The software industry is expected to flourish as industries continue to digitalize. This expansion is driven by increased demand for software solutions that can streamline processes, increase efficiency and improve the customer experience.
Therefore, investors might be wise to buy fundamentally sound software stock Vimeo, Inc. now. (VMEO) to buy. However, I think it is wise to wait for a better entry point into Smartsheet Inc. for the reasons discussed. (SMAR).
Gartner predicts that global software spending will reach $1.04 trillion by 2024, an increase of 13.8% year over year. This expansion is mainly driven by the rising demand for cloud-based software solutions and digital transformation projects across industries.
The global Software as a Service (SaaS) industry is expected to be worth approximately $1.02 trillion by 2032, at a CAGR of 13.9%. This expansion can be attributed to the increasing use of cloud computing and the demand for cost-effective and scalable software solutions.
Additionally, the increased use of remote work and digital transformation activities across industries is driving demand for SaaS apps to improve productivity and collaboration.
Investor interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) returns of 21.7% over the past six months and 27.9% over the past nine months.
Let’s delve into the fundamentals of the recommended stocks.
Stocks to buy:
Vimeo, Inc. (VMEO)
VMEO and its subsidiaries provide video software solutions worldwide. The company offers video tools through a software-as-a-service model, allowing users to create, collaborate and interact with video on a single platform.
VMEO’s trailing twelve month gross profit margin of 77.77% is 59.6% higher than the industry average of 48.73%. Its trailing-twelve-month asset turnover ratio of 0.69x is 35.3% higher than the industry’s 0.51x.
For the third quarter ended September 30, 2023, VMEO reported revenue of $106.825 million. Gross profit was $84.45 million, a marginal increase year over year. Net income was $8.46 million, compared to a net loss of $21.42 million in the year-ago quarter. Earnings per share also came in at $0.05, compared to a loss per share of $0.13 in the year-ago quarter.
Analysts expect VMEO’s revenue to rise 2.4% year-over-year to $423.49 million for the year ending September 2024. The stock is up 3.5% year-to-date at the last trading session to close at $3.55.
VMEO’s POWR Ratings reflect this promising outlook. The stock has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings rate stocks based on 118 different factors, each with its own weighting.
VMEO also has a B grade for Value, Sentiment and Quality. It ranks first among 23 stocks in the B-rated Software – SAAS industry. Click here for the additional POWR Growth, Stability, and Momentum ratings for VMEO.
Stock to hold:
Smartsheet Inc. (SMAR)
SMAR provides an enterprise platform for planning, capturing, managing, automating and reporting work for teams and organizations. It serves the aerospace, automotive, biotechnology, consumer, e-commerce, education, financial, government, healthcare, IT services, marketing, media, non-profit , publishing, software, technology and travel sectors.
SMAR’s trailing-12-month leveraged FCF margin of 25.54% is 254.6% higher than the industry average of 7.20%, while its negative trailing-12-month EBIT margin of 18.69% is comparable to sector average of 4.78%.
SMAR’s total revenue for the fiscal second quarter ended July 31, 2023 increased 26.2% year over year to $235.59 million, while gross profit was $188.55 million, up 29% year over year.
However, total current liabilities were $581.65 million for the period ended July 31, 2023, compared to $574.66 million for the period ended January 31, 2023.
The consensus revenue estimate of 951.49 million for the year ending January 2024 represents an increase of 24.1% year over year. Earnings per share are expected to be $0.55 for the same period. It exceeded EPS estimates in three of the trailing four quarters. Shares of SMAR are up 35.7% over the past year, closing the last trading session at $40.33.
SMAR POWR ratings reflect this optimistic outlook. The stock has an overall rating of C, which corresponds to a Neutral in our own rating system.
It has a C grade for value, stability and momentum. It ranks number 9 in the same industry. Click here to view SMAR’s rating for growth, sentiment and quality.
What should you do now?
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VMEO stock was trading at $3.51 per share Monday afternoon, down $0.04 (-1.13%). Year-to-date, VMEO is up 2.33%, versus a 16.45% gain in the S&P 500 index over the same period.
About the author: Rashmi Kumari
Rashmi has a passion for capital markets, asset 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 to help them make appropriate investment decisions. More…