The software industry’s future looks bright thanks to technological advancements, cloud-based service demand, AI advancements, and global digital transformation initiatives across industries.

Given the industry’s growth prospects, fundamentally strong software stocks Splunk Inc. (SPLK), SolarWinds Corporation (SWI) and eGain Corporation (EGAN) might be worth buying.

Before delving deeper into their fundamentals, let’s discuss what’s happening in the software industry.

According to a Forrester analysis of vendor financial reports, secondary research sources, and trade association data, global commercial software spending will increase by more than 12% annually for the next few years, reaching $1.4 trillion in 2027.

Additionally, the global software market is estimated to reach $858.10 billion by 2028, growing at a 5.3% CAGR. Also, the US software market revenue is expected to hit $353.50 billion this year. The sector’s revenue is expected to grow at a 4.1% CAGR over the next five years to $414.70 billion by 2028.

Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 47.1% gains over the past nine months.

Let’s analyze the fundamentals of the three featured software stocks.

Splunk Inc. (SPLK)

SPLK develops, markets, and sells cloud services and licensed software solutions internationally. The company provides unified security and observability platform, including Splunk Security and Splunk Observability. Also, it offers application programming interfaces, software development kits, and other interfaces.

SPLK’s trailing-12-month levered FCF margin of 25.23% is 177.3% higher than the industry average of 9.10%. Its trailing-12-month ROTA of 1.97% is 144.6% higher than the industry average of 0.80%.

SPLK’s total revenues increased 14.8% year-over-year to $1.07 billion in the third quarter that ended October 31, 2023. Its gross profit grew 17.8% year-over-year to $857.38 million.

In addition, the company’s net income came in at $96.85 million or $0.55, per share, compared to a net loss of $32.62 million or $0.20 per share in the previous-year quarter.

Analysts expect SPLK’s revenue to increase 10.8% year-over-year to $4.44 billion for the year ending January 2025. Its EPS is expected to grow 11.5% year-over-year to $4.79 for the same period. It is expected to surpass EPS in all four trailing quarters. The stock has gained 82% over the past nine months to close the last trading session at $154.42.

SPLK’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.

SPLK has an A grade for Growth and a B for Quality. Within the B-rated Software – SAAS industry, it is ranked #4 out of 24 stocks. To see additional POWR Ratings for Value, Stability, Momentum and Sentiment for SPLK, click here.

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.

SWI’s trailing-12-month EBIT margin of 22.56% is 376.4% higher than the 4.74% industry average. Its trailing-12-month EBITDA margin of 33.39% is 270.8% higher than the 9.01% industry average.

SWI’s total revenue for the fiscal fourth quarter, which ended on December 31, 2023, rose 5.9% year-over-year to $198.14 million. The company’s non-GAAP operating income increased 21.4% over the year-ago quarter to $81.70 million. Moreover, its non-GAAP net income and non-GAAP EPS increased 30.8% and 26.3% year-over-year to $39.48 million and $0.24, respectively.

The consensus revenue came in at $779.67 million for the fiscal year ending December 2024 represents a 2.8% increase year-over-year. Its EPS is expected to grow 9.9% year-over-year to $0.97 for the same period. It is expected to surpass EPS in all four trailing quarters. SWI’s shares have gained 52.6% past nine months to close the last trading session at $13.18.

It’s no surprise that SWI has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has a B grade for Value, Growth, Sentiment and Stability. It is ranked #3 out of 43 stocks in the B-rated Software - Business industry.

Beyond what is stated above, we’ve also rated SWI for Momentum and Quality. Get all SWI ratings here.

eGain Corporation (EGAN)

EGAN specializes in developing, licensing, implementing, and supporting customer service infrastructure software solutions. Its main offering is the Knowledge Hub, a unified solution that automates, augments, and orchestrates customer engagement. EGAN provides subscription services for cloud-based access to their software and offers professional services.

EGAN’s trailing-12-month ROCE of 10.94% is 449.2% higher than the industry average of 1.99%. Its 7.33% trailing-12-month net income margin is 229.2% higher than the 2.23% industry average.

For the fiscal second quarter ended December 31, 2023, EGAN reported total revenue of $23.82 million. Its gross profit came in at $16.83 million. In addition, the company’s net income came in at $2.19 million, compared to a loss of $104 thousand in the previous-year quarter. Also, its earnings per share came in at $0.07 and adjusted EBITDA increased 71.9% year-over-year to $3.77 million.

Street expects EGAN’s revenue to come in at $92.81 million for the year ending June 2024. Its EPS is expected to grow 22% year-over-year to $0.31 for the same period. It is expected to surpass EPS in all four trailing quarters. Shares of EGAN have gained 2.8% intraday to close the last trading session at $5.94.

EGAN has an overall A rating, equating to a Strong Buy in our POWR Ratings system.

EGAN’s is ranked #2 out of 131 stocks in the Software - Application industry. It has an A grade for Value and Quality. To see additional EGAN’s ratings for Growth, Stability, Sentiment and Momentum, click here.

What To Do Next?

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SPLK shares were trading at $154.54 per share on Tuesday afternoon, up $0.12 (+0.08%). Year-to-date, SPLK has gained 1.44%, versus a 4.16% rise in the benchmark S&P 500 index during the same period.

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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