Decoding Buy or Hold for These 3 Software Stocks
The software industry is experiencing a surge in demand driven by rising digitization and a significant transition toward cloud-based solutions. Given this backdrop, let’s decode whether software stocks Palo Alto Networks (PANW), Squarespace (SQSP), and Rimini Street (RMNI) are solid portfolio additions or not. Read more….
The software industry, witnessing noteworthy growth, is propelled by technological advancements, digital transitions across various sectors, the increasing emphasis on data-driven solutions, and significant investment in cloud-based technology.
Given this backdrop, I believe software stocks Squarespace, Inc. (SQSP) and Rimini Street, Inc. (RMNI) are strong candidates to invest in, given their solid growth trajectory and profitability. Conversely, waiting for a better entry point in Palo Alto Networks, Inc. (PANW) might be prudent.
The unparalleled influence of the software industry on individuals and institutions worldwide is undeniable. Projections indicate that the industry will significantly stimulate the U.S. economy.
Efforts to enhance efficiency in crucial applications are becoming increasingly common across organizations, expected to increase software expenses substantially. According to Gartner, Inc. (IT), global IT spending is anticipated to reach $5.10 trillion in 2024, suggesting an 8% year-over-year rise. The global enterprise software market is poised to expand at a CAGR of 11.5%, reaching $517.26 billion by 2030.
There has been a notable shift in workplace norms over recent years, with adopting hybrid work models and escalating reliance on cloud services significantly fueling increases in cloud usage. On average, enterprises use 1,427 cloud services, and an average employee uses up to 36 cloud services, including collaboration and file-sharing platforms.
Gartner projects a 20.4% increase in global end-user spending on public cloud services to $678.80 billion in 2024, a rise from $563.60 billion in 2023. Moreover, it anticipates that over 70% of enterprises will utilize industry cloud platforms to fast-track business initiatives, compared to less than 15% in 2023.
Despite these advancements, the shift toward increased digitalization presents heightened cybersecurity risks, thereby increasing organizations’ vulnerability to numerous cybersecurity threats. Over the past year, surging cyber-attack incidents, primarily driven by rapid digitalization, the growing adoption of cloud solutions, and the proliferation of smart devices, have thrown the spotlight on the cybersecurity industry.
The global cybersecurity market is estimated to expand at a 12.3% CAGR to reach $500.70 billion by 2030.
Considering these conducive trends, let’s take a look at the fundamentals of the three software stocks.
Palo Alto Networks, Inc. (PANW)
PANW provides cybersecurity solutions worldwide. It focuses on delivering value in four areas: Network Security; Cloud Security; Security Operations and Threat Intelligence; and Security Consulting.
On December 5, PANW acquired Dig Security, an innovative provider of Data Security Posture Management. Dig’s cutting-edge capabilities, seamlessly integrated into PANW’s Networks Prisma Cloud platform, will provide organizations with near-real-time data protection across the entire cloud estate. This should bode well for PANW.
On December 4, IBM Consulting and PANW expanded their strategic partnership to better enable clients to strengthen their end-to-end security postures and navigate evolving security threats. PANW will be in a select group of strategic IBM Consulting partners, and IBM Consulting will be a premier security services partner for PANW.
The longstanding partnership with IBM could help their clients mitigate risk and protect critical data assets with industry-leading, AI-powered solutions, cloud security, and services.
PANW’s trailing-12-month cash from operations of $3.07 billion is significantly higher than the industry average of $73.59 million. Its trailing-12-month ROCE and ROTA of 45.84% and 4.15% are significantly higher than the industry averages of 1.13% and 0.31%, respectively.
Over the past three and five years, its revenue grew at CAGRs of 26.2% and 24.3%, respectively, while its total assets grew at 19.3% and 20.6% CAGRs over the same periods.
In the fiscal first quarter that ended October 31, 2023, PANW’s total revenue and total gross profit increased 20.1% and 27.6% year-over-year to $1.88 billion and $1.41 billion, respectively.
For the same quarter, non-GAAP net income and non-GAAP net income per share stood at $466.30 million and $1.38, up 75% and 66.3% from the prior-year quarter, respectively. As of October 31, 2023, PANW’s total current assets came at $6.48 billion, compared to $6.05 billion as of July 31, 2023.
Street expects PANW’s revenue and EPS for the fiscal second quarter ending January 2024 to increase 19.1% and 23.8% year-over-year to $1.97 billion and $1.30, respectively. The company…