2 Little-Known Software Stocks to Buy in 2023

The software industry thrived during the pandemic, and amid rapid digitalization, the momentum is expected to continue. According to Statista, the market revenue from collaboration software is expected to keep increasing, reaching about $21 billion in 2026.

Moreover, the global enterprise software industry is expected to grow at a CAGR of 7.9% from 2022 to 2028. “Enterprise IT spending is recession-proof as CEOs and CFOs, rather than cutting IT budgets, are increasing spending on digital business initiatives,” said John-David Lovelock, Distinguished VP Analyst at Gartner.

In addition, cloud computing is gaining traction as organizations continue to migrate their workloads from traditional channels to digital formats, which should bode well for the software industry. The worldwide public cloud computing market is expected to reach an estimated $490 billion in 2022.

Therefore, under-the-radar software stocks Synopsys, Inc. (SNPS) and Progress Software Corporation (PRGS) should benefit significantly. These stocks could be worth buying in 2023.

Synopsys, Inc. (SNPS)

SNPS provides electronic design automation software products used to design and test integrated circuits.

SNPS’ total revenue came in at $1.28 billion for the fourth quarter ended October 31, 2022, up 11.4% year-over-year. Its non-GAAP net income came in at $297.69 million, up 4.2% year-over-year, while its non-GAAP EPS came in at $1.91, up 4.9% year-over-year.

On November 30, 2022, Aart de Geus, SNPS’ Chairman and CEO, said, “For the fiscal year 2023, we are targeting 14-15% revenue growth, continued non-GAAP operating margin expansion, and approximately 16% non-GAAP earnings per share growth.”

SNPS’ trailing-12-month gross profit margin of 80.38% is 62.3% higher than the industry average of 49.54%, while its trailing-12-month EBITDA margin of 26.28% is 123.8% higher than the industry average of 11.74%.

Analysts expect SNPS’ revenue to increase 14.1% year-over-year to $5.80 billion in 2023. Its EPS is expected to increase 16.1% year-over-year to $10.33 in 2023. It surpassed EPS estimates in all four trailing quarters. Over the past six months, the stock has gained 3.8% to close the last trading session at $315.31.

SNPS’ strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which indicates a Buy in our proprietary rating system. The POWR Ratings assess stocks by 118 different factors, each with its own weighting.

SNPS has an A grade for Quality and a B for Sentiment. In the Software – Application industry, it is ranked #20 out of 136 stocks. Click here for the additional POWR Ratings for Growth, Value, Momentum, and Stability for SNPS.

Progress Software Corporation (PRGS)

PRGS develops, deploys, and manages business applications. The company offers OpenEdge, Sitefinity, and Corticon.

PRGS’ revenue came in at $151.22 million for the third quarter that ended August 31, 2022, up 2.6% year-over-year. Its maintenance and services revenue came in at $103.60 million, up 8.5% year-over-year. Moreover, its cash and cash equivalents came in at $224.86 million for the period ended August 31, 2022, compared to $157.37 million for the period ended November 30, 2021.

On September 27, 2022, Yogesh Gupta, CEO at Progress, said, “The strength in our results was reflected across virtually all our products and provides a strong, durable base for Progress to continue to pursue our Total Growth Strategy.”

PRGS’ trailing-12-month gross profit margin of 87.82% is 77.3% higher than the industry average of 49.54%, and its trailing-12-month EBITDA margin of 33.08% is 181.7% higher than the industry average of 11.74%.

For 2022, PRGS’ revenue is expected to increase 10.2% year-over-year to $613.94 million. Its EPS is expected to increase 5.7% year-over-year to $4.09 for the same period. It surpassed EPS estimates in all four trailing quarters. The stock has gained 17.8% over the past three months to close the last trading session at $49.90.

PRGS has an overall A rating, equating to a Strong Buy in our proprietary rating system. In addition, it has an A grade for Quality and a B for Value. PRGS is ranked #3 in the same industry. 

Click here for the additional POWR Ratings for PRGS (Growth, Momentum, Stability, Sentiment).

SNPS shares were trading at $320.99 per share on Thursday morning, up $5.68 (+1.80%). Year-to-date, SNPS has declined -12.89%, versus a -18.66% rise in the benchmark S&P 500 index during the same period.

Riddhima is a financial journalist with a passion for analyzing financial instruments. With a master's degree in economics, she helps investors make informed investment decisions through her insightful commentaries.

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