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The 3 Best Software Stocks Money Can Buy and 1 to Avoid

The software industry is expected to witness solid growth amid the growing market for advance technologies like the cloud and artificial intelligence. However, the Fed’s rate hikes might remain a significant headwind this year. While we think Fortinet (FTNT), Progress Software (PRGS), and YEXT (YEXT) might be worth buying, fundamentally weak software stock Coinbase Global (COIN) could be best avoided. Keep reading...

The tech-heavy Nasdaq Composite posted its best January performance this year since 2001, indicating improving investor sentiments. Moreover, Gartner estimates that global IT spending this year will reach $4.60 trillion in 2023, a jump of 5.1% from the last year.

The software industry is evolving rapidly with the growing market for IoT, Artificial intelligence, edge computing, and so on.

As per a research report published by Polaris Market Research, the global industrial IoT market is anticipated to reach $771.72 billion by 2026, at a CAGR of 24.3% during the period.

Also, while it is evident that cloud computing will continue to mark its impact in 2023, the edge computing market is expected grow and hold endless opportunities in the future for edge networks in the software industry. The global edge computing market is expected to expand at a CAGR of 37.9% from 2023 to 2030.

In addition, with the rapid adoption of blockchain technology across various sectors, ChatGPT has the potential to play a significant role in the education and training of future developers, which should benefit the industry.

As the industry shows solid potential, fundamentally strong software stocks Fortinet, Inc. (FTNT), Progress Software Corporation (PRGS), and Yext, Inc. (YEXT) might be great buys.

However, rising interest rates triggered a wave of bankruptcies in the software companies dealing in cryptocurrencies. Given the rising fear of prolonged rate hikes, fundamentally weak Coinbase Global, Inc. (COIN) might be best avoided.

Stocks To Buy:

Fortinet, Inc. (FTNT)

FTNT provides broad, integrated, and automated cybersecurity solutions in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. It sells its security solutions to channel partners and directly to various customers in telecommunications, technology, government, financial services, education, retail, manufacturing, and healthcare industries.

Its trailing-12-month EBITDA margin of 22.56% is 101.1% higher than the 11.22% industry average. Its trailing-12-month gross profit margin of 75.21% is 53.6% higher than the 48.97% industry average.

FTNT’s total revenue increased 33.1% year-over-year to $1.28 billion in the fiscal fourth quarter, which ended December 31, 2022. Its non-GAAP net income and net income per share attributable to FTNT increased 69.9% and 76% year-over-year to $349.70 million and $0.44, respectively.

FTNT’s revenue is expected to rise 25.7% year-over-year to $1.20 billion for the current quarter ending March 2023. The company’s EPS for the same quarter is expected to increase 51.7% year-over-year to $0.29.

Additionally, the stock has topped consensus EPS estimates in each of the trailing four quarters and consensus revenue estimates in three of the trailing four quarters, which is impressive.

The stock has gained 17% over the past month to close the last trading session at $57.82.

FTNT’s POWR Ratings reflect its promising outlook. The stock has an overall rating of B, which translates to a Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.

FTNT has an A grade for Quality and B for Sentiment and Growth. It is ranked #2 out of 21 stocks in the Software - Security industry.  

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

Progress Software Corporation (PRGS)

PRGS develops, deploys, and manages business applications. The company offers Open Edge, an application development platform for running business-critical applications; Chef, a DevOps/DevSecOps automation software; and Developer Tools, which consists of software development tools collection.

PRGS’s trailing-12-month EBITDA margin of 33.6% is 199.4% higher than the 11.22% industry average. Its trailing-12-month gross profit margin of 87.97% is 79.7% higher than the 48.97% industry average.

On February 7, PRGS announced the completion of the acquisition of MarkLogic, a leader in complex data and semantic metadata management and a vector capital portfolio company. It is another significant milestone in PGGS’s Total Growth Strategy.

On January 17, PRGS announced a quarterly dividend of $0.18 per share, payable on March 15.

PRGS pays $0.70 annually as dividends which translates to a yield of 1.22% at the current price. Its 4-year average dividend yield is 1.54%. Its dividend payouts have grown at 3.6% and 6.3% CAGRs over the past three and five years, respectively.

During the fourth quarter of fiscal 2022, ended November 30, 2022, PRGS’s revenues increased 17.7% year-over-year to $159.17 million. The company’s non-GAAP net income increased 19.2% year-over-year to $49.24 million, and non-GAAP earnings per share increased 21.7% year-over-year to $1.12.

