In this article we share our list of the 10 best software stocks to buy now. The world is seeing a software revolution as every business scrambles to adapt automation, Cloud computing, e-commerce and digital presence. You can skip our detailed discussion of why you should invest in software stocks for big gains and go directly to the 5 Best Software Stocks to Buy Now.
Software is Eating the World
When American investor Andreessen penned his remarkable essay titled “Why Software is Eating the World” about 10 years ago, he very rightly predicted an era where software would penetrate almost every walk of human life. Today, businesses are racing to adapt software by moving to Cloud, websites, automation, AI, e-commerce, e-billing, social media, mobile apps, computer-based education and web applications. Market research firm IDC predicts that the technology industry is expected to reach a market value of $5 trillion in 2021. Governments, private sector, small and large businesses are spending heavily on software and technology infrastructure to expand their digital presence and capture the online market. Gartner projects in a report that worldwide IT spending will total $3.8 trillion in 2021, an increase of 4% from 2020.
Coronavirus Crisis: A Catalyst for Software
The coronavirus pandemic has but fueled the growth of the software industry. The rise of trends like working from home, telecommuting, freelancing, shopping online, app-based ride booking, grocery and food delivery are bringing the importance of efficient software and technology systems in the limelight.
“Companies have more IT to do and less money to do it, so they are pulling money out of the areas they can afford, such as mobile phone and printer refreshes, which is why there will be less growth in the devices and communications services segments. Instead, CIOs are spending more in areas that will accelerate their digital business, such as IaaS or customer relationship management software,” John-David Lovelock, VP at Gartner said in the report.
Another key area of growth is enterprise software where spending is expected to rise by 7.2% in 2021, mainly due to the acceleration of digitalization efforts by enterprises supporting a remote workforce, rise of distance learning, automation and telehealth systems.
Race to Capture The Next Billion Users
Software stocks will see immense growth in the future, as the world is just getting started with the IT revolution. Data shows that about 60% of the world’s population has access to the internet. Connectivity is yet to reach billions of people. Companies are scrambling to capture the huge populations of emerging markets like Asia, China and Africa. Therefore, investing in some of the best software stocks with a long-term perspective is a smart investment strategy.
As the world moves away from traditional business models and adapts digital mediums of communications and transactions, the financial markets are becoming volatile by the day. The hedge fund industry’s reputation has been tarnished in the last decade during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 88 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
The dramatic rise of Software-as-a-Service, or SaaS, model is taking over the technology industry. Major technology companies, including BlackBerry, Apple, Cisco, Microsoft and IBM are transitioning into software, as demand for traditional hardware, PCs and devices reach a plateau. Companies have started to prefer a subscription-based SaaS model. Gartner predicted in a report that by 2020, all new entrants and 80% of historical vendors would offer subscription-based business models, regardless of where the software resides.
Let’s take a look at the 10 best software stocks to buy now. Our list is in an ascending order, and our ranking criteria is based on the hedge fund sentiment, fundamental financial health and growth catalysts of the biggest software companies in the U.S.
10. VMware, Inc. (NYSE: VMW)
VMware ranks 10th on the list of 10 best software stocks to buy now. The company y sells cloud computing and virtualization software and services. VMware was the first commercially successful company to virtualize the x86 architecture. In November 2020, the stock gained after the company beat third-quarter earnings estimates and increased its revenue guidance for FY2021 to $11.7 billion versus the Street’s consensus estimate of $11.62 billion
A total of 31 hedge funds out of 816 tracked by Insider Monkey reported owning positions in VMware as of the end of the third quarter.
9. Palantir Technologies Inc (NYSE: PLTR)
PLTR ranks 9th on the list of 10 best software stocks to buy now. Founded by tech magnate Peter Thiel, Palantir sells defense and cybersecurity software, especially designed for governments and defense organizations. Palantir is known for Palantir Gotham, Palantir Metropolis and Palantir Foundry. Palantir Gotham is used by counter-terrorism analysts at the U.S. Intelligence and the Department of Defense.
Palantir went public in September 2020 and has since been making headlines due to its contracts with the U.S. government and skyrocketing stock price. Palantir shares have gained about 176% in in the last 6 months.
