While the software industry enjoys robust demand and investment, persistent challenges emerge in the sector, characterized by intense competition and evolving financial conditions. So, quality software stocks Constellation Software Inc. (CNSWF) and SS&C Technologies Holdings, Inc. (SSNC) could be solid buys this month.

Although HubSpot, Inc. (HUBS) could be an ideal addition to one’s watchlist, it could be best to avoid C3.ai, Inc. (AI).

Before we dive into the analysis of the stocks, let's take a peek at the Software industry’s current dynamics.

Recent years have seen a significant rise in software adoption, fueled by e-commerce growth, advancements in technologies like AI and IoT, and the proliferation of connected devices. The increasing sophistication of malware and cyber threats have also bolstered the software industry.

The software market is growing due to the adoption of remote work as the new norm, leading to increased productivity. Government support for a tech-led world further drives the market growth. The global software is expected to grow at a CAGR of 11.5% from 2023 to 2030.

Moreover, the growing demand for a unified solution to address business challenges is driving the growth of the Software as a Service (SaaS) market. Businesses increasingly utilize SaaS Platform software, integrating applications such as CRM, business intelligence, supply chain management, and e-commerce systems.

The global SaaS market is projected to reach $702.19 billion by 2030, growing at a CAGR of 18.8%.

In addition, the software development market is expected to grow due to rising demand for software applications leveraging IoT and cloud-based solutions to streamline business operations. Steady traction is anticipated for application development software, driven by the need for scalable and customized solutions.

The global application development software market is expected to expand at a CAGR of 24.3% from 2021 to 2028.

However, the software sector is marked by intense competition, with a multitude of companies fiercely contending for market dominance. This heightened competition can instigate price wars, precipitating downward pressure on pricing and compressing industry profit margins.

Also, the software industry continues to grapple with the repercussions of more stringent financial and credit conditions, stemming from the Federal Reserve's decision to raise its policy rate by 5.25 percentage points over the past 20 months.

Considering these conducive trends, let's take a look at the fundamentals of the four software stocks, starting with Stocks to Buy:

Constellation Software Inc. (CNSWF)

Headquartered in Toronto, Canada, CNSWF is a global provider of market-leading software and services to several industries. The company operates through Public- Sector and Private-Sector segments. CNSWF serves government and government-related customers, as well as commercial customers.

CNSWF’s trailing-12-month EBIT and net income margins of 13.59% and 6.64% are 184.1% and 183.3% higher than the industry averages of 4.78% and 2.35%.

On October 26, CNSWF’s subsidiary Vervotech and PriceTravel Holdings, a prominent global distribution company in Latin America and The Caribbean, announced a strategic technology collaboration. With over 20 years of experience in the travel industry, PriceTravel Holdings will provide its partner agencies access to Vervotech's AI-based mapping products, offering impeccably mapped, deduplicated, and enriched accommodation data with over 40 unique attributes.

On September 14, CNSWF completed the acquisition of the Optimal Blue business from Intercontinental Exchange, Inc. The company paid cash of $201 million and assumed an estimated cash holdback payable of $1 million and a long-term promissory note payable of $500 million.

On November 9, CNSWF declared a $1.00 per share dividend payable on January 11, 2024. It pays an annual dividend of $4, which translates to a yield of 0.17% on the current market price.

CNSWF’s revenue increased 23.2% year-over-year to $2.13 billion in the third quarter, ended September 30, 2023. The company’s net income rose 18.2% from the previous-year quarter to $169 million, and EPS grew 30.2% year-over-year to $8.36.

CNSWF’s revenue is expected to be 8.35 billion, increasing 26.1% year-over-year for its fiscal year ending December 2023. It has exceeded the consensus revenue estimates in each of the trailing four quarters, which is notable.

The stock has gained 60.7% over the past year and 15.2% over the past month to close the last trading session at $2390.

CNSWF’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 are calculated by considering 118 different factors, each weighted optimally.

The stock has an A grade for Stability. CNSWF is ranked #34 in the 131-stock Software – Application industry.

In addition to the POWR Rating grades just highlighted, one can see CNSWF’s ratings for Momentum, Quality, Value Sentiment, and Growth here.

SS&C Technologies Holdings, Inc. (SSNC)

SSNC delivers software products and services to streamline operations in finance and healthcare. Its solutions automate intricate business processes, aiding clients with information processing. The company controls a technology stack encompassing securities accounting, front-office and back-office functions.

SSNC’s trailing-12-month EBIT and EBITDA margins of 22.13% and 33.16% are 128.5% and 141.8% higher than the industry averages of 9.68% and 13.72%.

On November 29, SSNC announced that it had been selected by SmartStop Self Storage REIT, Inc. to provide transfer agency services for all of its sponsored Real Estate Investment Trusts (REITs). As the largest public non-traded self-storage REIT in the U.S. with over $2.9 billion in assets, SmartStop aims to enhance economies of scale with SS&C's efficient and scalable transfer agency technology.

On October 1, SSNC successfully acquired the Managed Funds Administration (MFA) business from Iress Limited, incorporating around 150 team members into SS&C's Global Investor & Distribution Solutions division.

The strategic move aims to enhance services in the Australian market, aligning with SSNC's global mission to aid asset managers in optimizing operations, mitigating risk, ensuring compliance, and improving client service.

