Rising inflation and the Fed’s aggressive rate hikes led to a significant sell-off in the technology sector over the past year. The tech-heavy Nasdaq Composite is down 25.2% over the past year.
However, the technology industry remains well-positioned for long-term growth due to rising investments in cloud solutions, software and cyber protection. According to Wedbush analyst Dan Ives, the tech industry will grow by 20% in 2023.
In addition, the software industry is expected to see steady growth with the increasing adoption of advanced technologies such as Internet of Things (IoT), 5G, Artificial Intelligence (AR), Virtual Reality (VR), the rise of e-commerce, and many others will be increased automation of business processes. The global software market is expected to grow at a CAGR of 7.2% through 2028.
Additionally, John-David Lovelock, Distinguished VP Analyst at Gartner, said, “Corporate IT spending is recession-proof as CEOs and CFOs increase spending on digital business initiatives rather than slashing IT budgets.”
With this backdrop, investors could add quality software stocks Microsoft Corporation (MSFT) and Salesforce, Inc. (CRM) to their watch lists in 2023.
Microsoft Corporation (MSFT)
MSFT develops, licenses and supports software, services, devices and solutions worldwide. The Company operates through three segments: Productivity and Business Processes; intelligent cloud; and more personal computing.
On December 14, MSFT and Viasat, Inc. (VSAT) announced a new partnership to bring Internet access to 10 million people around the world, including 5 million across Africa.
Teresa Hutson, Vice President of Technology and Corporate Responsibility at MSFT, said: “Working with Viasat, we will use satellite to reach remote areas that previously had few or no options for conventional connectivity. Together, we will be able to quickly scale and expand Airband’s reach, exploring a broader pipeline of projects and new countries where we haven’t worked before.”
MSFT’s gross profit margin of 68.26% is 37.8% above the industry average of 49.53%, while leveraged FCF margin of 22.73% is 203.5% above the industry average of 7.49%.
MSFT’s total revenue for the first quarter ended September 30, 2022 was $50.12 billion, a year-over-year increase of 10.6%. Additionally, gross margin was $34.67 billion, up 9.5% year over year. Also, operating income was $21.52 billion, up 6.3% year over year.
Analysts expect MSFT’s revenue to grow 7.1% year over year to $212.35 billion in 2023. Earnings per share are projected to rise 3.8% year over year to $9.56 in 2023. EPS estimates were exceeded in three out of four quarters. Over the past three months, the stock is up 2.2% to close the last trading session at $239.23.
MSFT’s strong fundamentals are reflected in its POWR ratings. The stock’s overall B rating is indicative of a Buy in our proprietary rating system. The POWR Ratings evaluate stocks based on 118 different factors, each with its own weighting.
MSFT has a B grade for stability, mood and quality. It ranks 9th out of 52 stocks in the software company industry. Click here to view MSFT’s additional Value, Growth and Momentum POWR scores.
Salesforce, Inc. (CRM)
CRM is a technology provider for customer relationship management. The company’s Customer 360 platform enables its customers to collaborate to deliver connected experiences.
In terms of forward price/book, CRM is currently trading at 2.48x, 36.2% lower than the industry average of 3.88x.
CRM’s gross profit margin of 72.69% is 46.8% above the industry average of 49.53%, while leveraged FCF margin of 30.62% is 308.8% above the industry average of 7.49%.
Total CRM revenue increased 14.2% year over year to $7.83 billion for the third quarter ended October 31, 2022. Additionally, subscription and support revenue increased 13.4% year over year to $7.23 billion. Also, gross profit increased 14.5% year over year to $5.75 billion.
Street expects CRM revenue to grow 16.9% year over year in 2023 to $30.97 billion. Earnings per share are projected to rise 3.1% year over year to $4.93 in 2023. EPS estimates were exceeded in all four subsequent quarters. CRM’s shares are up 10.3% over the past month to close the last trading session at $149.51.
CRM’s overall B rating equates to a purchase in our POWR rating system. It has an A grade for Growth and a B grade for Sentiment. It ranks #20 out of 139 stocks in the software applications industry.
Beyond the above, we also rated CRM for value, dynamism, stability, and quality. Get all CRM reviews here.
MSFT shares traded at $239.23 per share on Monday afternoon, up $0.72 (+0.30%). Year-to-date, MSFT is down -0.25% versus a 4.20% gain in the benchmark S&P 500 over the same period.
About the Author: RashmiKumari
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 aims to make complex financial issues understandable for individual investors and help them make appropriate investment decisions. More…