The software industry's future is alight with remarkable potential, fueled by forward technological leaps, extensive digital overhauls across various industries, the swift uptake of data-driven solutions, and significant capital investments in cloud technology.

Given this backdrop, quality software stocks Blackbaud, Inc. (BLKB), Pegasystems Inc. (PEGA), and SolarWinds Corporation (SWI), which are soaring, could be wise portfolio additions now.

Before embarking on an in-depth analysis of these stocks, let’s discuss why the software industry is primed for expansion in the foreseeable future.

The ripple effects of the software industry are far-reaching and deeply impactful, leaving a transformative mark on individuals and global institutions alike. Despite last year's economic turbulence, the software industry is set to bolster the U.S. economy significantly.

Business enterprises worldwide have tapped into the revolutionary possibilities of digitalization in reshaping their operations. Software companies play a crucial role, providing various services and solution suites that include key aspects like cloud computing and cybersecurity.

The technology-focused Nasdaq Composite has seen an impressive boost of 26.8% year-to-date, driven by a growing fascination with Generative AI and Large Language Models (LLMs).

As software companies integrate generative AI tools into their products, consumer spending on software is expected to increase. Goldman Sachs estimates Generative AI to add an extra $150 billion to the existing global software market.

The global software market is projected to skyrocket to $1.59 trillion by 2032, growing at an 11.9% CAGR. The SPDR S&P Software & Services ETF’s (XSW) 16.2% return year-to-date indicates investors’ interest in software stocks.

With these favorable trends in mind, let's delve into the fundamentals of the three Software - Business stock picks, beginning with the third choice.

Stock #3: Blackbaud, Inc. (BLKB)

BLKB operates internationally as a cloud software solutions provider to non-profits, foundations, companies, education and healthcare institutions, and other social good entities.

On July 26, 2023, BLKB announced its refreshed Blackbaud Partner Network, expected to deliver shared value for partners, customers, and the company. The revamped program simplifies partner onboarding and offers new resources to grow the network.

On June 5, BLKB announced the launch of a major new wave of its Intelligence for Good strategy, with an extensive agenda of initiatives and investments to be implemented on a rolling basis over upcoming quarters, targeted at making artificial intelligence (AI) more accessible, powerful, and responsible across the social impact sector.

BLKB’s trailing-12-month cash from operations of $197.12 million is 228.1% higher than the industry average of $60.08 million. Also, its trailing-12-month gross profit and levered FCF margins of 53.58% and 20.26% are 9.8% and 181.2% higher compared to the industry averages of 48.82% and 7.20%, respectively.

BLKB’s total revenue increased 2.3% year-over-year to $271.04 million in its fiscal second quarter that ended June 30, 2023. Its non-GAAP gross profit and income from operations stood at $166.90 million and $74.14 million, up 7.1% and 36.1% from the year-ago quarter, respectively.

The company’s non-GAAP net income and earnings per share grew 35.2% and 30.7% year-over-year to $52.60 million and $0.98. Moreover, as of June 30, 2023, its total current assets stood at $1.04 billion, compared to $918.64 million as of December 31, 2022.

Street expects BLKB’s revenue and EPS to increase 5.6% and 40.1% year-over-year in the fiscal third quarter ending September 2023, to $275.89 million and $0.97, respectively. The company surpassed consensus EPS estimates in each of the trailing four quarters, which is impressive.

The stock has gained 58.6% over the past year to close its last trading session at $72.26. Over the past three months, the stock has gained 4.3%.

BLKB’s POWR Ratings reflect this robust outlook. The stock has an overall rating of B, which translates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

BLKB has a B grade for Growth, Stability, and Sentiment. It is ranked #14 in the 45-stock Software – Business industry.

In addition to the POWR Rating grades we’ve stated above, one can see BLKB ratings for Value, Momentum, and Quality here.

