Software stocks permeate today’s market, and the trend is here to stay. Democratized, no-code platforms make software startups a breeze, and many of these founders (and investors) have their sights on liquidity events that end with the company listed on public exchanges. For investors, though, that represents a challenge.
Differentiation is key in software sectors, and finding those that are competitive enough to stand out while popular enough to keep cash coming in is tough. On the flip side, if it’s too differentiated, then it may struggle to find a viable market. A happy medium exists, though. software stocks offering stability and well-defined growth prospects that simultaneously are innovative and unique enough to stand apart in a flooded competitive field.
Braze, Inc. (BRZE)
Advertising technology is quietly undergoing rapid transformations as digital consumer trends change and content creator-centric media takes the fore. Venture capital cash flows into private AdTech company coffers, but don’t worry – publicly traded Braze, Inc. (NASDAQ:BRZE) is a top software stock perfectly positioned to ride the emerging marketing waves. Braze helps brands manage multichannel marketing across all popular digital channels and approaches it freshly and uniquely.
Whereas legacy AdTech companies went after consumer segments via aggressive campaigns, Braze better navigates consumer engagement practices to manage curated journeys that travel with the user between platforms and “feel” personalized and unique to the user. This type of personalization creates a mental bond between the user and the brand, which, as you can imagine, successfully converts potential customers rapidly. That’s likely why well-known names like Match (NASDAQ:MTCH), NASCAR, and Restaurant Brands International (NYSE:QSR) leverage the software stock’s unique offerings.
Not yet profitable, Braze admittedly trades at a premium today. However, the company is also at the forefront of emerging advertising trends, and early entrants tend to take some time to build momentum and walk the path toward profitability.
Software Stocks to Own: Intuit (INTU)
Tax season is upon us, and TurboTax owner Intuit (NASDAQ:INTU) is one software stock ready to help users file. But, unlike many tax-centric software stocks, Intuit does much more – it owns perennially popular bookkeeping and accounting software QuickBooks and personal finance company Credit Karma. These diverse offerings help Intuit smooth out its revenue streams throughout the year rather than seeing an early-year bump that falls off after April when tax season closes.
The company’s second-quarter earnings report reinforces the software stock’s strength. On a year-over-year (YoY) basis, Intuit improved total B2B revenue by double-digits across all market segments; its consumer segment revenue dipped 5%, but only because of IRS delays in kicking off tax season. Intuit will almost assuredly make up for the lost revenue in the next report, and it’s reasonable to assume significant consumer segment growth if its B2B channels are any indication. Even with the slight consumer dip, earnings per share climbed 20% YoY, even amid suppressed consumer lending and spending that impacted Credit Karma’s operations.
Microsoft (MSFT)
Naming top software stocks and not mentioning Microsoft (NASDAQ:MSFT) is all but impossible. Riding high on the waves of Google’s (NASDAQ:GOOG, NASDAQ:GOOGL) devastating Gemini AI debacle, Microsoft’s strategic partnership with OpenAI puts the software stock mega-firm toward the front of the pack when it comes to AI developments. But a lucky bet on OpenAI isn’t the only trick Microsoft has to stay on top – this week, Microsoft CEO Satya Nadella said that the company has “all the IP rights and all the capability” and that if “OpenAI disappeared […] we have all of the rights to continue innovation.”
This top-dog mentality may be why Microsoft just edged out Apple (NASDAQ:AAPL) to surprisingly little fanfare. Though Apple made waves when it hit a $3 trillion market cap, few outlets or investors celebrated to the same degree when Microsoft crossed the same line recently. Today, Microsoft’s market cap is $3.13 trillion while Apple’s is “just” $2.62 trillion – not to say Microsoft is undervalued by any means, but there’s an argument to be made that it’s under-appreciated considering its technological, competitive, and market positioning.
Software Stocks to Own: Oracle (ORCL)
Oracle (NYSE:ORCL) is one software stock that hundreds (or thousands) of massive, name-brand companies rely upon, but one that also tends to go overlooked among the retail investor set. The company offers a range of data and cloud computing services, including ERP and CRM software, and is a member of the S&P 100 index – reinforcing its size, reliability, and stability. And, lest you assume Oracle is a legacy software stock unable to adapt to changing conditions, the company is rapidly adopting AI tools to improve its supply chain software. It also deliberately deploys the tools in “very much in a controlled fashion” to generate feedback that drives adjustments (perhaps something Google’s Gemini team should have explored!).
Expect big things moving forward for Oracle because, even after an earnings beat earlier this month, company CEO Safra Catz told investors that “Some of [Oracle’s] goals might prove to be too conservative given our momentum.” Considering the wider tech drawdown, layoffs, and generally suppressed sector, Oracle is leagues ahead of competitors and may just be beginning its bull run.
UiPath (PATH)
UiPath (NYSE:PATH) is a unique software stack at the intersection of AI and automation, but targeting office administration tends to play second fiddle with bigger, flashier names. Still, this software stock is one of Cathie Wood’s favorites, meaning investors should at least consider the bull thesis. Cathie Wood specifically praises UiPath for its ability to leverage the untapped potential of accumulated company data, facilitating its practical application.
In one discussion, Cathie Wood highlighted UiPath’s role in her strategy for AI investment, focusing on its software-first approach. She pointed out that hardware investments have comparably limited returns, considering software companies can iterate indefinitely from even moderate hardware adaptations. She further noted the importance of proprietary data in their investment portfolio, singling out UiPath’s unique data access across numerous global companies and its wide-ranging solutions to automate tedious tasks.
UiPath just secured authorization from the Federal government to begin offering its software solutions to public entities. If any segment desperately needs to streamline bureaucratic inefficiency, it’s the government—and Federal contracts tend to be cash cows, setting UiPath up for solid revenue stream diversification.
Software Stocks to Own: Chegg (CHGG)
Chegg (NYSE:CHGG) is breaking free from its textbook rental origins to become a pioneering force in the EdTech software sector. The company is leveraging AI to enhance homework assistance and provide personalized learning experiences. An otherwise untapped market, these advancements position Chegg as a leader in transforming education through AI. Personally, I think one of the biggest long-term AI benefits is its potential to disrupt legacy leaning institutions, but that sector hasn’t yet caught wider market attention.
Despite experiencing a challenging year in 2023, with a 7% decrease in revenue year-over-year and declining subscription rates, Chegg is adjusting its operational strategies. As it transitions from its research and development phase, the company anticipates an improvement in its already impressive 68% gross margin, projecting it to reach around 74% in the first quarter. This adjustment signifies Chegg’s potential for growth and profitability as it solidifies its market position.
Furthermore, Chegg distinguishes itself among small-cap software stocks through its commitment to shareholder value, notably through a $200 million share buyback program. Trading at just 6x earnings and 0.8x sales, Chegg stands out as a rare value play in the high-growth software sector.
Palantir (PLTR)
Of course, I’d be remiss if I didn’t mention this year’s top software stock, Palantir (NYSE:PLTR). After ups and downs driven by ZIRP-era meme stock mania, Palantir comfortably settled into a reasonable valuation range. And, though the wider economy suffered, Palantir’s corporate adoption rate accelerated while government contracting continued unabated. That set Palantir up to achieve its fifth consecutive profitable quarter, becoming eligible for the S&P 500 and boosting per-share pricing by 50% since January 1st and more than 200% over the past year.
Palantir shares seem to have settled comfortably again in the $ 25 range, representing a moderate premium that may not look attractive to conservative investors. If that’s the case, look back to each prior earnings period – good news tends to accelerate Palantir’s growth faster than you may expect, and there’s no shortage of bullish Palantir catalysts on the horizon.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
