Decoding Buy or Hold for These 3 Software Stocks

The software industry, witnessing noteworthy growth, is propelled by technological advancements, digital transitions across various sectors, the increasing emphasis on data-driven solutions, and significant investment in cloud-based technology.

Given this backdrop, I believe software stocks Squarespace, Inc. (SQSP) and Rimini Street, Inc. (RMNI) are strong candidates to invest in, given their solid growth trajectory and profitability. Conversely, waiting for a better entry point in Palo Alto Networks, Inc. (PANW) might be prudent.

The unparalleled influence of the software industry on individuals and institutions worldwide is undeniable. Projections indicate that the industry will significantly stimulate the U.S. economy.

Efforts to enhance efficiency in crucial applications are becoming increasingly common across organizations, expected to increase software expenses substantially. According to Gartner, Inc. (IT), global IT spending is anticipated to reach $5.10 trillion in 2024, suggesting an 8% year-over-year rise. The global enterprise software market is poised to expand at a CAGR of 11.5%, reaching $517.26 billion by 2030.

There has been a notable shift in workplace norms over recent years, with adopting hybrid work models and escalating reliance on cloud services significantly fueling increases in cloud usage. On average, enterprises use 1,427 cloud services, and an average employee uses up to 36 cloud services, including collaboration and file-sharing platforms.

Gartner projects a 20.4% increase in global end-user spending on public cloud services to $678.80 billion in 2024, a rise from $563.60 billion in 2023. Moreover, it anticipates that over 70% of enterprises will utilize industry cloud platforms to fast-track business initiatives, compared to less than 15% in 2023.

Despite these advancements, the shift toward increased digitalization presents heightened cybersecurity risks, thereby increasing organizations' vulnerability to numerous cybersecurity threats. Over the past year, surging cyber-attack incidents, primarily driven by rapid digitalization, the growing adoption of cloud solutions, and the proliferation of smart devices, have thrown the spotlight on the cybersecurity industry.

The global cybersecurity market is estimated to expand at a 12.3% CAGR to reach $500.70 billion by 2030.

Considering these conducive trends, let's take a look at the fundamentals of the three software stocks.

Palo Alto Networks, Inc. (PANW)

PANW provides cybersecurity solutions worldwide. It focuses on delivering value in four areas: Network Security; Cloud Security; Security Operations and Threat Intelligence; and Security Consulting.

On December 5, PANW acquired Dig Security, an innovative provider of Data Security Posture Management. Dig's cutting-edge capabilities, seamlessly integrated into PANW’s Networks Prisma Cloud platform, will provide organizations with near-real-time data protection across the entire cloud estate. This should bode well for PANW.

On December 4, IBM Consulting and PANW expanded their strategic partnership to better enable clients to strengthen their end-to-end security postures and navigate evolving security threats. PANW will be in a select group of strategic IBM Consulting partners, and IBM Consulting will be a premier security services partner for PANW.

The longstanding partnership with IBM could help their clients mitigate risk and protect critical data assets with industry-leading, AI-powered solutions, cloud security, and services.

PANW’s trailing-12-month cash from operations of $3.07 billion is significantly higher than the industry average of $73.59 million. Its trailing-12-month ROCE and ROTA of 45.84% and 4.15% are significantly higher than the industry averages of 1.13% and 0.31%, respectively.

Over the past three and five years, its revenue grew at CAGRs of 26.2% and 24.3%, respectively, while its total assets grew at 19.3% and 20.6% CAGRs over the same periods.

In the fiscal first quarter that ended October 31, 2023, PANW’s total revenue and total gross profit increased 20.1% and 27.6% year-over-year to $1.88 billion and $1.41 billion, respectively.

For the same quarter, non-GAAP net income and non-GAAP net income per share stood at $466.30 million and $1.38, up 75% and 66.3% from the prior-year quarter, respectively. As of October 31, 2023, PANW’s total current assets came at $6.48 billion, compared to $6.05 billion as of July 31, 2023.

Street expects PANW’s revenue and EPS for the fiscal second quarter ending January 2024 to increase 19.1% and 23.8% year-over-year to $1.97 billion and $1.30, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters and revenue estimates in three of the trailing four quarters, which is impressive.

The stock has gained 115.3% year-to-date to close the last trading session at $300.44. Over the past nine months, it has gained 62.9%.

PANW’s POWR Ratings reflect its prospects. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

The stock has an A grade for Growth and a B for Quality. Within the Software - Security industry, it is ranked #14 out of 23 stocks.

To see additional POWR Ratings for Value, Momentum, Stability, and Sentiment for PANW, click here.

Squarespace, Inc. (SQSP)

SQSP offers domains, websites, marketing, and social media management tools. The company offers commerce solutions, which include tools for selling digital content, classes, appointments, reservations, physical goods, and more.

