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 like Agilysys, Inc. (AGYS), SolarWinds Corporation (SWI), and Sapiens International Corporation N.V. (SPNS), with promising upside potential, could be wise investments now. But 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 exponential growth in enterprise data volume has created a huge demand for robust software solutions and services to handle and analyze this data effectively. The demand for advanced software tools and services is growing, with automation on the rise in industries like retail, manufacturing, healthcare, and transportation.

Gartner predicts worldwide IT spending to rise 8% from the current year to reach $5.10 trillion in 2024, while software spending is expected to increase 13.8% year-over-year to $1.04 trillion in 2024.

Propelled by increased enterprise data volume, greater business process automation, and expanding digitization, the software industry shows robust prospects. The global software market is projected to skyrocket to $1.59 trillion by 2032, growing at an 11.9% CAGR.

Furthermore, as software companies integrate generative AI tools into their products, consumer spending on software is expected to increase. Goldman Sachs estimates the total addressable market for Generative AI software to be worth $150 billion.

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: Agilysys, Inc. (AGYS)

AGYS and its subsidiaries provide hardware and software solutions for the hospitality industry, including point of sale, property management, inventory, payments, and reservations management, aimed at enhancing the guest experience.

On October 10, AGYS highlighted technology flexibility at the Global Gaming Expo (G2E) 2023, enabling properties to adapt solutions to their preferences, potentially improving operational efficiency and customer satisfaction in the hospitality industry.

AGYS’ total net revenue for the second quarter ended September 30, 2023, increased 22.8% year-over-year to $58.62 million. Its operating income rose 21.7% from the prior-year quarter to $3.56 million. In addition, its adjusted EPS came in at $0.25, representing an increase of 4.2% year-over-year. Also, its adjusted EBITDA rose 8.9% year-over-year to $8.05 million.

For the fiscal fourth quarter (ending March 2024), AGYS’ revenue is expected to increase 17.8% year-over-year to $62.33 million, while its EPS is projected to come in at $0.29, showing an increment of 11.5% year-over-year. The company’s revenue topped analyst estimates in each of the four trailing quarters.

Over the past year, the stock has gained 31.3% to close the last trading session at $82.61. It has gained 24.9% over the past month.

AGYS’ sound fundamentals are apparent in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

It has an A grade for Sentiment and a B for Growth and Quality. Within the 44-stock B-rated Software - Business industry, it is ranked #12. To see AGYS’ ratings for Value, Momentum, and Stability, click here.

Stock #2: SolarWinds Corporation (SWI)

SWI provides Information Technology (IT) management software products. The company offers a portfolio of solutions to technology professionals to monitor, manage, and optimize 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 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. This should bode well for the firm.

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 December 2023 to increase 1.5% year-over-year to $189.81 million, while its EPS is expected to come at $0.19, indicating a 1.1% year-over-year increase. It surpassed the consensus revenue and EPS estimates in three of the trailing four quarters.

SWI’s shares have gained 8% over the past six months to close the last trading session at $9.31. Over the past five days, the stock has gained 1.4%.

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

It has a B grade for Growth, Value, and Sentiment. Within the same industry, it is ranked #6.

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

Stock #1: Sapiens International Corporation N.V. (SPNS)

SPNS is an international provider of insurance and financial software solutions, offering a range of products such as CoreSuite for different insurance lines, DigitalSuite for stakeholders, and FinancialPro for financial tools. Headquartered in Holon, Israel, SPNS serves its global clientele through direct and partner sales channels.

On October 25, SPNS launched Sapiens Decision Model.AI, integrating Microsoft Azure Open AI Service, which allows for the automatic translation of business policies into decision models, reducing the time required by 30% and enhancing decision-making efficiency. This technology aims to streamline the decision modeling process, potentially improving the company's competitive edge and customer offerings in the insurance industry.

During the second quarter that ended June 30, 2023, SPNS’ non-GAAP revenue increased 8.2% year-over-year to $128.35 million, while its non-GAAP gross profit increased 9% from the prior-year quarter to $57.99 million. Its non-GAAP operating income grew 12.9% from the year-ago value to $23.42 million.

Its non-GAAP EPS came in at $0.33, representing an increase of 22.2% from the same period last year. Also, the company’s adjusted EBITDA increased 12.5% year-over-year to $24.39 million.

Street expects SPNS’ revenue for the fourth quarter (ending December 2023) to increase 9.8% year-over-year to $131.22 million. Its EPS for the same quarter is expected to grow 5.9% year-over-year to $0.34. Moreover, it surpassed the EPS estimates in three of the trailing four quarters, which is impressive.

The stock has gained 36.2% year-to-date and 25% over the past six months to close the last trading session at $25.17.

SPNS’ strong fundamentals are reflected in its POWR Ratings. It has an overall rating of A, which translates to a Strong Buy in our proprietary rating system. It has a B grade for Growth, Value, Momentum, Stability, and Sentiment.

Within the same industry, it is ranked #3. Click here to view SPNS’ rating for Quality.

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AGYS shares were trading at $86.41 per share on Tuesday afternoon, up $3.80 (+4.60%). Year-to-date, AGYS has gained 9.19%, versus a 10.48% rise in the benchmark S&P 500 index during the same period.

Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research.

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