Street’s EPS estimate of $1.05 for the current quarter (ending February 2023) reflects a rise of 8.1% year-over-year. The company’s revenue estimate for the current quarter of $158.62 million indicates a 7.5% improvement from the prior-year quarter. Additionally, PRGS has topped consensus EPS estimates in each of the trailing four quarters.

The stock has gained 16% over the past nine months, closing the last trading session at $57.52.

It is no surprise that PRGS has an overall rating of A, which equates to a Strong Buy in our POWR Ratings system.

It has a grade A for Quality and a B for Growth, Stability, and Value. PRGS is ranked first among 136-stocks Software - Application industry.  

In addition to the POWR ratings stated above, we have also rated PRGS for Momentum and Sentiment. Get all the PRGS ratings here.

Yext, Inc. (YEXT)

YEXT organizes business facts to provide answers to consumer questions in North America and internationally. It serves the healthcare, retail, and financial services industries.

On January 12, YEXT announced an integration with Apple Inc.’s (AAPL) new tool, Apple Business Connect API, to give customers greater control over their presence on Apple Maps.

Marc Ferrentino, President and Chief Operating Officer of the company, said, “Our integration with the new Apple Business Connect API underscores our commitment to constantly advance our listings offering.”

YEXT’s trailing-12-month asset turnover ratio of 0.79x is 27.5% higher than the 0.62x industry average. Its trailing-12-month gross profit margin of 74.48% is 52.1% higher than the 48.97% industry average.

YEXT’s revenue came in at $99.28 million in the third quarter that ended October 31, 2022, and its non-GAAP operating expenses decreased 11% year-over-year to $72.10 million. It reported a non-GAAP net income of $2.50 million compared to the non-GAAP net loss of $5.50 million in the prior-year quarter.

YEXT’s revenue is expected to rise 2.2% year-over-year to $3.16 billion for the fiscal year that ended January 2023. The company’s EPS for the same year is expected to increase 70.7% year-over-year. The company has an impressive earnings surprise history, as it surpassed the consensus EPS estimates in each of the trailing four quarters.

YEXT has gained 52.9% over the past six months to close its last trading session at $7.34.

YEXT’s POWR Ratings reflect its robust outlook. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

YEXT also has a B grade for Growth, Quality, Value, and Sentiment. It is ranked the first out of 53 stocks in the Software - Business industry.   

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

Stock To Avoid:

Coinbase Global, Inc. (COIN)

COIN provides financial infrastructure and technology for the crypto economy. The company offers the primary financial account for retailers, marketplace for institutions, and technology and services for the crypto ecosystem partners.

COIN’s trailing-12-month levered FCF margin of 17.91% is 21% lower than the 14.80% industry average. Its trailing 12-month asset turnover ratio of 0.08x is 59.3% lower than the 0.19x industry average.

COIN’s adjusted total revenue declined 55% year-over-year to $590.34 million for the third quarter that ended September 30, 2022. The company’s net income per share attributable to common stockholders declined 250% year-over-year to a negative $2.43. Its adjusted EBITDA decreased 633.4% year-over-year to $618.22 million.

Analysts expect COIN’s EPS to amount to a negative $1.41 for the fiscal year 2022. Its revenue is expected to decline 76.2% year-over-year to $593.60 million for the same year. The company has failed to surpass the consensus revenue estimates in three of the trailing four quarters, which is disappointing.

The stock has declined 72.2% over the past year to close its last trading session at $59.63.

COIN’s POWR Ratings reflect this bleak outlook. The stock has an overall F rating, equating to a Strong Sell in our proprietary rating system.

COIN is graded an F in Value, Sentiment, Stability, and Growth and D for Quality. It is ranked last in the Software – Application industry.  

Beyond the POWR Rating grades we’ve stated above, COIN’s rating for Momentum can be seen here.

What To Do Next?

Get your hands on this special report:

3 Stocks To DOUBLE This Year

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First, because they are all low-priced companies with the most upside potential in today’s volatile markets.

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3 Stocks To DOUBLE This Year


FTNT shares were trading at $57.92 per share on Friday afternoon, up $0.10 (+0.17%). Year-to-date, FTNT has gained 18.47%, versus a 6.04% rise in the benchmark S&P 500 index during the same period.



About the Author: Kritika Sarmah

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.

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