On November 16, SSNC declared a quarterly dividend payout of $0.24 per share, consistent with its quarterly dividend policy. The dividend is payable on December 15, 2023. Its annual dividend of $0.96 translates to a yield of 1.70% on the prevailing price level. The company has raised its dividend payouts at a CAGR of 18.4% over the past three years.

During the fiscal third quarter that ended September 30, 2023, SSNC’s adjusted revenue increased 3.4% year-over-year to $1.37 billion. Its adjusted consolidated EBITDA grew 6.4% from the year-ago value to $533.90 million. In addition, adjusted EPS attributable to SSNC came in at $1.17, up 1.7% year-over-year improvement.

The consensus revenue estimate of $1.39 billion for the fiscal fourth quarter ending December 2023 reflects a 3.9% year-over-year improvement. The consensus EPS estimate of $1.25 reflects a 7.4% rise from the previous year. Also, the company surpassed the consensus revenue estimates in three of the four trailing quarters.

The stock has gained 12.5% over the past year, closing the last trading session at $57.06.

SSNC’s solid outlook is apparent in its POWR Ratings. The stock has an overall rating of A, which translates to a Strong Buy in our proprietary rating system.

SSNC has an A grade for Momentum and a B for Value, Sentiment, and Stability. It has ranked #10 in the Software – Application industry.

Click here to access additional SSNC ratings for Growth and Quality.

Stock to Hold:

HubSpot, Inc. (HUBS)

HUBS provides a cloud-based Customer Relationship Management (CRM) platform for businesses. The company’s CRM platform includes marketing, sales, service, and content management systems, as well as integrated applications, such as search engine optimization, blogging, website content management, etc.

HUBS’ negative trailing-12-month EBIT and EBITDA margins of 5.05% and 3.73% are lower than the industry averages of 4.78% and 9.25%. On the other hand, its trailing-12-month gross profit margin of 83.62% is 71.8% higher than the industry average of 48.67%.

On November 1, HUBS announced that it had entered into a definitive agreement to acquire Clearbit, a top B2B data provider, to help HUBS’ customers grow with industry-leading customer intelligence.

For the fiscal third quarter, which ended on September 30, 2023, HUBS’ total revenue increased 25.6% year-over-year to $557.56 million. The company’s non-GAAP net income amounted to $83.40 million and $1.59 per share, up 137.9% and 130.4% from the prior-year quarter, respectively. Also, its non-GAAP free cash flow rose 82.2% from the year-ago quarter to $64.74 million. But, its operating expenses increased 24.5% from the year-ago quarter to $490.47 million.

For the fiscal fourth quarter, HUBS anticipates total revenue between $556 million and $558 million, benefiting from a 2-point tailwind due to favorable foreign exchange rates. The projected non-GAAP operating income ranges from $85 million to $86 million. Non-GAAP net income per common share is expected to be $1.53 to $1.55, considering around 52.70 million weighted average shares outstanding.

Street expects HUBS’ revenue and EPS for the fiscal fourth quarter (ending December 2023) to increase 18.9% and 39.2% year-over-year to $558.30 million and $1.55, respectively. Moreover, the company topped its revenue and EPS estimates in each of the trailing four quarters.

The stock has gained 24.2% over the past nine months to close the last trading session at $497.79. However, it has declined 8.5% over the past three months.

HUBS’ mixed fundamentals are reflected in its POWR Ratings. The stock has an overall rating of C, which equates to a Neutral in our proprietary rating system.

It has a C grade for Momentum. Within the Software – Business industry, it is ranked #20 among 44 stocks.

To see HUBS’ Value, Growth, Stability, Sentiment, and Quality ratings, click here.

Stock to Sell:

C3.ai, Inc. (AI)

AI is a global enterprise artificial intelligence software company. It offers the C3 AI application platform, an application development and runtime environment that allows customers to design, build, and deploy enterprise AI applications. It has numerous partnerships in the financial services and oil and gas industries.

AI’s trailing-12-month levered FCF margin of negative 35.16% compares to the 8.12% industry average. Its trailing-12-month EBITDA margin of negative 104% is lower than the industry average of 9.25%.

During the fiscal 2023 second quarter (ended October 31, 2022), AI’s revenue rose 17.3% year-over-year to $73.23 million. However, its gross profit decreased 1.3% year-over-year to $41.11 million. Its total operating expenses increased 6.1% from the year-ago quarter to $120.51 million. The company’s net loss widened 1.4% from the prior year’s quarter to $69.78 million.

AI's financial outlook for the third quarter of fiscal 2024 anticipates total revenue in the range of $74 to $78 million, with a non-GAAP loss from operations between $40 and $46 million. For the full fiscal year 2024, the company expects non-GAAP losses from operations between $115 million and $135 million.

For the third quarter of fiscal 2024 (ending January 31, 2023), analysts expect AI’s loss per share to widen 65.2% year-over-year to $0.10.

Shares of AI have slumped 23.6% over the past six months to close the last trading session at $29.16.

AI’s POWR Ratings are consistent with this bleak outlook. The stock has an overall D rating, equating to a Sell in our proprietary rating system.

The stock has an F grade for Quality and a D for Stability and Value. Within the Software - SAAS industry, it is ranked #22 of 23 stocks.

Click here to see the additional ratings of AI for Growth, Momentum, and Sentiment.

What To Do Next?

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CNSWF shares were trading at $2,390.00 per share on Thursday morning, down $0.24 (-0.01%). Year-to-date, CNSWF has gained 53.62%, versus a 21.04% rise in the benchmark S&P 500 index during the same period.

Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.

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