8% year-to-date to finish last trading at $9.09.
HOOD’s gloomy outlook is reflected in the POWR ratings. The company has an overall rating of D, which translates to a sell in our proprietary rating system. Within the same industry, it is ranked #120. The company has an F grade for stability and a D for value and quality.
click here to see the additional POWR ratings of HOOD for Growth, Momentum and Sentiment.
Fastly, Inc. (FSLY)
FSLY operates an advanced cloud platform for processing, serving and securing the customer’s applications worldwide. Edge cloud is a category of Infrastructure as a Service that enables developers to build, secure and deliver digital experiences at the edge of the internet. It is a programmable platform designed for web and application delivery.
For the fiscal third quarter ended September 30, 2022, FSLY’s non-GAAP gross margin came in at 53.6%, compared to 57.5% in the same period last year. The company’s non-GAAP operating loss increased 53.4% year over year to $19.84 million. In addition, its non-GAAP net loss per common share increased 27.3% from the prior quarter to $0.14.
FSLY’s EPS for the quarter ending December 31, 2022 is expected to remain negative. The stock has fallen 73.2% year-to-date to finish last trading at $9.50.
FSLY’s gloomy outlook is reflected in the POWR ratings. The company has an overall rating of D, translating to a sell in our proprietary rating system. It is ranked #130 in the Software – Applications industry. In addition, it has a D grade for Momentum, Stability and Sentiment.
To see the additional ratings of FSLY for growth, value and quality, click here.
CRM stock was trading at $130.55 a share Thursday afternoon, down $4.20 (-3.12%). So far this year, CRM has fallen -48.63%, against an increase of -16.86% in the benchmark S&P 500 over the same period.
About the author: Malaika Alphonsus
Malaika’s passion for writing and interest in financial markets led her to pursue a career in investment research. With a degree in economics and psychology, she aims to help investors make informed investment decisions.
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