The software industry is anticipated to thrive amid growing digitization across industries. Given the industry’s solid growth prospects, investors could consider buying fundamentally sound software stocks such as Mitek Systems, Inc. (MITK), Progress Software Corporation (PRGS), and MarketWise, Inc. (MKTW) for solid returns.
Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.
The demand for software applications has expanded significantly with increasing investments in digitalization. As a result, the number of software development companies catering to these demands has increased.
The application development software market is expected to reach $1.04 trillion by 2030, increasing at a 25.5% CAGR. The market for application development software is likely to expand due to the rising need for scalable and customized software applications.
According to Statista, software market revenue is expected to hit $659 billion this year. Moreover, the sector’s revenue is expected to grow at a 5.4% CAGR over the next five years to $858.10 billion by 2028. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 30.5% over the past nine months.
In light of these encouraging trends, let’s look at the fundamentals of the three top-rated Software - Application stocks, beginning with number 3.
Stock #3: Mitek Systems, Inc. (MITK)
MITK provides mobile image capture and digital identity verification solutions worldwide. The company offers Mobile Deposit, Mobile Verify, Mobile Fill, and MiSnap products for remote depositing checks, identity verification, and form fill completion. It also provides an intuitive mobile-capture software for instant image capture.
MITK’s forward non-GAAP P/E multiple of 11.16 is 47.9% lower than the industry average of 21.44. Its forward EV/EBITDA multiple of 9.81% is 26.3% lower than the industry average of 13.31.
MITK’s trailing-12-month ROCE of 4.82% is 317.3% higher than the industry average of 1.16%. Its trailing-12-month levered FCF margin of 21.38% is 190% higher than the 7.37% industry average.
During the second quarter ended March 31, 2023, MITK’s total revenue were $45.31 million, up 35.2%year-over-year. Its non-GAAP net income increased 35.5% from the year-ago value to $13.08 million. Also, its non-GAAP EPS came in at $0.29, up 38.1% year-over-year. The company’s operating income grew 193.9% from the prior-year quarter to $7.88 million.
The consensus revenue estimate of 185.07 million for the year ending September 2024 represents a 9.5% increase year-over-year. Its EPS is expected to grow at 16.2% year-over-year to $1.12 for the same period. It surpassed EPS estimates in three of the four trailing quarters. MITK’s shares have gained 16.2% over the past six months to close the last trading session at $10.76.
MITK’s POWR Ratings reflect this promising outlook. The stock has an overall rating of B, equating to a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.
MITK also has a B grade for Growth, Value and Quality. It is ranked #25 out of 133 stocks in the Software - Application industry. Click here for the additional POWR Ratings for Sentiment, Stability, and Momentum for MITK.
Stock #2: Progress Software Corporation (PRGS)
PRGS develops, deploys, and manages business applications. OpenEdge, Sitefinity, Kemp LoadMaster, Developer Tools, and DataDirect Connect are some of the company’s applications. It sells its products to end users, independent software vendors, original equipment manufacturers, and system integrators.
On September 26, 2023, PRGS has announced a partnership with Software Improvement Group (SIG), an independent technology and advising organization specializing in software quality, security, and improvement, to assist assure the long-term maintainability and modernization of business-critical applications built on the Progress® OpenEdge® platform.
This partnership provides OpenEdge users with automated advise on areas to focus on while resolving technical debt and modernizing applications via Sigrid®, SIG’s software assurance platform. This partnership enables organizations to optimize their OpenEdge applications for long-term success in a continuously developing technical world by leveraging SIG’s expertise in software quality and optimization.
PRGS’ forward EV/EBITDA multiple of 10.58 is 20.5% lower than the industry average of 13.31. Its forward EV/EBIT multiple of 10.79% is 38% lower than the industry average of 17.42.
PRGS’ trailing-12-month net income margin of 11.65% is 472.7% higher than the 2.03% industry average. Its trailing-12-month ROCE of 19.35% is significantly higher than the 1.16% industry average.
PRGS’ revenue for the third quarter ended August 31, 2023, increased 15.7% year-over-year to $174.99 million. Its non-GAAP income from operations increased 13.8% year-over-year to $68.39 million. Its non-GAAP net income rose 10.6% year-over-year to $48.75 million. Also, its non-GAAP EPS came in at $1.08, representing an increase of 8% year-over-year.
Street expects PRGS’ revenue to increase 13.7% year-over-year to $694.23 million for the year ending November 2023. Its EPS is expected to grow at 2.5% year-over-year to $4.23 for the same period. It surpassed EPS estimates in all four trailing quarters. Over past year the stock has gained 15.6% to close the last trading session at $51.80.
PRGS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, which equates to a Buy in our proprietary rating system.
It is ranked #21 in the same industry. It has a B grade for Quality. To see additional PRGS’ ratings for Growth, Value, Stability, Sentiment, and Momentum, click here.
Stock #1: MarketWise, Inc. (MKTW)
MKTW operates a content and technology multi-brand platform for self-directed investors in the United States and Internationally. Its platform includes subscription businesses that provides financial research, software, education, and tools to navigate the financial markets.
MKTW’s forward Price/Sales of 0.13% is 94.2% lower than the 2.16% industry average.
MKTW’s trailing-12-month asset turnover ratio of 1.09x is 421.6% higher than the 0.21x industry average. Its trailing-12-month gross profit margin of 87.58% is 47.1% higher than the 59.55% industry average.
MKTW’s total net revenue came in at $103.64 million in the fiscal second quarter that ended June 30, 2023. Its income from operations came to $8.92 million. The company’s net income came to $9.74 million, and its total operating expenses decreased 9.5% year-over-year to $94.73 million.
Analysts expect MKTW’s revenue to increase 8.2% year-over-year to $481.48 million for the year ending December 2024. Its EPS is expected to grow 159.5% year-over-year to $0.12 for the same period. Shares of MKTW’s has gained marginally to close the last trading session at $1.50.
It’s no surprise that MKTW has an overall B rating, equating to a Buy in our POWR Ratings system. It has an A grade for Value and a B for Quality. It is ranked #17 in the same industry.
Beyond what is stated above, we’ve also rated MKTW for Growth, Sentiment, Momentum and Stability. Get all MKTW ratings here.
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PRGS shares were trading at $51.54 per share on Thursday afternoon, down $0.26 (-0.50%). Year-to-date, PRGS has gained 3.07%, versus a 11.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Rashmi Kumari
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 aspires to make complex financial matters understandable for individual investors and help them make appropriate investment decisions.
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