It wasn’t too long ago that software stocks were more desirable than semiconductor stocks. With recurring revenue and near-unlimited scalability, software companies offering networking, cloud and data technology were synonymous with exponential growth potential. While that isn’t wrong, not all companies were able to forecast and profit from the emergence of AI.
While larger cloud companies like hyperscalers have been able to continue finding incredible growth, many companies in this sector have finally come back down to Earth as supply and demand shifts have occurred. From sky-high valuations to multi-year lows, several software stocks have fallen out of favor with the markets. However, with this sector sell-off finally becoming well overdone, software is now reaching its point for a reversion back to the mean. Here are three software stocks we believe are ready to shine this summer!
Snowflake (SNOW)
Snowflake (NYSE:SNOW) is a data-focused software company that has seen its sentiment hit all-time lows as of late. Despite this, analysts remain bullish with a one-year average price target of $212.93 and a remarkable street-high target of $600.00 which represents nearly 400% upside from the current price.
This SaaS company has certainly seen better days. In its more recent Q1 earnings, this stock saw disappointing earnings and profit miss. However, in this company’s endeavors to catch up on the AI boom, Snowflake recently announced a full partnership with NVIDIA (NASDAQ:NVDA) to deliver its customers a full-stack AI platform. With this expanded collaboration set to accelerate AI productivity and business transformation, Snowflake investors are bound to see tangential growth oozing off NVDA.
Software stocks are always difficult to value as they tend to trade at quite a premium. SNOW trades at 238x forward earnings and 14.3x sales. While this valuation seems steep, we have to remember that revenue has grown at a CAGR of 78% over the past five years! The fact that nobody wants to invest in Snowflake right now likely means the bottom is in for market sentiment. We think Snowflake can absolutely see a bounce back as early as this summer!
Palantir (PLTR)
Palantir (NYSE:PLTR) is a data analytics provider that sells its unique software platform to both commercial and government users. Shares of PLTR are trading just above the average analyst price target of $23.31 and about 50% below its street-high price target of $35.00.
So, what exactly does Palantir do? Weirdly enough, this has always been the mystery surrounding the company. The stock has long been a favorite of retail investors and even started out as a meme stock on Reddit. But since then, the company has grown to become profitable and has become serious about its expansion of contracts with high-profile users. Most recently, Palantir has signed a new contract with the U.S. Army and the UK’s NHS.
Palantir is exhibiting some hypergrowth in its revenue over the years. Over the past five years, revenue has grown at a CAGR of 12%. Even better, in the past three, this figure ballooned to 21%. While PLTR’s 23x sales ratio and 70.4x forward earnings are not quite the cheapest, it has a long runway ahead that has only begun accelerating. Investors that haven’t already caught wind of PLTR are recommended to keep it on watch as this company grows in profitability and customers.
ZScaler (ZS)
ZScaler (NASDAQ:ZS) is a cybersecurity software platform provider that focuses on enterprise customers. Currently, shares of ZS are sitting right at the low end of its one-year price range. The street-high price target for ZScaler stock? Analysts believe it can hit as high as $400 over the next twelve months.
This company is coming off a blowout quarter when it far outperformed many of the high-flying tech stocks. This great quarter has only been achieved by ZScaler’s growing partnerships with some of the largest companies in the world including Micron Technology (NASDAQ:MU) and Unilever (NYSE:UL). Now, with news of an upcoming acquisition of Airgap networks to further extend its offerings and expand its SASE leadership, ZScaler is in a fantastic spot into the summer.
Despite its recent stock runup, shares of ZS are near its historical low models. Compared to PLTR and SNOW, ZS’s 54x forward earnings and 13x sales seem like a hefty bargain. And, despite limited publicity, this company has been quietly growing revenue at a CAGR of 49% over the past five years! If you’re looking for a sleeper software pick for this summer, look no further than ZScaler!
On the date of publication, Ian Hartana and Vayun Chugh did not hold (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.
