Digitalizing various processes and the adoption of new cutting-edge technologies to meet consumers' ever-changing needs have boosted the software industry’s growth prospects.

Against this backdrop, investors could consider buying fundamentally strong software stocks such as UiPath Inc. (PATH), SolarWinds Corporation (SWI), and Karooooo Ltd. (KARO) for solid gains in May. Before diving deeper into the fundamentals of these stocks, let’s first understand what’s shaping the software industry’s prospects.

As businesses increasingly digitize their operations, the demand for software solutions across various sectors has risen. According to Gartner, software spending is expected to grow 13.9% year-over-year to $1.04 trillion this year.

Given the rising popularity of cloud computing, the demand for Software-as-a-Service (SaaS) has grown substantially. SaaS's scalability, flexibility, and low deployment costs make it more appealing to businesses than traditional software. The worldwide SaaS market is expected to generate revenue of $374.50 billion by 2028, exhibiting a CAGR of 7.3%.

Digitalization of business operations, with the help of emerging technologies like artificial intelligence, machine learning, data analytics, and business intelligence, has aided the software industry in keeping up with consumers' ever-changing demands and finding innovative solutions. The business software market is projected to reach $1.10 trillion by 2029, growing at a CAGR of 11.2%.

Meanwhile, the uptick in the adoption of IoT and AI-based solutions, the need for custom software solutions, the proliferation of cloud platforms, and the growing emphasis on cutting-edge mobile applications are driving the demand for software applications. The global application development software market is estimated to reach $543.60 billion by 2030, growing at a 14.7% CAGR.

Considering these conducive trends, let’s examine the fundamentals of the three featured software stocks.

UiPath Inc. (PATH)

PATH provides an end-to-end automation platform that offers a range of robotic process automation (RPA) solutions, primarily in the U.S., Romania, the United Kingdom, the Netherlands, and internationally.

On March 6, PATH announced that the Ministry of Tourism of the Kingdom of Saudi Arabia started using the UiPath Business Automation Platform to further its national tourism strategy of thriving as a global destination and making tourism a leading industry in its dynamic and diverse economy.

On February 29, PATH and Google Cloud announced an expanded partnership to enable customers to transform their enterprises with AI-powered automation.

To facilitate Google Cloud customers' purchase of the UiPath Business Automation Platform, PATH has become available as a Premier Level partner. This makes it easy for customers to install and advance their automation initiatives on Google Cloud infrastructure.

PATH’s trailing-12-month gross profit margin and levered FCF margin of 85.09% and 26.39% are 74.9% and 172.8% higher than the industry averages of 48.64% and 9.67%, respectively.

Over the past three years, PATH’s revenue grew at a CAGR of 29.1%. Similarly, its total assets grew at a CAGR of 50.5% during the same period.

PATH’s total revenue and non-GAAP gross profit for the fiscal fourth quarter that ended January 31, 2024, increased 31.3% and 34% year-over-year to $405.25 million and $360.07 million, respectively. For the same quarter, its non-GAAP net income and net income per share stood at $128.51 million and $0.22, up 55.4% and 46.7% from the prior-year quarter, respectively.

Street expects PATH’s revenue and EPS for the quarter that ended April 30, 2024, to increase 14.9% and 5.9% year-over-year to $332.85 million and $0.12, respectively. The company surpassed consensus revenue and EPS estimates in each of the trailing four quarters, which is impressive. The stock has gained 34.7% over the past year to close the last trading session at $18.97.

PATH’s strong fundamentals are reflected in its POWR Ratings. It has an overall B rating, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

It has an A grade for Growth and a B for Sentiment and Quality. It is ranked #7 out of 18 stocks in the A-rated Software - SAAS industry. Click here to see the additional POWR Ratings for PATH (Value, Momentum, and Stability).

SolarWinds Corporation (SWI)

SWI provides information technology (IT) management software products in the U.S. and internationally. The company offers solutions for observability, IT service management, application performance, and database management.

On April 18, SWI launched a groundbreaking new consultative approach to maximizing the value of IT service management (ITSM) solutions for enterprises without bearing the costs and staffing requirements that are generally associated with high-level IT consultancy.

