It might seem like it’s way too late to be looking for undervalued software stocks in July 2024.
After all, the Nasdaq 100 Index has been going virtually straight up for the past two years. Most companies related to growth fields such as artificial intelligence (AI) have already rocketed higher in recent months. Valuations are stretched in many leading growth names.
However, other software stocks are still trading near multi-year lows and at truly bombed out valuations. These are three profitable software companies that have strong growth track records and are currently selling at deep value prices.
Open Text Corporation (OTEX)
Open Text Corporation (NASDAQ:OTEX) is a Canadian software conglomerate whose core business strategy is built around mergers and acquisitions. It buys up small software firms that it believes are undervalued and uses these deals to build a broader solutions ecosystem for its clients. Open Text Corporation then recycles its cash flows for further acquisitions along with paying a healthy dividend.
OTEX has a dizzying array of different software tools in its portfolio including solutions for web content management, digital asset management, customer analytics, artificial intelligence (AI) and insights. Other tools include e-discovery, digital fax, omnichannel communications, secure messaging and voice of customer. Incredibly, 98 of the top 100 global companies are Open Text Corporation customers.
Investors have assigned OTEX stock a low valuation, with shares currently going for just eight times forward earnings. Some discount makes sense as Open Text Corporation is a complex firm and many of its software tools are legacy rather than cutting-edge products. Regardless, eight times forward earnings is an awfully low price, and shares seem set for a solid recovery after their recent 30% pullback.
Endava (DAVA)
Endava (NYSE:DAVA) is a consulting company which designs, implements and maintains software and information technology tools. Their clients are primarily in the financial services sector such as insurance, banks and payments processors.
Also, the core business model at Endava is to provide IT services via outsourcing. Essentially, Endava hires skilled IT workers in lower cost-of-living countries such as Poland, Colombia and Vietnam and uses this workforce to fulfill IT contracts for multinational companies.
DAVA stock is down 46% over the past 12 months and more than 80% from its all-time highs. This seems like an excessive decline, given that the company generated record revenues and profits in 2023.
Further, the business has seen a slowdown in 2024 as companies pull back on IT spending amid a more challenging macroeconomic environment. But analysts see Endava returning to growth in 2025. And, Endava’s AI tools and solutions offering should see rapid growth as clients seek to implement these cutting-edge systems into their day-to-day workflows.
Paycom Software (PAYC)
Paycom Software (NYSE:PAYC) has faced some similar challenges as Endava. PAYC stock has crashed, falling 58% over the past 12 months. Simply put, major companies aren’t willing to boost their enterprise software spending dramatically at the moment given the cloudy economic situation.
Notably, Paycom Software offers top-notch, cloud-based human capital management solutions. That includes applicant tracking, background checks, onboarding, tax management and employee scheduling.
Paycom Software enjoyed dramatic growth during the pandemic as companies increasingly embraced remote work solutions and needed to digitize their human resources tools. However, as that momentum slowed, investors have thrown in the towel on Paycom Software.
Yet, the underlying business is fine. Indeed, analysts are projecting greater than 10% revenue growth this year. That’s a rather surprising disparity from PAYC stock’s recent performance. The company easily beat estimates last quarter and now goes for just 18 times forward earnings.
On the date of publication, Ian Bezek held a long position in DAVA stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