Stock #2: Pegasystems Inc. (PEGA)

PEGA develops, markets, licenses, hosts, and supports enterprise software applications. The company provides Pega Platform, an intelligent automation software for clients’ processes and workflows, and Pega Infinity, a software platform that unifies customer engagement and digital process automation.

On September 17, PEGA announced a quarterly cash dividend of $0.03 per share, maintaining the company’s current dividend program, payable to the shareholders on October 16. The company’s annual dividend of $0.12 translates to a 0.28% yield on the prevailing prices, while its four-year average dividend yield is 0.18%.

On September 13, the company announced the general availability of Pega Infinity '23, a new generative AI capability anticipated to help businesses operationalize agility to become more autonomous enterprises.

PEGA’s trailing-12-month cash from operations of $141.16 million is 134.9% higher than the industry average of $60.08 million. Also, its trailing-12-month gross profit and levered FCF margins of 70.61% and 12.23% are 44.7% and 69.8% higher than the industry averages of 48.82% and 7.20%, respectively.

In the fiscal second quarter that ended June 30, 2023, PEGA’s total revenue increased 8.7% year-over-year to $298.27 million. Its gross profit stood at $202.13 million, up 12.8% from the year-ago quarter.

The company’s non-GAAP net income and non-GAAP earnings per share came in at $1.20 million and $0.01, compared to a non-GAAP net loss and non-GAAP loss per share of $31.41 million and $0.38 in the same quarter last year, respectively.

Street expects PEGA’s revenue for the fiscal third quarter ending September 2023 to increase 9.7% year-over-year to $296.93 million, while its EPS is expected to come at $0.01.

The stock has gained 23.7% year-to-date to close the last trading session at $42.34. Over the past year, it has returned 31.2%.

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

It also has a B grade for Growth and Value. Within the Software – Business industry, it is ranked #12.

Click here to see PEGA’s additional Momentum, Stability, Sentiment, and Quality ratings.

Stock #1: SolarWinds Corporation (SWI)

SWI provides information technology (IT) management software products. The company offers a portfolio of solutions to technology professionals for monitoring, managing, and optimizing networks, systems, desktops, applications, storage, databases, website infrastructures, and IT service desks.

On September 20, SWI announced the launch of new service management and database observability solutions designed to help companies achieve operational excellence, better business outcomes, and accelerated innovation across the enterprise.

The new Enterprise Service Management (ESM) and upgraded SQL Sentry® solutions are part of the company’s ongoing transformative strategy to unify observability and service management uniquely. This should bode well for the firm.

SWI’s trailing-12-month cash from operations of $122.83 million is 104.4% higher than the industry average of $60.08 million. Also, its trailing-12-month gross profit and levered FCF margins of 90.31% and 22.54% are 85% and 212.8% higher than the industry averages of 48.82% and 7.20%, respectively.

For the fiscal second quarter that ended June 30, 2023, SWI’s total revenue stood at $185.03 million, up 5.1% year-over-year. Its non-GAAP gross profit and non-GAAP operating income increased 3.7% and 17.7% from the year-ago quarter to $167.05 million and $74.59 million, respectively.

Its non-GAAP net income and non-GAAP earnings per share stood at $34.07 million and $0.21, respectively. Its adjusted EBITDA stood at $79.14 million, up 18.4% year-over-year.

Street expects SWI’s revenue for the fiscal quarter ending September 2023 to increase 2.4% year-over-year to $183.70 million, while its EPS is expected to come at $0.18. It surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

SWI’s shares have gained 27% over the past year to close the last trading session at $9.75. Over the past six months, the stock has returned 16.5%.

It’s no surprise that SWI has an overall rating of B, which translates to a Buy in our proprietary rating system.

It has a B grade for Growth, Value, and Sentiment. Within the same industry, it is ranked #5.

Beyond what we stated above, we also have given SWI grades for Momentum, Stability, and Quality. Get all the SWI ratings here.

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BLKB shares were trading at $71.74 per share on Tuesday morning, down $0.52 (-0.72%). Year-to-date, BLKB has gained 21.88%, versus a 13.13% 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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