In recent weeks, software stocks have taken off, with the iShares Expanded Tech-Software Sector ETF (CBOE:IGV) soaring 23% from Oct. 30 to Dec. 22. In addition to Wall Street’s reduced worries about interest rates and a recession, several software companies have made positive comments about their outlooks in recent weeks. “Commentary from (several software firms) seems to indicate that the IT spending picture into 2024 is stabilizing and there are some (small) green shoots on the horizon,” investment bank Evercore ISI wrote, Investor’s Business Daily noted at the beginning of December. One of the key positive catalysts likely pushing IT spending and software stocks higher is the AI revolution.
Not only are software companies marketing many AI-powered applications, but most AI-powered services are currently accessed through the cloud. This bodes well for cloud software firms. Finally, the proliferation of AI, which empowers hackers, has made IT security more important than ever. Here are the three best software stocks to buy to capitalize on these as well as other strong trends.
These companies are all growing rapidly and are well-positioned. However, their valuations, unlike many other names in the sector, are not stratospheric.
Workday (WDAY)
Workday (NASDAQ:WDAY) provides companies with financial management and human resources software.
Last quarter, the company’s earnings per share soared 53% versus the same period a year earlier to $1.53. Its subscription backlog jumped 30% year-over-year.
Multiple major banks were very impressed with the company’s Q3 results. For example, Japanese bank Mizuho wrote that Workday is”well positioned to become the preeminent vendor in the back-office suite over the longer-term.” JPMorgan raised its price target on WDAY stock to $260.
Analysts, on average, expect its revenue to climb to $8.45 billion next year. This shows that the firm is indeed becoming “the preeminent vendor” in its sector.
Investor’s Business Daily gives WDAY stock an extremely high composite rating of 98. Its elevated relative strength rating of 90 shows that it has performed very well over the last year.
In September, Workday released “new generative AI capabilities.” The company said this would “help increase productivity, grow and retain talent, streamline business processes, and drive better decision-making.”
The company’s investments in AI should enable it to gain market share form its competitors and charge more for its offerings.
ServiceNow (NOW)
Multiple, major banks are becoming more bullish on ServiceNow (NOW), one of my longtime favorite software stocks. NOW provides software that automates IT tasks to businesses and governments.
Australian bank Macquarie recently hiked its price target on NOW to $800 from $612, citing the company’s ability to benefit from its AI-related initiatives.
Moreover, investment bank Oppenheimer believes that NOW can benefit meaningfully from Assist, its AI-powered coding tool, while Swiss bank UBS hiked its price target on the shares to $820 from $650, citing the company’s strong Q3 results.
CEO Bill McDermott recently reported that “over 300 (of its) customers” from “every industry” are evaluating Vancouver, its new AI-powered software tool.
Cadence Design (CDNS)
Cadence “provides the software that helps other companies design electronics hardware such as semiconductors and circuit boards.”
Due to the AI boom, the production of semiconductors and circuit boards should move into a much higher gear. That’s because many computer chips and computer servers must be utilized to create AI.
Similarly, the Internet of Things trend, including the proliferation of connected software and semiconductors in automobiles, will be very positive for CDNS. Furthermore, Cadence can even benefit from the Energy Revolution ,since circuit boards are used in both solar panels and wind turbines.
On the date of publication, Larry Ramer’s wife held a long position in NOW. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