On October 4, SQSP launched Squarespace Refresh 2023, an annual release of new products, features, and updates supporting a future where everyone can be an entrepreneur. Many of its innovations are designed to help entrepreneurs sell, representing the biggest advancements in commerce.

SQSP continues to make enhancements to SQSP AI, a custom combination of generative AI solutions aimed at helping customers build an integrated online presence faster and easier than ever before.

SQSP’s trailing-12-month CAPEX/Sales of 19.84% is 752.2% higher than the industry average of 2.33%. Its trailing-12-month gross profit and EBIT margins of 81.66% and 9.64% are 67.8% and 97.7% higher than the industry averages of 48.67% and 4.88%, respectively.

In the fiscal third quarter that ended September 30, 2023, SQSP’s revenue and gross profit increased 18.1% and 14.8% year-over-year to $257.06 million and $205.31 million, respectively.

For the same quarter, adjusted EBITDA and unlevered free cash flow stood at $66.46 million and $54.13 million, up 52% and 28.5% from the prior-year quarter, respectively. As of September 30, 2023, SQSP’s total current assets came at $340.82 million, compared to $327.89 million as of December 31, 2022.

Street expects SQSP’s revenue and EPS for the fiscal fourth quarter ending December 2023 to increase 15.1% and 114.5% year-over-year to $263.36 million and $0.29, respectively. The company surpassed consensus revenue estimates in each of the trailing four quarters.

The stock has gained 6.8% over the past nine months to close the last trading session at $28.83. Over the past year, it has gained 39.1%.

SQSP’s solid fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, translating to Buy in our proprietary rating system.

SQSP has a B grade for Growth and Quality. Within the Software - Application industry, it is ranked #40 out of 130 stocks.

Beyond what we’ve stated above, we have also rated the stock for Value, Momentum, Stability, and Sentiment. Get all ratings of SQSP here.

Rimini Street, Inc. (RMNI)

RMNI is a global provider of end-to-end enterprise software support products and services for various industries. The company offers application management services for Oracle and SAP enterprise software products.

Recently, RMNI announced that Japan-based santec, selected Rimini Consult for SAP to provide professional services and guidance for the strategic separation of the company into four corporations.

RMNI’s team guided santec through the project and provided education and training on navigating the SAP systems. This level of care is uncommon in the consulting industry and is greatly appreciated by the santec IT team.

On November 29, RMNI announced MYOB, a leading SaaS provider based in Australia, selected Rimini ONE to streamline and enhance the support of one of its core platforms. The decision allows MYOB’s internal development team to focus on delivering more strategic outcomes for the company.

This partnership underscores RMNI’s commitment to providing tailored, end-to-end support solutions that meet the client's unique needs and enable them to confidently achieve their business objectives.

RMNI’s trailing-12-month asset turnover ratio of 1.28x is 107.3% higher than the industry average of 0.62x. Its trailing-12-month ROTC and ROTA of 139.42% and 3.41% are significantly higher than the industry averages of 2.69% and 0.31%, respectively.

Over the past three and five years, its revenue grew at CAGRs of 10.8% and 12%, respectively, while its total assets grew at 15% and 32.7% CAGRs over the same periods.

In the fiscal third quarter that ended September 30, 2023, RMNI’s revenue and gross profit increased 5.4% and 7.5% year-over-year to $107.45 million and $67.34 million, respectively. Moreover, net income per share attributable to common stockholders stood at $0.08.

For the same quarter, non-GAAP net income and adjusted EBITDA stood at $12.06 million and $18.24 million, up 45.7% and 81.8% from the prior-year quarter, respectively.

Street expects RMNI’s revenue in the fiscal fourth quarter ending December 2023 to increase 1% year-over-year to $109.69 million. Its EPS is expected to be $0.11. The company surpassed consensus revenue estimates in each of the trailing four quarters and EPS estimates in three of the trailing four quarters.

The stock has gained 39.6% over the past three months to close the last trading session at $3.21. Over the past month, it has gained 5.9%.

RMNI’s robust prospects are reflected in its POWR Ratings. The stock has an overall A rating, equating to a Strong Buy in our proprietary rating system.

RMNI has a B grade for Growth, Value, Sentiment, and Quality. It is ranked #4 within the Software - Application industry.

Click here for the additional POWR Ratings for RMNI (Momentum and Stability).

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PANW shares were unchanged in premarket trading Friday. Year-to-date, PANW has gained 115.31%, versus a 24.79% rise in the benchmark S&P 500 index during the same period.

The stock market dynamics sparked Sristi's interest during her school days, which led her to become a financial journalist. Investing in undervalued stocks with solid long-term growth prospects is her preferred strategy. Having earned a master's degree in Accounting and Finance, Sristi hopes to deepen her investment research experience and better guide investors.

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