The software industry is anticipated to thrive amid growing digitization across industries. Given the industry’s growth prospects, investors could consider buying fundamentally sound software stocks Fortinet, Inc. (FTNT), The Sage Group plc (SGPYY) and SS&C Technologies Holdings, Inc. (SSNC) for solid returns.

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

The software industry is expected to grow as industries rapidly shift towards digitalization. The increased need for software solutions that can streamline processes and improve efficiency is driving this growth. Also, technological breakthroughs such as machine learning and cloud computing are adding to the growth of the software industry.

The security software industry is estimated to increase at a CAGR of 9% to $11.96 billion by 2030. The increasing demand for improved security measures in industries such as banking, healthcare, and government is also propelling market expansion.

According to Statista, software market revenue is expected to hit $698 billion this year. Moreover, the sector’s revenue is expected to grow at a 5.3% CAGR over the next four years to $858.10 billion by 2028. Investors’ interest in software stocks is evident from the iShares Expanded Tech-Software Sector ETF’s (IGV) 28.3% over the past nine months.

Considering these conducive trends, let’s examine the fundamentals of the three software stock picks.

Fortinet, Inc. (FTNT)

FTNT provides cybersecurity and networking solutions worldwide. It offers FortiGate hardware and software licenses that provide various security and networking functions, including firewall, intrusion prevention, anti-malware, virtual private network, application control, web filtering, anti-spam, and wide area network acceleration.

On December 05, 2023, FTNT has expanded its strategic alliance with Digital Realty (DLR), the world’s biggest provider of cloud- and carrier-neutral data center, colocation, and interconnection solutions. This collaboration accelerates the growth of Fortinet Universal SASE, which has already reached over 100 locations worldwide.

Customers can secure their hybrid IT workflows across clouds and geographies by leveraging Digital Realty’s global data center platform, PlatformDIGITAL®.

FTNT’s trailing-12-month ROTA of 15.39% is significantly higher than the industry average of 0.31%. Its trailing-12-month ROTC of 100.90% is significantly higher than the industry average of 2.75%.

For the fiscal third quarter that ended September 30, 2023, FTNT’s total revenue increased 16.1% year-over-year to $1.33 billion. Its non-GAAP operating income grew 14.3% from the year-ago value to $371.40 million.

The company’s non-GAAP net income attributable to FTNT and its per share value came in at $323.50 million and $0.41, representing increases of 23.1% and 24.2%, respectively, from the prior-year quarter.

Analysts expect FTNT’s revenue to increase 12.8% year-over-year to $5.98 billion for the year ending December 2024. Its EPS is expected to grow 8.3% year-over-year to $1.69 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 19.2% over the past year to close the last trading session at $57.85.

FTNT’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.

FTNT also has an A grade for Quality and a B for Sentiment. It is ranked #5 out of 23 stocks in the Software – Security industry. Click here for the additional POWR Ratings for Growth, Value, Stability and Momentum for FTNT.

The Sage Group plc (SGPYY)

Based in Newcastle upon Tyne, the United Kingdom, SGPYY and its subsidiaries provide technology solutions and services for small and medium businesses in North America, Northern Europe, and internationally. It offers cloud native solutions, such as Sage Intacct, Sage People, Sage 200, Sage X3, Sage Accounting, Sage Payroll, and Sage HR.

SGPYY’s trailing-12-month ROCE of 15.05% is significantly higher than the industry average of 1.27%. Its trailing-12-month ROTA of 5.36% is significantly higher than the industry average of 0.31%.

SGPYY’s underlying total revenue for the year ended September 30, 2023, increased 12.1% year-over-year to £2.18 billion ($2.77 billion). Its underlying operating profit rose 21% year-over-year to £456 million ($578.68 million). The company’s EBITDA increased 15.9% year-over-year to £553 million ($701.78 million). Also, its underlying basis EPS came in at 32.25p, representing an increase of 25.3% year-over-year.

The consensus revenue came in at $3.02 billion for the fiscal year ending September 2024 represents a 10.7% increase year-over-year. Shares of SGPYY has gained 64.7% over the past year to close the last trading session at $58.65.

SGPYY’s positive outlook is reflected in its POWR Ratings. The stock has an overall rating of B, translating to a Buy in our proprietary rating system.

SGPYY has a B grade for Growth, Stability and Quality. It ranks #5 out of 21 stocks in the A-rated Software - SAAS industry. Click here to access additional SGPYY ratings (Value, Sentiment and Momentum).

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 margin of 22.13% is 125.6% higher than the industry average of 9.81%. Its trailing-12-month EBITDA margin of 33.16% is 141.8% higher than the industry average of 13.72%.

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.

Street expects SSNC’s revenue to increase 3.9% year-over-year to $5.70 billion for the fiscal year ending December 2024. Its EPS is expected to come in at $5.12 for the same period. Shares of SSNC has gained 13.1% over the past year to close the last trading session at $59.34.

SSNC has an overall A rating, equating to a Strong Buy in our POWR Ratings system. It has an A grade for Momentum and a B for Stability, Value and Sentiment. It is ranked #9 out of 133 stocks in the Software – Application industry.

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

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FTNT shares were trading at $58.13 per share on Thursday afternoon, up $0.28 (+0.48%). Year-to-date, FTNT has declined -0.68%, versus a -1.25% 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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