With the launch of this free tool, SWI has offered enterprises a deeper understanding of their current ITSM practices and provided a tailored, actionable roadmap toward operational excellence, cost reduction, and superior service delivery.

SWI’s trailing-12-month Return on Total Capital of 3.89% is 63.5% higher than the industry average of 2.38%. Similarly, its trailing-12-month EBIT margin of 22% is 358.1% higher than the industry average of 4.80%.

Over the past three years, SWI’s revenue grew at a CAGR of 1.9%. Similarly, its EBIT grew at a CAGR of 41.2% during the same period.

For the fiscal fourth quarter that ended December 31, 2023, SWI’s total revenue and non-GAAP gross profit increased 5.9% and 6.1% year-over-year to $198.14 million and $179.88 million, respectively. For the same quarter, its non-GAAP net income and earnings per share stood at $39.48 million and $0.24, up 30.8% and 26.3% from the prior-year quarter, respectively.

Analysts expect SWI’s revenue and EPS for the quarter that ended March 31, 2024, to increase 2.8% and 9.5% year-over-year to $191.10 million and $0.22, respectively. The company surpassed the consensus revenue and EPS estimates in each of the trailing four quarters. The stock has gained 38.8% over the past year to close the last trading session at $11.02.

SWI’s POWR Ratings reflect its positive prospects. It has an overall A rating, equating to a Strong Buy in our proprietary rating system.

SWI has an A grade for Growth and a B for Value and Sentiment. Within the B-rated Software - Business industry, it is ranked #3 out of 43 stocks. To see the additional POWR Ratings of SWI for Momentum, Stability, and Quality, click here.

Karooooo Ltd. (KARO)

Headquartered in Singapore, KARO provides a mobility software-as-a-service (SaaS) platform for connected vehicles in South Africa, the rest of Africa, Europe, the Asia-Pacific, the Middle East, and the U.S.

KARO’s trailing-12-month CAPEX / Sales of 14.37% is 518.6% higher than the industry average of 2.32%. Similarly, its trailing-12-month asset turnover ratio of 1.06x is 73% higher than the industry average of 0.61x.

Over the past three years, KARO’s EBITDA grew at a CAGR of 13.5%. Similarly, its net income grew at a CAGR of 26.2% during the same period.

KARO’s revenue and gross profit for the fiscal third quarter that ended November 30, 2023, increased 16.1% and 17.9% year-over-year to ZAR1.08 billion ($57.62 million) and ZAR687.31 million ($36.67 million), respectively. In addition, its adjusted EBITDA stood at ZAR427.87 million ($22.83 million), up 28.3% from the year-ago quarter.

For the same quarter, its profit attributable to owners of the parent and earnings per share increased 34.9% each from the prior-year quarter to ZAR196.34 million ($10.47 million) and ZAR6.34, respectively.

For the quarter that ended February 29, 2024, KARO’s revenue and EPS are expected to increase 14.5% and 28.5% year-over-year to $57.26 million and $0.33, respectively. Over the past year, the stock has gained 24.8%, closing the last trading session at $29.06.

KARO’s POWR Ratings reflect this promising outlook. It has an overall rating of A, equating to a Strong Buy in our proprietary rating system.

KARO has an A grade for Sentiment and Quality and a B for Value and Stability. Within the Software - Application industry, it is ranked #3 out of 134 stocks. To see KARO’s Growth and Momentum ratings, click here.

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PATH shares fell $0.15 (-0.79%) in premarket trading Wednesday. Year-to-date, PATH has declined -23.63%, versus a 5.94% rise in the benchmark S&P 500 index during the same period.

From her school days, Neha harbored a profound fascination for finance, a passion that steered her toward a career as an investment analyst following the completion of her bachelor's degree in commerce. Currently enrolled in the CFA program, Neha is dedicated to further enriching her comprehension of investment fundamentals. Neha's primary objective is to aid retail investors in discerning optimal investment opportunities by diligently evaluating crucial aspects of financial instruments, with a primary focus on stocks and ETFs. Her commitment lies in empowering individuals to make informed and strategic investment decisions in the dynamic world of finance.

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