Hedge funds are also loading up on Palantir. Data shows that 31 elite hedge funds bought Palantir shares in the third quarter. One of the top holders of Palantir was billionaire George Soros. Soros’ fund disclosed a position in Palantir in its 13F because the data analytics software company went public during the third quarter. After revealing its large Palantir stake, Soros Fund Management told CNN Business that “Soros Fund Management’s current stake in Palantir amounts to about 1% of the voting shares of Palantir and was a result of an early-stage investment made in 2012 by a portfolio manager who no longer works at Soros.”
Soros Fund Management also told in its statement that it doesn’t approve Palantir’s business practices and it made the initial investment in Palantir when “the negative social consequences of big data were less understood” and it wouldn’t make the same investment in this controversial stock today. Due to being an early investor and lockup restrictions, Soros Fund Management isn’t allowed to sell all of its positions in PLTR today, but it sounds like the fund will cash out as soon as it is legally allowed to do so.
SPLK ranks 8th on the list of 10 best software stocks to buy now. California-based Splunk sells software used for monitoring, security and analysis. The company is known for its for its enterprise security software, which is used by businesses to detect vulnerabilities and weaknesses in their systems. Splunk shares recently crashed after the company posted a surprise Q3 earnings miss. However, Rosenblatt gave bullish comments for the company, starting its coverage at a Buy rating and a $196 price target. The firm said that Splunk has several secular growth catalysts that will drive the stock price in the future.
As of the end of the third quarter, 44 hedge funds tracked by Insider Monkey held stakes in Splunk. Here is what Carillon Eagle Mid Cap Growth Fund said about SPLK in its 2020 Q3 investor letter:
“Splunk provides software that analyzes data from technology infrastructure such as servers and network equipment, from which insights can be gleaned about business trends, security, and operations. The company reported inline quarterly results and provided an outlook as expected. The firm is seeing strength in software provided as a service and delivered over the internet, known as cloud software. While COVID-19 has modestly limited management’s near-term visibility, we remain positive on the company’s competitive position and see this pandemic as a longer-term driver of the secular shift towards digital transformation.”
INTU ranks 7th in our list of the best software stocks to buy now. Intuit sells financial and business software. The company is known for its tax preparation application TurboTax, personal finance app Mint and small business accounting program QuickBooks. In November 2020, Morgan Stanley upped its price target for Intuit to $455 from $400, citing potential improved EPS revisions through fiscal 20201. Piper Sandler also increased its price target for the company to $412 from $378, citing strong revenue and operating margins.
Cliff Asness’ AQR Capital Management owns $313.83 million worth of shares of Intuit as of the end of the third quarter. Overall, 54 hedge funds tracked by Insider Monkey held positions in the company as of the end of the September quarter. Here is an excerpt from L1 Capital’s lengthy comments about INTU:
“Strong financial position – Intuit has US$3.7 billion net cash. Net cash will be approximately nil after completion of the US$7.1 billion acquisition of Credit Karma (funded 50% cash, 50% equity). Intuit generated operating profit of over US$2.2 billion in FY2020 and has the financial strength to withstand a challenging operating environment for small businesses caused by COVID‑19.
Management is led by Sasan Goodarzi who has held senior management positions at Intuit for the past 14 years. Scott Cook co‑founded Intuit in 1983 and remains a Board member and significant shareholder.
Intuit is trading on around 30x FY2021 EBITA, 42x FY 2021 PE, 2.5% free cashflow yield and provides a dividend yield of around 1%. While the near‑term earnings and cashflow multiples optically are relatively high, we believe they fairly reflect Intuit’s attractive business, industry, management and financial attributes, including its consistent, predictable and long‑term growth profile. Intuit will continue to deliver strong value to shareholders for many years to come, with our base case implying a double‑digit annual return for this investment.”
6. Oracle Corporation (NYSE: ORCL)
Cofounded by legendary entrepreneur Larry Ellison, Oracle sells software services and products, including Cloud, database technology, CRM, ERP, retail and business suites. In December 2020, Piper Sandler raised its price target for Oracle to $57 from $50, with a Neutral outlook. Morgan Stanley also upped its price target for the company to $67 from $62, citing a strong momentum in Cloud operating margins.
Jean-Marie Eveillard’s First Eagle Investment Management owns 29.6 million Oracle shares as of the end of the third quarter, worth $1.77 million. Overall, 56 funds in Insider Monkey’s database held stakes in the company entering the fourth quarter.
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Disclosure: None. 10 Best Software Stocks To Buy Now is originally published at Insider Monkey.