3 Best Tech Stocks To Buy in the Enterprise Software Sector
Tech stocks were among the big winners in 2020, a year to remember for the historic U.S. stock market crash in March. And the fast comeback of equities that took place ever since and resulted in a year of great volatility for investing in stocks.
Moreover, Reportlinker.com recently published a report titled “Global Enterprise Software Industry” mentioning the following highlights:
“Global Enterprise Software Market to Reach $650.2 Billion by 2027
– Amid the COVID-19 crisis, the global market for Enterprise Software estimated at US$415.4 Billion in the year 2020, is projected to reach a revised size of US$650.2 Billion by 2027, growing at a CAGR of 6.6% over the analysis period 2020-2027. Enterprise Resource Planning (ERP), one of the segments analyzed in the report, is projected to record a 6.4% CAGR and reach US$64.2 Billion by the end of the analysis period. After an early analysis of the business implications of the pandemic and its induced economic crisis, growth in the Business Intelligence (BI) segment is readjusted to a revised 7.1% CAGR for the next 7-year period.
– The U.S. Market is Estimated at $120 Billion, While China is Forecast to Grow at 10.2% CAGR.”
This compound annual growth rate of 6.6% over the years 2020-2027 is considered to be both satisfactory and sustainable, as a higher growth rate would probably be subject to revision and could be fragile too. It is very difficult for companies or sectors to have very large growth rates for a long period, so it is a more conservative approach to select stocks that are expected to witness a growth rate in their earnings per share (EPS) that is sustainable rather than be too high at first and then decline too fast.
Overall, growth, good fundamentals and attractive valuation are of paramount importance. Thus, as I have excluded several stocks with losses and pricey valuations, I narrowed my selection to the following three tech stocks that I consider now worthwhile to buy based on highly quantitative features. They are:
Now, let’s dive in and take a closer look at each one.
Tech Stocks to Buy: Adobe Inc. (ADBE)
Tech stocks are supposed to be mostly growth stocks. ADBE stock last time it had a negative EPS surprise was back in December 2018. It has an expected EPS growth for the next 3-5 years of 18.3%.
ADBE stock is up 6.7% in 2021, and has a one-year return of 34.3%. Things I like about it? A sales growth that is positive for the past five years, a positive and impressive net income growth for the same period, and a noteworthy net income growth of 78.3% in 2020, which left the company at a very good financial position and immune to the pandemic crisis, and a relatively low current debt-equity (D/E) ratio of 0.30.
The stock has a very high financial strength and profitability too. According to MorningStar, the net margin of 40.88% is the highest from 2016 through 2020, and one of my favorite key metrics free cash flow per share is also at its highest level of $10.09 for the same 5-year period. The company has mentioned that it has an active stock repurchase program through the end of fiscal 2021. Another reason to be optimistic for the stock.
Salesforce (CRM)
One of the best ways to pursue growth as a strategic decision and implementation is by using synergies or economies of scale. salesforce.com, inc. has announced the acquisition of Slack Technologies, Inc. (NYSE:WORK). Investor’s Business Daily posted that “Salesforce agreed to pay $27.7 billion for workplace collaboration software maker Slack Technologies (WORK) on Dec. 1. That marked a 55% premium to Slack’s closing price on Nov. 24, before reports of the deal surfaced”. Also, the article mentions that “Since the Slack deal was announced, Salesforce stock has underperformed the Nasdaq Composite amid worries over organic growth and operating margins.”
These worries seem to be somehow unjustifiable now. CRM stock has an expected 3-5 year EPS growth of 18.44%, and according to MorningStar operating margin dipped to 2.1% in 2021 compared to an operating margin of 2.7% in 2020 but for the trailing twelve months it has recovered to 4.2%.
Moreover, the first-quarter fiscal 2022 results were better than expected.
Some key points notable are:
“The business software company posted adjusted earnings per share of $1.21, up from EPS of 70 cents reported in the prior-year quarter. Analysts had predicted EPS of $0.88.
Revenue during the same period came to $5.96 billion, up 23% year-over-year. Wall Street had anticipated $5.89 billion in revenue.Revenue during the same period came to $5.96 billion, up 23% year-over-year. Wall Street had anticipated $5.89 billion in revenue.”
CRM stock has at least two key financial trends for the last five years that I like. The 5-year average operating income growth is 31.68% and the 10-year average EPS growth is 43.60%. And to me, this is what matters, profitability and growth that both are expected to continue.
Tech Stocks to Buy: VMware (VMW)
VMW stock has been up 15.55% in 2021 and has a 1-year performance of 11.93% as of June 8, 2021. And while other tech stocks have rallied more, some features make this stock a compelling buy for the long term. I am not always in favor of buy and hold strategy especially at times of increased stock market volatility. But this stock is an exception.
It is not just the 3-5 year expected EPS growth of 25% according to Zacks. The stock has a PEG ratio of 0.93 implying it is undervalued. I like the fact that in the past 16 quarters the stock has had positive EPS in 15 of them. This shows consistency.
The last earnings report was a strong one.
Total revenue, Subscription & SaaS revenues plus services revenue increased.” License revenues declined 2.1% year-over-year to $646 million” but “Adjusted earnings soared 16% year-over-year to $1.76 per share, beating the consensus estimate of $1.73 per share.”
The stock has very strong profitability with an operating income margin of 20.7% for 2021 according to MorningStar and a net margin of 17.49% too. The net margin has dipped though severely from the 59.31% in 2020. This needs further analysis. But both the operating cash flow trend and free cash flow trend are positive and strong and with a 10-year average net income growth of 18.94%, I love consistency.
All these three tech stocks are profitable, have plenty of expected growth, and in general very good fundamentals. Their valuation seems attractive too. What is not to like?
On the date of publication, Stavros Georgiadis, CFA did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
